The European Investment Bank and the UK’s missing £7.6 billion

The European Investment Bank is a major part of the European Union’s and also the Euro area’s infrastructure. Yet so many have not heard of it which I plan to begin to correct today. But there are also big issues and a possible expensive error on the way as the UK’s relationship with it gets set to change assuming that the UK does carry out some form of Brexit. As we stand the UK is one of the four largest shareholders ( along with France,Germany and Italy) with a shareholding of 16.1% or 39.2 billions Euros according to the EIB.

What is the EIB?

The first impression is that it is very large as we look at the scale of its operations.

Since its establishment in 1958 the EU bank has invested over a trillion euros.

Even in these inflated times that is quite a lot and it is expanding fast.

Lending: From ECU 10bn in 1988, our annual lending neared EUR 45bn in the mid-2000s before jumping to EUR 79bn in 2009 as a temporary response to the crisis. It was EUR 55.63bn in 2018.

In terms of its own operations it has been a win for Luxembourg. Quite a win really when you note its very small shareholding in the venture.

Our HQ: Founded in Brussels in 1958 as the Treaty of Rome comes into force, we moved to Luxembourg in 1968. We relocated to our current site in 1980 with a major new building extension completed in 2008.

As to its lending this is described here.

We support projects that make a significant contribution to sustainable growth and employment in Europe and beyond. Our activities focus on four priority areas:

 

Innovation and skills are key ingredients for ensuring sustainable growth and creating high-value jobs.

 

Small and medium-sized enterprises (SMEs) are important drivers of growth, innovation and employment in Europe…..Supporting access to finance for SMEs and mid-caps is a top priority for the EIB Group.

 

Infrastructure is an essential pillar that interconnects internal markets and economies.

 

As the EU bank, we have made climate action one of our top priorities and today we are the largest multilateral provider of climate finance worldwide.

We commit to climate change adaptation and mitigationmore than 25% of our total financing.

One way of looking at the EIB is that it’s role involves some regional policy which is of course an apposite issue both across the region and within the Euro area. Although it comes with buzzwords and phrases like “smart,sustainable and inclusive growth” which mean what exactly?

As the EU bank, promoting economic and social cohesion is one of the principles that guide us throughout our activities. Our investments support the delivery of the Europe 2020 strategy for smart, sustainable and inclusive growth.

Also it operates a financial version of foreign policy.

Outside the EU, the EIB’s activities reflect EU external policy. The EIB is active mainly in the pre-accession countries and eastern and southern neighbours.
The EIB also operates in African, Caribbean and Pacific countries, Asia and Latin America, financing local private sector development, social and economic infrastructure and climate action projects.

Where does the money come from?

You may have spotted that the capital quoted is less than the lending with a ratio of one to a bit over four.

Building on its financial merits, the EIB is able to borrow at attractive rates, and the benefits of EIB’s borrowing conditions are passed on to project promoters.

It also specialises in what it calls green finance.

The Bank plays a leading role in the Green Bond market. The EIB issued the world’s first Green Bond in 2007, called Climate Awareness Bonds (CABs). Since then, the Bank has expanded CAB issuance across a number of currencies, providing benchmark size transactions in the core currencies EUR, USD and GBP.

It borrows very cheaply as last week it issue a three-year US Dollar bond at only 0.114% over what the US Treasury can borrow at. In January it borrowed for ten-years in Euros at a mere 0.742%. So we see that especially in these times of ultra-low interest-rates and bond yields the EIB is a vehicle that can provide lending for a very low annual cost. In that sense it has been quite a triumph as I do not believe it is picked up on national balance sheets and when I checked with the UK Office for National Statistics only realised numbers are picked up which matters as pretty much all of it is notional.

The UK and the EIB

The House of Lords reported on its role in the UK at the end of January.

The European Investment Bank (EIB) has been active in the UK since 1973,during which time it has lent more than €118 billion to key infrastructure projects…… In 2015 alone, the EIB provided £5.6 billion for 40 different projects, amounting to approximately one-third of total investment in UK infrastructure.

This provokes an immediate thought about another bank namely the Bank of England. The Funding for Lending Scheme which began in the summer of 2012 was supposed to push small and medium-sized business lending higher but did not, That looks even more of a failure as we note that until recently the EIB has been expanding its support of lending.

Next although the House of Lords do not put it this way we have a clear driver of the fall in business investment in the UK which was picked up in last week’s economic growth (GDP) data.

This is all the more worrying given the 87 percent fall in EIB funding since 2016 and the fact that new UK projects will no longer have access to the EIB after 29 March 2019, until and unless a future relationship is agreed.

So I can only support this conclusion 100%.

It is therefore seriously concerning that, with Brexit and the associated loss of access to EIB financing a matter of
weeks away, the Government has said nothing publicly about its ambitions for a future relationship with the EIB.

With the problems in the UK infrastructure arena with the failure of Carillion and the more recent problems at Interserve already providing flashing warning lights this echoes too.

Losing access to the EIB will have negative consequences for the financing of UK infrastructure. Not only does the EIB offer cheaper and longer-term loans than commercial lenders, but the quality of its independent expertise and due
diligence also provides projects with a stamp of approval that crowds in additional private investment.

Comment

There is a lot to consider here as we mull what is an organisation with many successes but also issues as we note it has come under more political control. For example the way it has a role in the financial version of foreign policy and being used as a type of Euro area fiscal policy under the ( Jean-Claude) Juncker Plan. Those are political rather than financial choices.

Next comes the issue of how the UK might Brexit from this and looking at the House of Lords report it is quite a scandal.

Under the Withdrawal Agreement, the UK will, over a period of 12 years, receive the €3.5 billion of capital it has paid in to the EIB. However, the UK will not receive any share of the profits that the EIB has accumulated, nor any
interest or dividends. Given that this could amount to €7.6 billion, almost 20 percent of the UK’s obligations under the £35–39 billion financial settlement, we regret that the Government has failed to provide an adequate explanation of the position taken in the negotiations.

Whoever is responsible for this on the UK side should be named and shamed.

Weekly Podcast

 

 

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Germany will be the bellweather for the next stage of ECB monetary easing

Today there only is one topic and it was given a lead in late last night from Japan. There GDP growth was announced as 0.3% for the last quarter of 2018 which sounded okay on its own but meant that the economy shrank by 0.4% in the second half of 2018. Also it meant that it was the same size as a year before. So a bad omen for the economic growth news awaited from Germany.

In the fourth quarter of 2018, the gross domestic product (GDP) remained nearly at the previous quarter’s level after adjustment for price, seasonal and calendar variations.

If you want some real precision Claus Vistensen has given it a go.

German GDP up a dizzying 0.0173% in Q4.

Of course the numbers are nothing like that accurate and Germany now faces a situation where its economy shrank by 0.2% in the second half of 2018. The full year is described below.

Hence short-term economic development in Germany showed two trends in 2018. The Federal Statistical Office (Destatis) reports that, after a dynamic start into the first half of the year (+0.4% in the first quarter, +0.5% in the second quarter), a small dip (-0.2% in the third quarter, 0.0% in the fourth quarter) was recorded in the second half of the year. For the whole year of 2018, this was an increase of 1.4% (calendar adjusted: 1.5%). Hence growth was slightly smaller than reported in January.

Another way of looking at the slowdown is to compare the average annual rate of growth in 2018 of 1.5% with it now.

+0.6% on the same quarter a year earlier (price and calendar adjusted)

If we look at the quarter just gone in detail we see that it was domestic demand that stopped the situation being even worse.

The quarter-on-quarter comparison (price, seasonally and calendar adjusted) reveals that positive contributions mainly came from domestic demand. Gross fixed capital formation, especially in construction but also in machinery and equipment, increased markedly compared with the third quarter of 2018. While household final consumption expenditure increased slightly, general government final consumption expenditure was markedly up at the end of the year.

Is the pick up in government spending another recessionary signal? So far there is no clear sign of any rise in unemployment that is not normal for the time of year.

the number of persons in employment fell by 146,000, or 0.3%, in December 2018 on the previous month. The month-on-month decrease was smaller than the relevant average of the past five years (-158,000 people.

Actually we can say that it looks like there has been a fall in productivity as the year on year annual GDP growth rate of 0.6% compares with this.

Number of persons in employment in the fourth quarter of 2018 up 1.1% on the fourth quarter of 2017.

Also German industry does not seem to have lost confidence as we note the rise in investment which is the opposite of the UK where it ha been struggling. But something that traditionally helps the German economy did not.

However, development of foreign trade did not make a positive contribution to growth in the fourth quarter. According to provisional calculations, exports and imports of goods and services increased nearly at the same rate in the quarter-on-quarter comparison.

In a world sense that is not so bad news as the German trade surplus is something which is a global imbalance but for Germany right now it is a problem for economic growth.

So let us move on as we note that German economic growth peaked at 2.8% in the autumn of 2017 and is now 0.6%.

Inflation

This morning’s release on this front does not doubt have an element of new year sales but seems to suggest that inflation has faded.

 the selling prices in wholesale trade increased by 1.1% in January 2019 from the corresponding month of the preceding year. In December 2018 and in November 2018 the annual rates of change had been +2.5% and +3.5%, respectively.
From December 2018 to January 2019 the index fell by 0.7%.

Bond Yields

It is worth reminding ourselves how low the German ten-year yield is at 0.11%. That according to my chart compares to 0.77% a year ago and is certainly not what you might expect from reading either mainstream economics and media thoughts. That is because the German bond market has boomed as the ECB central bank reduced and then ended its monthly purchases of German government bonds. Let me give you some thoughts on why this is so.

  1. Those who invest their money have seen a German economic slowing and moved into bonds.
  2. Whilst monthly QE ended there are still ECB holdings of 517 billion Euros which is a tidy sum especially when you note Germany not expanding its debt and is running a fiscal surplus.
  3. The likelihood of a new ECB QE programme ( please see Tuesday’s post) has been rising and rising. Frankly the only reason it has not been restarted is the embarrassment of doing so after only just ending it.

Accordingly it would not take much more for the benchmark ten-year yield to go negative again. After all all yields out to the nine-year maturity now are. Let me point out how extraordinary that is on two counts. First that it happened at all and next the length of time for which negative bond yields have persisted.

If we look at that from another perspective we see that Germany could if it so chose respond to this slowing with fiscal policy. It can borrow for essentially nothing and in both absolute and relative terms its national debt has been falling. The awkward part is presentational after many years of telling other euro area countries ( most recently Italy) that this is a bad idea!

Comment

If you are a subscriber to the theme that Euro area monetary policy has generally been set for Germany’s benefit then there is plenty of food for thought in the above. Indeed it all started with the large devaluation it engineered for its exporters via swapping the Deutschmark for the Euro. That is currently very valuable because a mere glance at Switzerland suggests that rather than 1.13 to the US Dollar  the DM would be say 1.50 and maybe higher. Care is needed because as the Euro area’s largest economy of course it should be a major factor in monetary policy just not the only one.

Right now there will be chuntering of teeth in Frankfurt on two counts. Firstly that my theme that the timing of what you do matters nearly as much as what you do and on this front the ECB has got it wrong. Next comes the issue that it was not supposed to be the German economy that was to be a QE junkie. Yes the trade issues have not helped but it is deeper than that.

With some of the banks in trouble too such as Deutsche Bank and Commerzbank we could see a “surprise” easing from the ECB especially if there is a no-deal Brexit. That would provide a smokescreen for a fast U-Turn.

Me on The Investing Channel

When will the ECB ease monetary policy again?

Sometimes life catches up with you really fast and we have seen another example of this in the last 24 hours, so let;s get straight to it.

Analysts at Deutsche Bank say European Central Bank’s Mario Draghi indicated the possibility of a one-off interest rate hike at his last press conference. With his next appearance due on Thursday, the president may choose to feed or quell that speculation. ( Bloomberg)

I found this so extraordinary that I suggested on social media that Deutsche Bank may have a bad interest-rate position it wants to get rid of. After all at the last press conference we were told this and the emphasis is mine.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

Now Forward Guidance by central banks is regularly wrong but it is invariably due to a cut in interest-rates after promising a rise rather than an actual rise. The latter seems restricted to currency collapses. So let us move onto the economic situation which has been heading south for a while now as the declining money supply data we have been tracking has been followed by a weakening economic situation.

France

This morning brought more worrying news from the economy of France from the Markit PMI business survey. It started well with the manufacturing PMI rising to 51.2 but then there was this.

Flash France Services Activity Index at 47.5 in January (49.0 in December), 59-month low.

So firmly in contraction territory as we look for more detail.

Private sector firms in France reported a further
contraction in output during the opening month of
2019. The latest decline was the fastest for over four
years, even quicker than the fall in protest-hit
December. The strong service sector that had
supported a weak manufacturing sector in the
second half 2018 declined at a faster rate in January.
Meanwhile, manufacturers recovered to register
broadly-unchanged production.

These numbers added to the official survey released only yesterday.

In January 2019, the balances of industrialists’ opinion on overall and foreign demand in the last three months have recovered above their long-term average – they had significantly dropped over the past year.

They record a manufacturing bounce too, but the general direction of travel is the same as the number for foreign demand has fallen from 21.8 at the opening of 2018 to 3.6 now and the number for global demand has fallen from 21.7 to 1.0 over the same timescale.

Perhaps we get an idea of a possible drop from wholesale trade.

The composite indicator has fallen back by five points compared to November 2018. At 99, it has fallen below its long-term average (100) for the first time since January 2017.

But in spite of a small nudge higher in services the total picture for France looks rather poor as we note that it looks as though it saw a contraction in December and that may well have got worse this month.

Germany

There was little solace to be found in the Euro area’s largest economy.

“The Germany PMI broke its recent run of
successive falls in January thanks to a stronger
increase in service sector business activity, but the
growth performance signalled by the index was still
one of the worst over the past four years.
“Worryingly for the outlook, the recent soft patch in
demand continued into the New Year.”

So some growth but not very much and I note Markit are nervous about this as they do not offer a suggestion of what level of GDP ( Gross Domestic Product) grow is likely from this. This of course adds to the flatlining we seem to have seen for the second half of 2018 as around 0.2% growth in the fourth quarter merely offset the 0.2% contraction seen in the third quarter.

Also the recovery promised by some for the manufacturing sector does not seem to have materialised.

Manufacturing fell into contraction in January as
the sector’s order book situation continued to
worsen, showing the steepest decline in incoming
new work since 2012.

The driving force was this.

Weakness in the auto industry was once again widely reported, as was a slowdown in demand from China.

Euro area

The central message here followed that of the two biggest Euro area economies we have already looked at. The decline in the composite PMI suggests on ongoing quarterly GDP growth rate of 0.1%. Added to it was the suggestion that the future is a lot less than bright.

New orders for goods fell for a fourth successive
month, declining at a rate not seen since April
2013, while inflows of new business in the service
sector slipped into decline for the first time since
July 2013

Inflation

The target is just below 2% as an annual rate so we note this.

The euro area annual inflation rate was 1.6% in December 2018, down from 1.9% in November

Of course being central bankers they apparently need neither food nor energy so they like to focus on the inflation number without them which is either 1.1% or 1% depending exactly which bits you omit, But as you can see this is hardly the bedrock for an interest-rate rise which is reinforced by this from @fwred of Bank Pictet.

More bad news for the ECB. Our PMI price pressure gauge fell by the largest amount since mid-2011, to levels consistent with monetary easing along with activity indicators.

Comment

The situation has become increasingly awkward for Mario Draghi and the ECB as a slowing economy and lower inflation have been described by them as follows.

When you look at the economy, well, you still see the drivers of this recovery are still in place. Consumption continues to grow, basically supported by the increase in real disposable income, which, if I am not mistaken, is at the historical high since six years or something, and households’ wealth. Business investments continue to grow, residential investment, as I said in the IS [introductory statement] is robust. External demand has gone down but still grows.

Yet as we can see the reality is that economic growth looks like it has dropped from the around 0.7% of 2017 to more like 0.1% now. If we were not where we are with a deposit rate of -0.4% and monthly QE having only just ended they would be openly looking at an interest-rate cut or more QE.

Whilst we have been observing the slow down in the M1 money supply from just under 10% to 6.7% the ECB has lost itself in a world of “ongoing broad-based expansion”. It is not impossible we will see some liquidity easing today via a new TLTRO which would also help the Italian banks but we will have to see.

As to why there has been talk about an interest-rate rise well it is not for savers it is for the precious and the emphasis is mine.

As a result, reductions in
rates can end up having a similar effect as a flattening of the yield curve, as banks interest
revenue drops along with rates, but interest costs only adjust partially because of the zero
lower bound on retail deposits. In this situation, lowering rates below zero can pose a
threat to banks’ profitability. ( ECB November 2018)

Now we can’t have that can we?

Me on The Investing Channel

 

Economic growth in Germany converged with that in Italy in the latter part of 2018

As we arrive in the UK at “meaningful vote” day which seems about as likely to be true as a Bank of England “Super Thursday” actually being super the real economic news comes from the heart of the Euro area. So here it is.

According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 1.5% higher in 2018 than in the previous year. The German economy thus grew the ninth year in a row, although growth has lost momentum. In the previous two years, the price adjusted GDP had increased by 2.2% each. A longer-term view shows that German economic growth in 2018 exceeded the average growth rate of the last ten years (+1.2%)……….As the calendar effect in 2018 was weak, the calendar-adjusted GDP growth rate was 1.5%, too ( German statistics office )

A little care if needed as these numbers are not yet seasonally adjusted. But we do have price-adjusted numbers have gone 2.2% (2016) then 2.5% (2017) and now 1.5%. This immediately reminds me of the words of European Central Bank President Mario Draghi at his last press conference.

 I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery. There are lots of numbers that we can give about how it did change financing conditions in a way that – in many ways. But let’s not forget that interest rates had dramatically declined even before QE but they continued to do so after QE…….. We view this as – but I don’t think I’m the only one to be the crucial driver of the recovery in the eurozone. At the time, by the way, when also other drivers were not really – especially in the first part, there was no other source of growth in the real economy.

This comes to mind because if you take that view and now factor in the reduction in the monthly QE purchases and then their cessation in 2018 then the decline in GDP growth in Germany was sung about by Radiohead.

With no alarms and no surprises
No alarms and no surprises
No alarms and no surprises
Silent, silent

In essence if we switch to the world of football then 2018 was a year of two halves for Germany because if we go back to half-time we were told this.

Compared with a year earlier, the price adjusted GDP rose 2.3% in the second quarter of 2018.

At that point economic growth seemed quite consistent at around 0.5% per quarter if we ignore the 1,1% surge in the first quarter of 2017. So Mario’s point is backed up by German economic growth heading south in the second half of 2018 which if we now look wider poses an implication for another part of his speech.

 Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters.

We do not have the final result for the second half of 2018 but the range seems set to be between -0.1% and 0.1%. Ironically it means that the quote below from the Italian economy minister is rather wrong.

*TRIA: EU TO FACE POTENTIAL COLLAPSE IF POLICIES FEED DIVERGENCE

As we stand the German economic performance has in fact converged with the Italian one.

Detail

There has been quite a slow down in domestic consumption because at the end of the second quarter we were told this.

Overall, domestic uses increased markedly by 0.9% compared with the first three months of the year.

Whereas now we are told this was the situation six months later.

Both household final consumption expenditure (+1.0%) and government final consumption expenditure (+1.1%) were up on the previous year. However, the growth rates were markedly lower than in the preceding three years.

That is not an exact comparison because investment is not in the latter and it has remained pretty strong but nonetheless there has been quite a fall in domestic consumption. Also investment has not turned out to be the golden weapon against an economic slowing.

Total price-adjusted gross fixed capital formation rose 4.8% year-on-year.

Also a usual strength for the economy was not on its best form.

German exports continued to increase on an annual average in 2018, though at a slower pace than in the previous years. Price-adjusted exports of goods and services were up 2.4% on 2017. There was a larger increase in imports (+3.4%) over the same period. Arithmetically, the balance of exports and imports had a slight downward effect on the German GDP growth (-0.2 percentage points).

In terms of the world economy that is a good thing as many have argued ( including me) that the German trade surplus is an imbalance if we look at the world economy. The catch is how you fix it and shrinking it in a period of economic weakness is far from ideal. Also another number went against the stereotype.

 For the first time in five years, short-term economic growth in industry was lower than in the services sector.

Lastly these are not precise numbers but output per head of productivity growth seems to have slowed to a crawl.

On an annual average in 2018, the economic performance in Germany was achieved by 44.8 million persons in employment whose place of employment was in Germany. According to first calculations, that was an increase of roughly 562,000 on the previous year. This 1.3% increase was mainly due to a rise in employment subject to social insurance.

1.5% is not much more than 1.3%.

Fiscal Policy

This is not getting much attention but you can argue that Germany has made the same mistake in 2017/18 that it made in 2010/11 in Greece albeit on a much smaller scale.

General government achieved a record surplus of 59.2 billion euros in 2018 (2017: 34.0 billion euros). At the end of the year, central, state and local government and social security funds recorded a surplus for the fifth time in a row, according to provisional calculations. Measured as a percentage of the gross domestic product at current prices, this was a 1.7% surplus ratio of general government for 2018.

It has contracted fiscal policy into an economic slow down and thereby added to it.

Comment

As these matters can get very heated on social media let me be clear I take no pleasure in Germany’s economic slow down. For a start it would be illogical as it will be a downward influence on the UK. But it has been a success for the monetary analysis I presented in 2018 as the fall in the money supply was both an accurate and timely indicator of what was about to happen next.

Official policy has seen a dreadful run however. I have dealt with fiscal policy above which has been contracted in a slow down but we also see that the level of monetary stimulus was reduced. Apart from the obvious failure implied by this there are other issues. The most fundamental is a point I have made many times about Euro area economic growth being a “junkie” style culture depending on the next stimulus hit. That has meant it has arrived at the next slow down with the official deposit rate still negative ( -0.4%) as I have long feared. Still I suppose it could be worse as the Riksbank of Sweden managed to raise interest-rates in this environment after not doing so when the economy was doing well.

Let me post a warning to avoid the Financial Times article today about UK Index-Linked Gilts. No doubt this will later be redacted but in the version I read the author was apparently unaware that the RPI inflation measure not CPI is used for them.

The outlook for the economy of Germany has plenty of dark clouds

Sometimes it is hard not to have a wry smile at the way events are reported. Especially as in this instance it has been a success for my style of analysis. If we take a look at the fastFT service we were told this yesterday.

German industrial production unexpectedly drops in November.

My immediate thought was as the German economy contracted by 0.2% in the third quarter we should not be surprised by declines. Fascinatingly the Financial Times went to the people who have not been expecting this for an analysis of the issue.

German data released over the past two days have painted a glum picture for how Europe’s biggest economy performed during the latter part of 2018. fastFT rounds up what economists and analysts have said about what is happening. Anxieties over global trade wars and political uncertainty in the eurozone have taken their toll, and Europe’s powerhouse is showing signs of fatigue. Questions of whether a recession is looming have also been raised, while many economists remain cautiously optimistic in their prognosis.

If we now switch to what we have been looking at I wrote this on December 7th about the situation.

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area.

So not only had there been an expected weakening of the economy but there had been at that point no clear sign of the promised bounce back. What we know in addition now is this which was released on January 3rd.

  • Annual growth rate of broad monetary aggregate M3 decreased to 3.7% in November 2018 from 3.9% in October
  • Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.7% in November, compared with 6.8% in October

So another decline and if we look for a trend we would expect Euro area growth to continue to be weak and this time around that is being led by Germany. The link between monetary data and the economy is not precise enough for us to say Germany is in a recession but we can expect weak growth at best heading into the early months of 2019. The FT does to be fair give us a brief mention of the monetary data from Oxford Economics.

lending growth remaining robust

The problem with that which as it happens repeats the argument of Mario Draghi of the ECB is that it is a lagging indicator in my opinion as banks respond to the better economic news from 2017.

As these matters can be heated let me make it quite clear that I wish Germany no ill in fact quite the reverse but the money supply data has been clear and has worked so far. Frankly the way it is still being widely ignored suggests it is likely to continue to work.

This week’s data

Trade

This morning’s release started in conventional fashion as we got the opportunity to observe yet another trade surplus for Germany.

 Germany exported goods to the value of 116.3 billion euros and imported goods to the value of 95.7 billion euros in November 2018………The foreign trade balance showed a surplus of 20.5 billion euros in November 2018. In November 2017, the surplus amounted to 23.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.0 billion euros in November 2018.

In world terms an annual decline in Germany’s surplus is a good thing as it was one of the imbalances which set the ground for the credit crunch. But if we switch to looking at this on a monthly basis this leapt off the page at me about imports.

-1.6% on the previous month (calendar and seasonally adjusted)

A fall in imports is a sign of a weak economy as for example we saw substantial falls in Greece back in the day. There are caveats to this of which the biggest is that monthly trade data is inaccurate and erratic but such as the numbers are they post another warning. The other side of the balance sheet was more conventional in that with current trade issues one might expect this.

also reports that German exports in November 2018 remained nearly unchanged on November 2017.

Let us move on by noting that due to the way that Gross Domestic Product or GDP is calculated lower imports in isolation provide a boost before a “surprise” fall later as it filters through other parts.

Production

If we step back to Monday there was some troubling news on this front.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2018 a seasonally and calendar adjusted 1.0% on the previous month.

So not much sign of an improvement and it was hardly reassuring that geographically the issue was concentrated in the Euro area.

Domestic orders increased by 2.4% and foreign orders decreased by 3.2% in November 2018 on the previous month. New orders from the euro area were down 11.6%, new orders from other countries increased 2.3% compared to October 2018.

Then on Tuesday we got disappointing actual production numbers.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). The revised figure shows a decrease of 0.8% (primary -0.5%) from October 2018.

So November has quite a fall and this was compared to an October number which had been revised lower. This meant that the annual picture looked really poor.

-4.7% on the same month a year earlier (price and calendar adjusted)

Business surveys

At then end of last week we were told this by the Markit PMI ( Purchasing Manager’s Index) at the end of last week.

December saw the Composite Output Index fall for the fourth month running to 51.6, down from 52.3 in
November and its lowest reading since June 2013.
The latest slowdown was led by the service sector, as the rate of manufacturing output growth strengthened for the first time in five months, albeit picking up only slightly and staying below that of services business activity.

The problem for Markit is that rather than leading events they are lagging them as they are recording declines after the economic contraction in the third quarter. If we took them literally then the economy would shrink by even more this quarter! Anyway they no seem to be on the case of the motor industry. From yesterday.

Latest data indicated a worsening downturn in the European autos sector at the end of 2018. Production of automobiles & parts fell for the third month running, and at the fastest rate since March 2013. New orders fell sharply, with new export business (including intra-European trade) declining at the fastest rate in six years.

Comment

The German economy found itself surrounded by dark clouds as 2018 developed and as I am typing this we have seen more worrying signs. From @YuanTalks.

It’s the FIRST YEARLY DROP in at least 20 years. Passenger car sales slumped 19% y/y in Dec 2018 to 2.26 mln vehicles.

Over 2018 as a whole car sales fell by 6% so we can see the issue is accelerating and there are obvious implications for German manufacturers. It has been accompanied by another generic sign of possible world economic weakness from @LiveSquawk.

Exclusive: Apple Cuts iPhone Production Plan By 10% – Nikkei

Suddenly there is a lot of concern over a German recession or as it is being described a technical recession. In case you were wondering that means a recession that is within the error range of the data which actually covers most of them! Because of these errors it is hard to say whether the German economy grew or contracted at the end of last year, as for example wage growth should support consumption. But what we can say is that the broad sweep from it to the like;y trend for the early part of 2019 is weak. Perhaps some growth but not much after all even 0.2% growth in the final quarter would mean flat growth for the second half of the year.

For those who think ECB policy is set for Germany this poses quite a problem as it has ended its monthly QE purchases just as things have deteriorated in a shocking sense of timing. But to my mind just as bad is the issue that my “junkie culture” theme that growth was dependent on the stimulus also gets a tick including something of a slap on the back from Mario Draghi who seems to have come round to at least part of my point of view.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

According to Handelsblatt every little helps.

Germany has saved €368 billion in interest costs on its debt thanks to record low interest rates since the financial crisis in 2008, according to Bundesbank calculations. That’s more than 10% of annual GDP.

 

 

 

How long will it be before the Bank of England cuts interest-rates?

This morning has opened with some good news for the UK economy and it has come from the Nationwide Building Society. So let us get straight to it.

Annual house price growth slows to its
weakest pace since February 2013. Prices fell 0.7% in the month of December,after taking account of seasonal factors.

I wish those that own their own house no ill but the index level of 425.7 in December compares with 107.1 when the monthly series first began in January of 1991, so you can see that it has been a case of party on for house prices. If you want a longer-term perspective then the quarterly numbers which began at 100 at the end of 1952 were 11.429.5 and the end of the third quarter of 2018. I think we can call that a boom! Putting it another way the house price to earnings ratio is 5.1 which is not far off the pre credit crunch peak of 5.4.

The actual change is confirmed as being below both the rate of consumer inflation and wage growth later.

UK house price growth slowed noticeably as 2018 drew to a close, with prices just 0.5% higher than December 2017.

Also the Nationwide which claims to be the UK’s second largest mortgage lender is not particularly optimistic looking ahead.

In particular, measures of consumer confidence weakened
in December and surveyors reported a further fall in new
buyer enquiries towards the end of the year. While the
number of properties coming onto the market also slowed,
this doesn’t appear to have been enough to prevent a
modest shift in the balance of demand and supply in favour
of buyers.

Although they then seem to change their mind.

It is likely that the recent slowdown is attributable to the
impact of the uncertain economic outlook on buyer
sentiment, given that it has occurred against a backdrop of
solid employment growth, stronger wage growth and
continued low borrowing costs.

The economic environment is seeing some ch-ch-changes right now but let us first sort out some number-crunching where each UK country has done better than the average.

Amongst the home nations Northern Ireland recorded the
strongest growth in 2018, with prices up 5.8%, though
Wales also recorded a respectable 4% gain. By contrast,
Scotland saw a more modest 0.9% increase, while England
saw the smallest rise of just 0.7% over the year.

They have I think switched from the monthly to the quarterly data here as that average was up by 1.3%.

The UK economy

We have now received the last of the UK Markit Purchasing Manager Index surveys so let us get straight to it.

At 51.6 in December, the seasonally adjusted All Sector
Output Index was up slightly from 51.0 in November.
However, the latest reading pointed to the second-slowest
rate of business activity expansion since July 2016.

I am a little surprised they mention July 2016 so perhaps they are hoping we have short memories and do not recall how it turned into a lesson about being careful about indices driven by sentiment. This was mostly driven by the manufacturing sector which had Markit looking for a scapegoat.

December saw the UK PMI rise to a six-month high,
following short-term boosts to inventory holdings and
inflows of new business as companies stepped up their
preparations for a potentially disruptive Brexit.
Stocks of purchases and finished goods both rose
at near survey-record rates, while stock-piling by
customers at home and abroad took new orders growth
to a ten-month high.

So preparation is bad as presumably would be no preparation. It is especially awkward for their uncertainty theme which was supposed to be reducing output. But let us move onto the main point here which is that the UK is apparently managing some economic growth but not a lot. This matters if we now switch to the wider economic outlook.

The world economy

As I have been typing this the Chinese cavalry have arrived. Reuters.

China’s just cut bank reserve requirement ratios by 100 bps, releasing an estimated RMB1.5t in liquidity by Jan 25. expected this, but argues the central bank can do a lot more – like cutting benchmark guidance lending rates.

Reuters are understandably pleased about finding someone who got something right. But the deeper issue is the economic prognosis behind this which we dipped into on Wednesday and is that the Chinese economy is slowing. For those wondering about what the People’s Bank of China is up to it is expanding the money supply via reducing the reserves banks have to hold which allows them to lend more. So they are acting on the quantity of money rather than the price or interest-rate of it. This relies on the banks then actually lending more. Or more specifically not just lending to those in distress.

Then there is the Euro area which according to the Markit PMIs is doing this.

The eurozone economy moved down another gear
at the end of 2018, with growth down considerably
from the elevated rates at the start of the year.
December saw business activity grow at the
weakest rate since late-2014 as inflows of new
work barely rose……….The data are consistent with eurozone GDP rising by just under 0.3% in the fourth quarter, but with quarterly growth momentum slowing to 0.15% in December.

We need to rake these numbers as a broad sweep rather than going for specific accuracy as, for example, Germany is described as being at a five-year low which requires amnesia about the 0.2% GDP contraction in the third quarter of this year.

Comment

If we switch to our leading indicator for the UK which is money supply growth we see a by now familiar pattern. The two signals of broad money growth have diverged a bit but neither M4 growth at 2.2% in November or M4 lending growth at 3.5% are especially optimistic. That only gets worse once you subtract inflation from it. Or to put it another way in ordinary times we would be in a situation where a bank rate cut would be expected.

What does the Bank of England crystal ball or what is called Forward Guidance in one of Governor Mark Carney’s policy innovations tell us?

The MPC had judged in November that, were the economy to develop broadly in line with its Inflation
Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a
limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

So “I agree with Mark” seems to be the most popular phase which should make taxpayers wonder why we bother with the other 8 salaries? Indeed one of them will be in quite a panic now as back in May Deputy Governor Ramsden told us that 8.8% consumer credit growth was “Weak” so I dread to think what he makes of the current 7.1%. Although @NicTrades has a different view.

that’s China fast!

So that is how a promised Bank Rate rise begins to metamorphose into a Bank Rate cut which will be presented as “unexpected” ( as opposed to on here where we have been watching the journey of travel for nearly a year) and a “surprise”, just like the last time this happened just over 2 years ago.

Let me finish by welcoming the addition of two women to the Financial Policy Committee as there is of course nothing like a Dame.

Dame Colette Bowe and Dame Jayne-Anne Gadhia have been appointed as external members of ‘s Financial Policy Committee (FPC)

So sadly the diversity agenda only adds female members of the establishment to the existing list of male establishment appointees. That went disastrously with the Honorable Charlotte Hogg who proved that even being the daughter of an Earl and a Baroness cannot allow you to avoid family issues, especially when you forget you have a brother.

Weekly Podcast

Including my answer to this question from Rob Wilson.

How can economies such as Italy and Japan endures decades of virtually zero growth and yet the general population don’t seem to be suffering compared to other economies with growth?

 

 

 

 

 

 

ECB monetary policy can inflate house prices at least….

Tomorrow the European Central Bank meets for what has become a crucial policy meeting. There is a lot for it to discuss on the economic front and let us open with an element of deja vu.

Bank Of Spain Governor De Cos: No Signs Of New Property Bubble In Spain – RTRS ( @LiveSquawk )

It is hard not to think of the “Never believe anything until it is officially denied” by the apocryphal prime minister Jim Hacker at this point. He is responding to this covered by El Pais yesterday.

The International Monetary Fund (IMF) is calling on Spain to monitor the price of real estate following a rebound of the property market after years of crisis. After analyzing late 2017 statistics, the global agency has detected early signs of “a slight overvaluation,” although it stressed that there is still nothing like a new housing bubble in Spain.

Here is a reminder of the state of play which is that Spain is a nation of home owners.

The IMF finds that house prices increased by around 15% between 2014 and 2017, but that sales are being driven by existing housing stock rather than new housing. Another change from pre-crisis days is that the home ownership rate has dropped from 80% to 77% as people increasingly turn to the rental market.

Let us bring the numbers up to date via INE from the end of last week.

The annual variation of the Housing Price Index (IPV) in the third quarter of 2018 increases four tenths and stands at 7.2%……The quarterly variation of the general IPV in the third quarter of 2018 is 2.2%.

The IMF seems to have missed that the pace of house price growth has picked up in Spain. Not only the 2.2% quarterly rise but the fact that the overall index set at 100 in 2015 is now at 120.5. Returning to the role of the ECB a typical mortgage rate (over 3 years) is 1.93%.

Ireland

Last time around a housing boom and later bust in Spain was accompanied by one in Ireland so let us check in on yesterday’s official update.

Residential property prices increased by 8.4% nationally in the year to October. This compares with an increase of 8.5% in the year to September and an increase of 11.7% in the twelve months to October 2017.

As you can see the heat is on again and is heading towards levels which caused so much trouble last time around.

Overall, the national index is 17.6% lower than its highest level in 2007. Dublin residential property prices are 20.1% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 22.7% lower than their May 2007 peak.

Also they have got there rather quickly.

Property prices nationally have increased by 83.8% from their trough in early 2013. Dublin residential property prices have risen 98.0% from their February 2012 low, whilst residential property prices in the Rest of Ireland are 77.9% higher than at the trough, which was in May 2013.

Now that it has got the central banking holy grail of higher house prices the ECB seems to have, for some reason got cold feet about putting them in the consumer inflation index.

The ECB concludes that the integration of the OOH price index would deteriorate the current
frequency and timeliness of the HICP, and would introduce an asset element. Against this
background, it takes the view that the OOH price index is in practice not suitable for
integration into the official HICP.

It has turned into a classic bureaucratic move where you promise something have a committee formed to do it which concludes so sadly that it will not do it. The reasons stated were known all along.

Economic growth

Whilst house price developments will put a smile on the faces of Governing Council members other economic developments may wipe that smile away. One possible bright spot has gone a bit dark. From France24.

 

The Bank of France said the Eurozone’s second-biggest economy would eke out growth of only 0.2% in the three months to December, down from 0.4% in a previous estimate and from that rate in the third quarter.

“Services activity has slowed under the impact of the movement. Transport, the restaurant and auto repair sectors have gone backwards,” the bank said in its latest company survey.

The forecast is well short of the 0.8% that would be needed to meet the government’s 2018 growth target of 1.7%.

That was reinforced by the production and manufacturing data for October which was up on the month but 0.1% lower than a year ago. The growth shortfall will only make the next French problem worse. From Reuters.

Macron announced wage increases for the poorest workers and a tax cut for most pensioners on Monday to defuse discontent, leaving his government scrambling to come up with extra budget savings or risk blowing through the EU’s 3 percent of GDP limit.

That is especially awkward considering how vocal the French government had been about the Italian budget plans which in percentage terms was set to be a fair bit smaller.

Italy

The perennial under performer in economic terms seems to be in yet another “girlfriend in a coma” style phrase. From the latest monthly economic report.

In Italy, the GDP decreased marginally in the third quarter due to a contraction in both gross fixed investments and private consumption. On the contrary, the net exports contributed positively to growth.

The employment stabilized on past months levels recording a re-composition, which favored full time employees. Unemployment rate increased and was complemented by a reduction in inactive persons.

Italian inflation continued to be lower than the Eurozone average but the gap is closing.
In November, both the consumer confidence and the composite indicators decreased. The leading indicator stabilized on past months minimum values confirming the business cycle weakness.

There is a genuine danger of what some of the media have decided to call a technical recession. I get the point about it being within the margin of error and applaud their sudden conversion to this cause. But missing from this is the fact that this is an ongoing depression in Italy which shows not only no sign of ending but may be getting worse.

Comment

This will be a meeting of two halves. The awkward part is that after all the extraordinary monetary action involving negative interest-rates, QE and credit easing the Euro area economy has slowed from a quarterly growth rate of 0.7% to 0.2%. If we were not where we are the ECB would be discussing a stimulus programme. Except of course the plan is to announce the end to monthly QE bond purchases. Some places are suggesting a delay to future interest-rate increases as they catch up with my long-running view that Mario Draghi has no intention of raising them on his watch.

The second half will be the one emphasised which is that the ECB has hit its inflation target.

Euro area annual inflation is expected to be 2.0% in November 2018, down from 2.2% in October 2018, according to a flash estimate from Eurostat.

Okay not the 1.97% level defined by the previous President Jean-Claude Trichet but close enough. I wonder if any of the press corps will have the wit to ask about the U-Turn on including house prices in the inflation measure and whether that is because monetary policy can inflate house prices?