UK GDP growth is as flat as a pancake

Today brings us the last major set of UK economic data before the General Election on Thursday at least for those who vote in person. It is quite a set as we get trade, production, manufacturing and construction data but the headliners will be monthly and quarterly GDP. As the latter seem set to be close to and maybe below zero no doubt politicians will be throwing them around later. Let’s face it they have thrown all sorts of numbers around already in the campaign.

The UK Pound

This has been the economic factor which has changed the most recently although it has not got the attention it deserves in my opinion. At the time of writing the UK Pound £ is above US $1.31, 1.18 to the Euro and nearing 143 Yen. This means that the effective or trade-weighted index calculated by the Bank of England is at 81.1 which is about as good as it has been since the post EU leave vote fall ( there were similar levels in April of last year). This particular rally started on the 9th of August from just below 74 so it has been strong or if you prefer for perspective we opened the year at 76.4.

Thus using the old Bank of England rule of thumb we have seen the equivalent of more than a 1% rise in official interest-rates or Bank Rate in 2019 so far. This has produced two economic developments or at least contributed to them. The first is that inflation prospects look good and I mean by my definition not the Bank of England one. The CPI versions could head below 1% in the months to come and RPI towards 1.5%. The other is that it may have put a small brake on the UK economy and contributed to our weak growth trajectory although many producers are probably used to swings in the UK Pound by now.

Some good news

The trade figures will be helped by this from UK wind.

GB National Grid: #Wind is currently generating 13.01GW (33.08%) out of a total of 39.34GW

The catch is that of course we are reliant on the wind blowing for a reliable supply. Also that it is expensive especially in its offshore guise, as it it both outright expensive to add to the costs of a back-up.

GDP

As to growth well our official statisticians could not find any.

UK GDP was flat in the three months to October 2019.

If we look at the different sectors we see what has become a familiar pattern.

The services sector was the only positive contributor to gross domestic product (GDP) growth in the three months to October 2019, growing by 0.2%. Output in both the production and construction sectors contracted, by 0.7% and 0.3%, respectively. The weakness seen in construction was predominantly driven by a fall of 2.3% in October.

So services grew and production shrank with construction erratic but also overall lower. If you wish to go to another decimal place you can find a small smidgeon of growth as services pushed GDP up by 0.17%, production cost 0.1% and construction cost 0.02% leaving a net 0.05%. But that is spurious accuracy as that puts the numbers under too much pressure.

Services

There was something of note in the monthly series ( October).

Services also grew by 0.2% in October, with widespread growth in several industries. The most notable of these were real estate activities and professional, scientific and technical activities, which both contributed 0.06 percentage points to gross domestic product (GDP) growth. The latter was driven by strength in both architectural and engineering activities, and research and development.

Two things stand out from this. Firstly the quarterly growth was essentially October  and next that much of it was from real estate and architecture. Is Nine Elms booming again? But more seriously something is perhaps going on here that has not been picked up elsewhere.

Production

Here the news has been pretty gloomy all round although the energy part is good news in terms of better weather and less expense for consumers.

Total production output decreased by 0.7% for the three months to October 2019, compared with the three months to July 2019; this was led by manufacturing output, which fell by 0.7%, followed by falls in mining and quarrying (2.6%) and electricity and gas (1.0%).

This reminds us that these areas have been seeing a depression in the credit crunch era.

Production output in the UK remained 6.2% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008……..Manufacturing output in the UK remained 3.5% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008.

It was not so long ago that it looked like manufacturing was about to escape this but then the trade war happened.

There was a flicker in October alone but the impact of the swings in the pharmaceutical industry are usually much stronger than that.

The growth of 0.1% in total manufacturing output in October 2019, compared with September 2019, was mainly because of widespread strength, with 8 of the 13 subsectors displaying upward contributions. The largest of these came from the volatile pharmaceutical products subsector, which rose by 2.1%, following two consecutive periods of significant monthly weakness during August and September 2019.

Trade

The issue here is the uncertainty of the data which today has illustrated,

The total UK trade deficit (goods and services) widened £2.3 billion to £7.2 billion in the three months to October 2019, as imports grew faster than exports

That seems clear but then again maybe not.

Excluding unspecified goods (which includes non-monetary gold), the total trade deficit narrowed £4.3 billion to £2.9 billion in the three months to October 2019.

The oversea travel and tourism problems have still not be solved.

For earlier monthly releases of UK Trade
Statistics that have also been affected by this error, the versions on the website should be amended
to make clear to users that the errors led the Authority to suspend the National Statistics
designation on 14 November 2014.

Moving on there is also this.

In current prices, the trade in goods deficit widened £6.8 billion to £35.6 billion, largely driven by rising imports; the trade in services surplus widened £4.4 billion to £28.4 billion, largely driven by rising exports.

So there is hope for the UK services exports which seem to be doing well and I have long suspected have been under recorded. For example smaller businesses are likely to be missed out. The scale of this is simply unknown and as we have issues here this must feed into the wider GDP numbers which are so services driven.

So our trade problem is a case of definitely maybe.

Comment

We perhaps get the best perspective from the annual rate of GDP growth which is now 0.8% using the quarterly methodology. If we take out the spring blip that has been declining since the 2% of August 2018. There are some ying and yangs in the detail because of we start with the positive which is services growth ( 1.3%) it has been pulled higher by the information and communication category which is up by 5.4% and education which is up by 3%. But on the other side of the coin the depression in production and manufacturing has worsened as both have fallen by 1.5%. I have little faith in the construction numbers for reasons explained in the past but growth there has fallen to 0%.

There are lots of permutations for the General Election but yet another interest-rate cut by the Bank of England just got more likely. It meets next week. Also political spending plans are getting harder to afford in terms of economic growth,

 

 

 

Is the Bundesbank still sure that Germany is not facing a recession?

The year so far has seen a development which has changed the economic debate especially in Europe.This is the malaise affecting the German economy which for so long has been lauded. This continued in 2017 which saw quarterly GDP growth of 1.2%, 0.6%, 0.9% and 0.7% giving the impression that it had returned to what had in the past been regarded as normal service. However before the trade war was a glint in President Trump’s eye and indeed before the ECB QE programme stopped things changed. As I have pointed out previously we did not know this at the time because it is only after more recent revisions that we knew 2018 opened with 0.1% and then 0.4% rather changing the theme and meaning that the subsequent -0.1% would have been less of a shock. We can put the whole situation in perspective by noting that German GDP was 106.04 at the end of 2017 and was 107.03 at the end of the third quarter this year. As Talking Heads would put it.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride

Industrial Production

This has been a troubled area for some time as regular readers will be aware. Throughout it we have seen many in social media claim that in the detail they can see reasons for an improvement, whereas in fact things have headed further south. This morning has produced another really bad number. .

WIESBADEN – In October 2019, production in industry was down by 1.7% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In September 2019, the corrected figure shows a decrease of 0.6% from August 2019, thus confirming the provisional result published in the previous month.

If we look at the breakdown we see that the future is not bright according to those producing capital goods.

Within industry, the production of intermediate goods increased by 1.0% and the production of consumer goods by 0.3%. The production of capital goods showed a decrease by 4.4%. Outside industry, energy production was up by 2.3% in October 2019 and the production in construction decreased by 2.8%.

There is a flicker of hope from intermediate goods but consumer goods fell. There is an additional dampener from the construction data as well.

Moving to the index we see that the index set at 100 in 2015 is at 99.4 so we are seeing a decline especially compared to the peak of 107.8 in May last year. If we exclude construction from the data set the position is even worse as the index is at 97.6.

The annual comparison just compounds the gloom.

-5.3% on the same month a year earlier (price and calendar adjusted)

Looking Ahead

Yesterday also saw bad news on the orders front.

WIESBADEN – Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in October 2019 a seasonally and calendar adjusted 0.4% on the previous month.

This was a contrast to a hint of an uptick in the previous month.

For September 2019, revision of the preliminary outcome resulted in an increase of 1.5% compared with August 2019 (provisional: +1.3%).

If we peer into the October detail we see that this time around the problem was domestic rather than external.

Domestic orders decreased by 3.2% and foreign orders rose 1.5% in October 2019 on the previous month. New orders from the euro area were up 11.1%, new orders from other countries decreased 4.1% compared to September 2019.

The oddity here is the surge in orders from the rest of the Euro area when we are expecting economic growth there to be very flat. If we switch to Monday’s Markit PMI then there was no sign of anything like it.

At the aggregate eurozone level, ongoing declines in
output and new orders were again recorded.

Indeed ICIS reported this in October based on the Markit survey.

Sharp declines in order book volumes weighed on operating conditions during the month, concentrated on intermediate goods producers, while consumer goods makers saw significantly milder levels of deterioration.

If we look back we see that this series has turned out to be a very good leading indicator as the peak was in November 2017 at 108.9 where 2015 = 100. Also we see that in fact it is domestic orders which have slumped the most arguing a bit against the claim that all of this is trade war driven.

The annual picture is below.

-5.5% on the same month a year earlier (price and calendar adjusted)

Monetary Policy

This has remained extraordinarily easy but does not appear to have made any difference at all. The turn in production took place when ECB QE was still going full steam ahead for example. Indeed even those who voted for such measures seem to have lost the faith as this from yesterday’s twitter output from former Vice-president Vitor Constancio suggests.

In 2014 when the main policy rate reached zero, keeping a corridor implied a negative deposit rate. There was then a risk of deflation and it was supposed to be a temporary tool.Since last year I have been tweeting against going to deeper negative rates.

A welcome realisation but it is too late for him to change policy now.

The problem for monetary policy is that with the German ten-year yield being -0.3% and the official deposit rate being -0.5% what more can be done? It all has the feeling of the famous phrase from Newt in the film Aliens.

It wont make any difference

Fiscal Policy

The policy was explained by Reuters in late October.

Eurostat said Germany’s revenues last year exceeded expenses by more than previously estimated, allowing Berlin to post a budget surplus of 1.9% of its output, above the 1.7% that Eurostat had calculated in April.

That has been the state of play for several years now and the spending increases for next year may not change that much.

The total German state budget for next year is to be €362 billion ($399 billion), €5.6 billion more than is being spent this year. ( DW )

Although further down in the article it seems that the change may be somewhat limited.

As in previous years, and following the example of his conservative predecessor, the Social Democrat Finance Minister Scholz has pledged not to take on any more debt – maintaining Germany’s commitment to the so-called “black zero”: a balanced budget.

Some more spending may have an implicit effect on the industrial production numbers. Indeed defence spending can have a direct impact should orders by forthcoming for new frigates or tanks.

Yesterday FAZ reported that this fiscal year was more or less the same as the last.

German state is facing a significant surplus this year. All in all, revenues will exceed spending by around 50 billion euros. This is apparent from an internal template for the Stability Council meeting on 13 December. It contains the information on the state’s net lending of between € 49.5 and 56.5 billion.

Comment

There is a case here of living by the sword and perhaps then dying by it as it is what has been considered a great success for Germany which has hit the buffers last year then this. The manufacturing sector is around 23% of the economy and so the production figures have a large impact. October is only the first month of three but such weak numbers for an important area pose a question for GDP in the quarter as a whole? Rather awkwardly pay rates seem to have risen into the decline.

The third quarter saw an exceptionally strong
increase in negotiated pay rates. Including additional benefits, these rates rose year-on-year
by 4.2% in the third quarter of 2019, compared
with 2.1% in 2018. This temporary, considerably higher growth rate was mainly due to new
special payments in the metal-working and
electrical engineering industries, which had
been agreed last year and were first due in July
2019.

Before we knew the more recent data the Bundesbank was telling us this.

The slowdown of the German economy will
probably continue in the fourth quarter of
2019. However, it is not likely to intensify markedly. As things currently stand, overall economic output could more or less stagnate.
Thus, the economy would largely tread water
again in the second half of this year as a whole.

Then they left what is now looking like a hostage to fortune.

However, from today’s vantage point, there is
no reason to fear that Germany will slide into recession.

 

 

Greece GDP growth is a tactical success but a strategic disaster

Yesterday the Eurogroup made a statement lauding the economic progress made by Greece.

We welcome the confirmation by the institutions that Greece is projected to comfortably meet the primary surplus target of 3,5% of GDP for 2019. We also welcome the adoption of a budget for 2020, which is projected to ensure the achievement of the primary surplus target and which includes a package of growth-friendly measures aimed at reducing the tax burden on capital and labour. Greece has also made significant progress with broader structural reforms, notably in the area of the labour market, digital governance, investment licensing and the business environment.

Actually of course this is another form of punishment beating as we note that the depression ravaged Greek economy will find 3.5% of GDP subtracted from it each year. It is hard not to then laugh at the mention of “growth-friendly” measures. Moving to reform well this all started in the spring of 2010 so why is reform still needed? Indeed the next bit seems to suggest not much has been done at all.

 It will be crucial for Greece to maintain, and where necessary accelerate, reform momentum going forward, including through determined implementation of reforms on all levels. Against this background, we welcome that the Greek authorities reiterated their general commitment to continue the implementation of all key reforms adopted under the ESM programme, especially as regards the reduction of arrears to zero, recruitments in the public sector and privatisations.

Anyway they are going to give Greece some of the interest and profits they have taken off it back.

Subject to the completion of national procedures, the EWG and the EFSF Board of Directors are expected to approve the transfer of SMP-ANFA income equivalent amounts and the reduction to zero of the step-up interest margin on certain EFSF loans worth EUR 767 million in total.

What about the economy?

We have reached the stage I have long feared where any improvement is presented as a triumph. This ignores two things which is how bad matters got and how long it has taken to get here. Or to put it another way Christine Lagarde was right to describe it as “shock and awe” when she was French finance minister but in the opposite way to what she intended.

Manufacturing

This week’s PMI survey from Markit was quite upbeat.

November PMI® survey data signalled a quicker improvement in operating conditions across the Greek manufacturing sector. Overall growth was supported by sharper expansions in output and new orders. Stronger domestic and foreign client demand led to a faster rise in workforce numbers and a greater degree of business confidence.

The reading of 54.1 is really rather good at a time when many other countries are reporting declines although of course the bit below compares to a simply dreadful period.

The rate of overall growth was solid and among the sharpest seen over the last decade.

However there was some good news in a welcome area too.

In response to greater new order volumes, Greek
manufacturers expanded their workforce numbers at a steep pace that was the quickest for seven months.

Also there was some optimism for next year.

Our current forecasts point towards a faster expansion in industrial production in 2020, with the rate of growth expected to pick-up to 1.1% year-on-year.

Sadly though if we look at the previous declines even at such a rate before Maxine Nightingale would be happy.

We gotta get right back to where we started from

Retail Trade

If we switch to the official data we see that the recent news looks good.

The Overall Volume Index in retail trade (i.e. turnover in retail trade at constant prices) in September 2019, increased by 5.1%, compared with the corresponding index of September 2018, while, compared with the corresponding index of August 2019, decreased by 3.9%

So in annual terms strong growth which should be welcomed. But having followed the situation in Greece for some time I know that the retail sector collapsed in the crisis. So we need to look back and if we stay with September we see that the index ( 2015=100) was 144.5 in 2009 and 129.3 in 2010 whereas this year it was 107.3. In fact looking back the peak in September was in 2006 at 167.1 so as you can see here is an extraordinary depression which brings the recent growth into perspective.

Indeed the retail sector was one of the worst affected areas.

Trade

This is one way of measuring the competitiveness of an economy and of course is the area the International Monetary Fund used to prioritise before various French leaders thought they knew better. After such a long depression you might think the situation would be fixed but no.

The deficit of the Trade Balance, for the 9-month period from January to September 2019 amounted to 16,500.5 million euros (18,313.6 million dollars) in comparison with 15,390.6 million euros (18,139.7 million dollars) for the corresponding period of the year 2018, recording an increase, in euros, of 7.2%.

However there is a bright spot which we find by switching to the Bank of Greece.

A rise in the surplus of the services balance is due to an improvement primarily in the travel balance and secondarily in the transport and other services balance. Travel receipts and non-residents’ arrivals increased by 14% and 3.8% year-on-year respectively. In addition, transport (mainly sea transport) receipts rose by 5.5%.

Shipping and tourism are traditional Greek businesses and the impact of the services sector improves the situation quite a bit.

In the January-September 2019 period, the current account was almost balanced, while a €1.4 billion deficit was recorded in the same period of 2018. This development reflects mainly a rise in the services surplus and also an improvement in the primary and the secondary income accounts, which more than offset an increase in the deficit of the balance of goods.

In fact tourism has played an absolute blinder for both the trade position and the economy.

In January-September 2019, the balance of travel services showed a surplus of €14,032 million, up from a surplus of €12,507 million in the same period of 2018. This development is attributed to an increase, by 14.0% or €1,976 million, in travel receipts, which were only partly offset by travel payments, up by 28.0% or €450 million.

GDP

Today has brought the latest GDP data from Greek statistics.

The available seasonally adjusted data indicate that in the 3rd quarter of 2019 the Gross Domestic
Product (GDP) in volume terms increased by 0.6% in comparison with the 2nd quarter of 2019, while
in comparison with the 3rd quarter of 2018, it increased by 2.3%.

The story here is of export driven growth which provides some hope. The domestic economy shrank with consumption 0.4% lower and investment 5% lower on a quarterly basis whereas there was this on the external side.

Exports of goods and services increased by 4.5% in comparison with the 2nd quarter of 2019……….Imports of goods and services increased by 0.6% in comparison with the 2nd quarter of 2019.

Comment

At first it looks extraordinary that the Greek domestic economy could shrink on a quarterly basis but then of course we need to remind ourselves that the fiscal policy described at the beginning of this article is extraordinarily contractionary. So in essence the recovery seems to be depending rather a lot on the tourism industry. I also note that if we look at the Euro area data there is an unwelcome mention in the employment section.

The largest decreases were observed in Lithuania (-1.2%), Romania (-1.1%), Finland (-0.5%) and Greece (-0.3%).

Not what you would hope for in a recovery period.

Switching to an idea of the scale of the depression we see that in the latest quarter GDP was 49 billion Euros, compared to the previous peak in the spring of 2007 of 63.3 billion Euros ( 2010 prices). So more than 12 years later still nearly 23% lower. That is what you call a great depression and at the current rate of growth it will be quite some time before we get right back where Greece started from.

 

Italy faces yet more economic hard times

This morning has brought more signs of the economic malaise that is affecting Italy, a subject which just goes on and on and on. Here is the statistics office.

In 2019, GDP is expected to increase by 0.2 percent in real terms. The domestic demand will provide a contribution of 0.8 percentage points while foreign demand will account for a positive 0.2 percentage point and inventories will provide a negative contribution (-0.8 percentage points).

That is a reduction of 0.1% on the previous forecast. In one way I doubt their forecasts are accurate to 0.1% but then in another way counting 0.1% growth is their job in Italy. The breakdown is odd though. As the net foreign demand may be small but any growth is welcome at a time of a time war but with domestic demand growing why are inventories being chopped?

So annual economic growth has gone 1.7% in 2017 and 0.8% last year and will now be 0.2% if they are correct. They do manage a little optimism for next year.

In 2020, GDP is estimated to increase by 0.6 percent in real terms driven by the contribution of domestic demand (+0.7
percentage points) associated to a positive contribution of the foreign demand (+0.1 p.p.) and a negative contribution of inventories (-0.2 p.p.).

So the main change here is that the decline in inventories slows. If we switch to a positive we are reminded that Italy’s trade position looks pretty good for these times.

In 2019, exports will increase by 1.7 percent and imports will grow by 1.3 percent, both are expected
to slighty accelerate in 2020 (+1.8% and +1.7% respectively)

Looking at domestic demand it will be supported by wages growth and by this.

Labour market conditions will improve over the forecasting period but at moderate pace. Employment
growth is expected to stabilise at 0,7 percent in 2019 and in 2020. At the same time, the rate of
unemployment will decrease at 10.0 percent in the current year and at 9.9 percent in 2020.

They mean 10% this year and 9.9% next although there is a catch with that.

The number of unemployed persons declined (-1.7%, -44 thousand in the last month); the decrease was the result of a remarkable drop among men and a light increase for women, and involved all age groups, with the exception of over 50 aged people. The unemployment rate dropped to 9.7% (-0.2 percentage points), the youth rate decreased to 27.8% (-0.7 percentage points).

As you can see the unemployment rate was already below what it is supposed to be next year so I struggle to see how that is going to boost domestic demand. Perhaps they are hoping that employment will continue to rise.

In October 2019 the estimate of employed people increased (+0.2%, +46 thousand); the employment rate rose at 59.2% (+0.1 percentage points).

The Markit PMIs

There was very little cheer to be found in the latest private-sector business survey published earlier.

The Composite Output Index* posted at 49.6 in November,
down from 50.8 in October and signalling the first decline in Italian private sector output since May. Despite this, the rate of contraction was marginal.
Underpinning the latest downturn was a marked slowdown
in service sector activity growth during November, whilst
manufacturing output recorded its sixteenth consecutive
month of contraction. The latest decrease was sharp but
eased slightly from October.

I doubt anyone is surprised by the state of play in Italian manufacturing so the issue here is the apparent downturn in the service sector. This leads to fears about December and for the current quarter as a whole. Also the official trade optimism is not found here.

Meanwhile, export sales continue to fall.

Sadly there is little solace to be found if we look at the wider Euro area.

The final eurozone PMI for November came in
slightly ahead of the earlier flash estimate but still
indicates a near-stagnant economy. The survey
data are indicating GDP growth of just 0.1% in the
fourth quarter, with manufacturing continuing to act
as a major drag. Worryingly, the service sector is
also on course for its weakest quarterly expansion
for five years, hinting strongly that the slowdown
continues to spread.

Unicredit

We have looked regularly at the Italian banking sector and its tale of woe. But this is from what is often considered its strongest bank.

After cutting a fifth of its staff and shutting a quarter of its branches in mature markets in recent years, UniCredit said it would make a further 8,000 job cuts and close 500 branches under a new plan to 2023………UniCredit’s announcement triggered anger among unions in Italy, where 5,500 layoffs and up to 450 branch closures are expected given the relative size of the network compared with franchises in Germany, Austria and central and eastern Europe.

Back in January 2012 I described Unicredit as a zombie bank on the business programme on Sky News. It has spent much if not all of the intervening period proving me right. That is in spite of the fact that ECB QE has given it large profits on its holdings of Italian government bonds. Yet someone will apparently gain.

UniCredit promised 8 billion euros ($9 billion) in dividends and share buybacks on Tuesday in a bid to revive its sickly share price, although profit at Italy’s top bank will barely grow despite plans to shed 9% of its staff.

This is quite a mess as there are all sorts of issues with the share buyback era in my opinion.  In the unlikely event of me coming to power I might rule them ultra vires as I think the ordinary shareholder is being manipulated. Beneath this is a deeper point about lack of reform in the Italian banking sector and hence its inability to support the economy. This is of course a chicken and egg situation where a weak economy faces off with a weak banking sector.

Mind you this morning Moodys have taken the opposite view.

The outlook for Italy’s banking system has changed to stable from negative as problem loans will continue to fall, while banks’ funding conditions improve and their capital holds steady, Moody’s Investors Service said in a report published today.

“We expect Italian banks’ problem loans to fall in 2020 for a fifth consecutive year,” said Fabio Iannò, VP-Senior Credit Officer at Moody’s. “However, their problem loan ratio of around 8% remains more than double the European Union average of 3%, according to European Banking Authority data. We also take into account our forecast for weak yet positive Italian GDP growth, and our stable outlook on Italy’s sovereign rating.”

What could go wrong?

Comment

There is a familiar drumbeat and indeed bass line to all of this. In the midst of it I find it really rather amazing that Moodys can take UK banks from stable to negative whilst doing the reverse for Italian ones! As we look for perspective we see that the “Euro boom” and monetary easing by the ECB saw annual economic growth of a mere 1.7% in 2017 which has faded to more or less zero now. We are back once again to the “girlfriend in a coma” theme.

Italy has strengths in that it has a solid trade position and is a net saver yet somehow this never seems to reach the GDP data. Maybe the grey economy provides an answer but year after year it fails to be measured. Of course if politico are correct there is always plenty of trade and turnover here.

Italy’s new coalition government might not last the winter, with tensions reaching a peak this week over EU bailout reform……The 5Stars oppose the planned ESM reform because they say it would make it harder for highly indebted countries, like Italy, to access bailout funds without painful public-debt restructuring.

That reminds me about fiscal policy which is the new go to in the Euro area according to ECB President Christine Lagarde, well except for Italy and Greece.

 

 

 

India has an economic growth problem

As 2019 has developed we have been noting the changes in the economic trajectory of India. Back on October 4th we noted this from the Reserve Bank of India as it made its 5th interest-rate cut in 2019.

The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

This was in response to this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

For India that was a slow growth rate for what we would call the second quarter as they work in fiscal years.

What about now?

Friday brought more bad news for the Indian economy as this from its statistics office highlights.

GDP at Constant (2011-12) Prices in Q2 of 2019-20 is estimated at `35.99 lakh crore, as against `34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent. Quarterly GVA (Basic Price) at Constant (2011-2012) Prices for Q2 of 2019-20 is estimated at `33.16 lakh crore,
as against `31.79 lakh crore in Q2 of 2018-19, showing a growth rate of 4.3 percent over the corresponding quarter of previous year.

The areas which did better than the average are shown below.

‘Trade, Hotels, Transport, Communication and Services related to Broadcasting’ ‘Financial, Real Estate and Professional Services’ and ‘Public Administration,
Defence and Other Services’.

The first two however slowed in the year before leaving us noting that the state supported the economy as you can see below.

Quarterly GVA at Basic Prices for Q2 2019-20 from this sector grew by 11.6 percent as compared to growth of 8.6 percent in Q2 2018-19. The key indicator of this sector namely, Union Government Revenue Expenditure net of Interest Payments excluding Subsidies, grew by 33.9
percent during Q2 of 2019-20 as compared to 22.2 percent in Q2 of 2018-19.

Regular readers will not be surprised what the weakest category was.

Quarterly GVA at Basic Prices for Q2 2019-20 from ‘Manufacturing’ sector grew by (-)1.0
percent as compared to growth of 6.9 percent in Q2 2018-19.

Also those who use electricity use as a signal will be troubled.

The key indicator of this sector, namely, IIP of Electricity registered growth rate of 0.4 percent during Q2 of 2019-20 as compared to 7.5 percent in Q2 of 2018-19.

In terms of structure the economy is 31.3% investment and 56.3% consumption. The investment element is no great surprise in a fast growing economy but it has been dipping in relative terms. The main replacement has been government consumption which was 11.9% a year ago and is 13.1% now as we get another hint of a fiscal boost.

Switching to a perennial problem for India which is its trade deficit we see that it was 3.8% of GDP in the third quarter of this year. That is a little better but there is a catch which is that it has happened via falling imports which were 26.9% of GDP a year ago as opposed to 24% now. So another potential sign of an internal economic slowing.

We can move on by noting that this time last year the GDP growth rate was 7% and that The Hindu reported it like this.

Growth in the gross domestic product (GDP) in the July-September quarter hit a 25-quarter low of 4.5%, the government announced on Friday.

The lowest GDP growth in six years and three months comes as Parliament has been holding day-long discussions on the economic slowdown, with Union Finance Minister Nirmala Sitharaman assuring the Rajya Sabha that the country is not in a recession and may not ever be in one.

4.5% growth is a recession?

Unemployment

The numbers are rather delayed am I afraid leaving us wondering what has happened since.

Unemployment Rate (UR) in current weekly status in urban areas for all ages has been estimated as 9.3% during January-March 2019 as compared to 9.8% during April- June 2018.

Inflation

This has been picking up as the Economic Times reports below.

Inflation touched 4.62%, according to the data released by the statistics office on Wednesday, compared to 3.99% in the month of September. Inflation, as measured by the Consumer Price Index (CPI), was 3.38% in October last year.

Sadly for India’s consumers and especially the poor much of the inflation is in food  prices as inflation here was 7.9%. Vegetables were 26.1% more expensive than a year before and it would seem the humble onion which is a big deal in India is at the heart of it. From India Today.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

For those wondering about any inflation in pork prices then the answer is maybe.The meat and fish category rose at an annual rate of 9.75%.

Manufacturing

We noted in the GDP numbers that there was a fall but this seems to have sped up at the end of the quarter as it fell by 3.9% in September on a year before driven by this.

The industry group ‘Manufacture of motor vehicles, trailers and semitrailers’ has shown the highest negative growth of (-) 24.8 percent followed by (-) 23.6 percent in ‘Manufacture of furniture’ and (-) 22.0 percent in ‘Manufacture of fabricated metal products, except machinery and equipment’ ( India Statistics)

Fiscal Policy

From Reuters last month.

After the corporate tax cuts and lower nominal GDP growth, Moody’s now expects a government deficit of 3.7 per cent of GDP in the fiscal year ending in March 2020, compared with a government target of 3.3 per cent of GDP.

Also there is this from the Economic Times.

In India, private debt in 2017 was 54.5 per cent of the GDP and the general government debt was 70.4 per cent of the GDP, a total debt of about 125 of the GDP, according to the latest IMF figures.

The ten-year bond yield is 6.5% showing us that India does face substantial costs in issuing debt.

Comment

We get another hint of the changes at play as we note this from the Reserve Bank of India in November and note that the result was 5%.

For Q1:2019-20, growth forecast was revised
down from 7.2 per cent in the November 2018 round
to 6.1 per cent in the July 2019 round.

As we look forwards it is hard to see what will shake India out of its present malaise.Of course if the daily news flow that the trade war is fixed ever turns out to be true that would help. But otherwise India may well still be suffering from the demonetarisation effort of a couple of years or so ago.

After the falls of last year the Rupee has been relatively stable and is now at 71.6 versus the US Dollar. A lower Rupee is something which gives with one hand ( competitiveness) and takes away with another ( cost of imports especially oil). But as it starts its policy meeting tomorrow the RBI will feel the need to do something in addition to changing its fan chart for economic growth ( lower) and inflation ( higher) giving us what is for India something of a stagflationary influence.

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Climate change is on Mark Carney’s agenda as he ignores the rise in consumer credit

As November ends and we move into December there is a fair bit for the Bank of England to consider.Only a week ago we were told this by the new “flash” Markit PMI business survey.

“The weak survey data puts the economy on course for a 0.2% drop in GDP in the fourth quarter, and also pushes the PMI further into territory that would normally be associated with the Bank of England adding more stimulus to the economy”

Poor old Markit never seem to question why more stimulus is apparently nearly always needed, But this was quite a different outlook to what the Bank of England had told us earlier this month.

The MPC expected continued subdued growth, of 0.2%, in 2019 Q4.

Another factor to add in is that the Bank of England has in an example of being once bitten, twice shy lost a bit of faith in the Markit PMIs since the day the absent-minded professor Ben Broadbent so lauded them.

Although business survey indicators, taken together, pointed to a contraction in GDP in Q4, the relationship between survey responses and growth appeared to have been weaker at times of uncertainty and some firms may have considered a no-deal Brexit as likely when they had
responded to the latest available surveys/

Even central bankers must realise that the panicky hints of a 0.1% Bank Rate based on the post EU Leave vote PMIs was a complete failure.

The UK Pound £

This has been in a stronger phase and was noted in the monetary minutes.

The sterling exchange rate index had
increased by around 3% since the previous MPC meeting, and sterling implied volatilities had fallen back
somewhat, although they remained significantly higher than their euro and dollar counterparts.

If we look now we see that the broad effective or trade weighted exchange rate fell to around 73.5 in mid August but is now 79.3. Under the old Bank of England rule of thumb that was considered to be nearly equivalent to a 1.5% interest-rate rise. Even if we reduce the impact as times have changed I think and trim the effect we are still left in my opinion with say a 1% rise.

We can look at that in two ways.Firstly it has a material impact and secondly it has hard not to have a wry smile. After all who can actually see the present Bank of England raising interest-rates by 1%?! Events would have to have taken over.

Broad Money

We can also look at the likely outlook via the money supply numbers. This morning the Bank of England has told us this.

Broad money (M4ex) is a measure of the amount of money held by households, non-financial businesses (PNFCs) and financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs). Total money holdings in October rose by £1.6 billion, this was weak compared to both September and the average of the previous six-months.

That is a slowing after three better months. This is an erratic series and we see that this month businesses were responsible.

The amount of money held by households rose by £3.7 billion in October, primarily driven by increased holdings of interest bearing sight deposits. NIOFC’s money holdings fell by £2.4 billion, while the amount held by PNFCs rose by £0.4 billion.

If we switch to what does this mean? Well broad money impacts nominal output around 18 months to 2 years ahead.  So with an annual rate of growth of 3.6% we would expect economic growth of 1.6% assuming the Bank of England hits its 2% inflation target. That’s the theory as reality is usually not so convenient so please take this as a broad brush.

The good news is that the last 6 months or so have seen a pick-up so we may see one in 2021.The problem is that the numbers had been falling since the impact of the “Sledgehammer QE” of the summer/autumn of 2016. So it is no great surprise to those who look at the monetary data that economic growth has been weak and using it suggests similar as we head into 2020.

Mortgage Lending

We cannot look into the mind of a central banker without noting the large area taken up by the housing market.From that perspective this is good news below.

Net mortgage borrowing by households was £4.3 billion in October, £0.4 billion higher than in September. The recent stability in the monthly flows has left the annual growth rate unchanged at 3.2%, close to levels seen over the past three years. Mortgage approvals for house purchase (an indicator for future lending) fell slightly in October, to 65,000, but remained within the narrow range seen over the past two years.

Indeed their hearts must have been racing when they read this in the Guardian yesterday.

House price growth in the UK has picked up

Only to be dashed when they read further down.

The average price of a home rose by 0.5% in November to £215,734, according to Nationwide building society. This is the biggest monthly rise since July 2018, and up from 0.2% in October. The annual growth rate picked up to 0.8% from 0.4%, the highest since April.

Whilst we welcome the relative improvement in affordability from the point of view of the Bank of England this will lead to head scratching. They went to a lot of effort with the Funding for Lending Scheme back in the summer of 2012 to get net mortgage lending back into positive territory. But it and real wage growth have lost their mojo for now in this area.

Consumer Credit

By contrast this has lifted off again.

The extra amount borrowed by consumers in order to buy goods and services rose to £1.3 billion in October, above the £1.1 billion average since July 2018. Within this, net borrowing for both credit cards and other loans and advances rose, to £0.4 billion and £1.0 billion respectively.

The annual growth rate of consumer credit was 6.1% in October, up from 5.9% in September.

Is there anything else in the UK economy rising at an annual rate of 6.1%? Also there is an element of being economical with the truth below.

This is the first increase in the annual growth rate since June 2018, but it remains considerably lower than its post-crisis peak of 10.9% in November 2016.

You see last month they revised the figures by adding an extra £6.1 billion or around 5 months worth of growth at the current rate. Anyway the total is now £225 billion.

Comment

For the moment the Bank of England is in a type of purdah period which the Governor is using to expand into other areas.

The world needs a new, sustainable financial system to stop runaway climate change…….A new, sustainable financial system is under construction. It is funding the initiatives and innovations of the private sector and amplifying the effectiveness of governments’ climate policies—it could even accelerate the transition to a low-carbon economy. ( IMF )

Those worried about the future of the planet should be terrified at the present march of the globetrotting central bankers onto their lawns.Just look at their track record! But I guess Governor Carney is in need of a new job.

Returning to his present job we see that an interest-rate cut on the 19th of next month is looking increasingly likely. After all they are seldom much bothered by issues such as consumer credit rising although these days they seem to be having ever more trouble simply counting.

Some statistics on the outstanding amount of lending and deposits within the banking sector have been revised for September. In the first vintage of September’s statistics, some of this data was reported using an approach that was inconsistent to previous data, and reduced the total amounts outstanding. The current vintage of data corrects for this.

Even less reason for them to be involved in the future of the planet and that is before we get to their forecasting record….

The Investing Channel

Where next for US house prices?

Yesterday brought us up to date in the state of play in the US housing market. So without further ado let us take a look.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 3.2% annual gain in September, up from 3.1% in the previous month. The 10-City Composite annual increase came in at 1.5%, no change from the previous month. The 20-City Composite posted a 2.1% year-over-year gain, up from 2.0% in the previous month.

The first impression is that by the standards we have got used to that is a low number providing us with another context for the interest-rate cuts we have seen in 2019 from the US Federal Reserve. Of course it is not only the Fed that likes higher asset prices.

“DOW, NASDAQ, S&P 500 CLOSE AT RECORD HIGHS”

Another new Stock Market Record. Enjoy!

Those are 2 separate tweets from Monday from President Trump who not only loves a stock market rally but enjoys claiming it is all down to him. I do not recall him specifically noting house prices but it seems in the same asset price pumping spirit to me.

In my opinion the crucial part of the analysis provided by S&P comes right at the beginning.

After a long period of decelerating price increases, it’s notable that in September both the national and
20-city composite indices rose at a higher rate than in August, while the 10-city index’s September rise
matched its August performance. It is, of course, too soon to say whether this month marks an end to
the deceleration or is merely a pause in the longer-term trend.

If we look at the situation we see that things are very different from the 10% per annum rate reached in 2014 and indeed the 7% per annum seen in the early part of last year.That will concern the Fed which went to an extreme amount of effort to get house prices rising again. From a peak of 184.62 in July of 2006 the national index fell to 134.62 in February of 2012 and has now rallied to 212.2 or 58% up from the low and 15% up from the previous peak.

As ever there are regional differences.

Phoenix, Charlotte and Tampa reported the highest year-over-year gains among the 20 cities. In
September, Phoenix led the way with a 6.0% year-over-year price increase, followed by Charlotte with
a 4.6% increase and Tampa with a 4.5% increase. Ten of the 20 cities reported greater price increases
in the year ending September 2019 versus the year ending August 2019…….. Of the 20 cities in the composite, only one (San Francisco) saw a year-over-year price
decline in September

Mortgage Rates

If we look for an influence here we see a contributor to the end of the 7% per annum house price rise in 2018 as they rose back then. But since then things have been rather different as those who have followed my updates on the US bond market will be expecting. Indeed Mortgage News Daily put it like this.

2019 has been the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections……Fed policy and the US/China trade war have been key players.

But we see that so far a move that began in bond markets around last November has yet to have a major influence on house prices. If you wish to know what US house buyers are paying for a mortgage here is the state of play.

Today’s Most Prevalent Rates For Top Tier Scenarios

  • 30YR FIXED -3.75%
  • FHA/VA – 3.375%
  • 15 YEAR FIXED – 3.375%
  • 5 YEAR ARMS –  3.25-3.75% depending on the lender

More recently bonds seem to be rallying again so we may see another dip in mortgage rates but we will have to see and with Thanksgiving Day on the horizon things may be well be quiet for the rest of this week.

The economy

This has been less helpful for house prices.There may be a minor revision later but as we stand the third quarter did this.

Real gross domestic product (GDP) increased 1.9 percent in the third quarter of 2019, according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( US BEA ).

Each quarter in 2019 has seen lower growth and that trend seems set to continue.

The New York Fed Staff Nowcast stands at 0.7% for 2019:Q4.

News from this week’s data releases increased the nowcast for 2019:Q4 by 0.3 percentage point.

Positive surprises from housing data drove most of the increase.

Something of a mixture there as the number rallied due to housing data from building permits and housing starts.Mind you more supply into the same demand could push future prices lower! But returning to the wider economy back in late September the NY Fed was expecting economic growth in line with the previous 5 months of around 2% in annualised terms.But now even with a rally it is a mere 0.7%.

Employment and Wages

The situation here has continued to improve.

Total nonfarm payroll employment rose by 128,000 in October, and the unemployment rate was little
changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in
food services and drinking places, social assistance, and financial activities……..In October, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $28.18. Over the past 12 months, average hourly earnings have increased by 3.0 percent.

But the real issue here is the last number. Yes the US has wage gains and they are real wage gains with CPI being as shown below in October.

Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

So this should be helping although it is a slow burner at just over 1% per annum and of course we are reminded that according to the Ivory Towers the employment situation should mean that wage growth is a fair bit higher and certainly over 4% per annum.

Moving back to looking at house prices then wage growth is pretty much the same so houses are not getting more affordable on this criteria.

Comment

As we review the situation it is hard not to laugh at this from Federal Reserve Chair Jerome Powell on Monday.

While events of the year have not much changed the outlook,

You can take this one of two ways.Firstly his interest-rate cuts are not especially relevant or you can wonder why he did them? Looking at the trend for GDP growth does few favours to his statement nor for this bit.

Fortunately, the outlook for further progress is good

Indeed he seemed to keep contradicting himself.

 The preview indicated that job gains over that period were about half a million lower than previously reported. On a monthly basis, job gains were likely about 170,000 per month, rather than 210,000.

But I do note that house prices did get an implicit reference.

But the wealth of middle-income families—savings, home equity, and other assets—has only recently surpassed levels seen before the Great Recession, and the wealth of people with lower incomes, while growing, has yet to fully recover.

As to other signals we get told pretty much every day that the trade war is fixed so there is not a little fatigue and ennui on this subject. Looking at the money supply then it should be supportive but the most recent number for narrow money M1 at 6.8% shows a bit of fading too.

So whilst we may see a boost for the economy from around the spring of next year we seem set for more of the same for house prices.Unless of course the US Federal Reserve has to act again which with the ongoing Repo numbers is a possibility. The background is this though which brings me back to why central bankers are so keen on keeping on keeping house prices out of consumer inflation measures.Can you guess which of the lines below goes into the official CPI?

https://www.bourbonfm.com/blog/house-price-index-vs-owners-equivalent-rent-residences-1990

Whilst it is not sadly up to date it does establish a principle….