Of China, Bitcoin, football and innovative finance

This week was one when those who consider themselves to be the world’s elite wanted us to concentrate on events at the World Economic Forum in Davos. However this has gone rather wrong for them as the main news items this week turned out to be the Brexit speech given by Prime Minister May in the UK and of course the inauguration of Donald Trump as the new US President later today. These matters were referred to in Davos as George Soros explained how his profit and loss account would have been so much better except for those pesky voters in the UK and US. Bow down mortals, was the message there. The “open society” he proclaims seems to mean being open to agreeing with him.

China

We have found ourselves looking East quite a few times in 2017 and this morning we saw another instance of a thought-provoking action. From Ioan Smith.

| has cut RRR 1% at Big 5 banks HAS CUT RRR BY 1% temporarily to ease “seasonal liquidity pressure” – source

So the People’s Bank of China has eased pressure in the monetary system by reducing the amount of reserves the big banks need to hold. Reuters has given us more detail on this.

The People’s Bank of China (PBOC) has cut the reserve requirement ratio (RRR) for the banks by one percentage point, taking the ratio down to 16 percent.It will restore their RRR to the normal level at an appropriate time after the holiday, according to sources……….The five biggest lenders are Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB), Bank of China, Bank of Communications Co (BoCom) and Agricultural Bank of China.

 

This adds to other moves on the monetary system as I explained on the 5th of this month.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

We have seen signs of this in two areas since. The first was the collapse in the price of Bitcoin as China applied capital controls. There has been more news about this in the last 24 hours. From the Wall Street Journal.

Chinese banking regulators said two bitcoin exchanges in Beijing improperly engaged in margin financing and failed to impose controls to prevent money laundering, a development that could hurt trading of the virtual currency in its biggest market.

The action by China’s central bank signals heightened government scrutiny of bitcoin trading on the mainland, which has been allowed to expand largely unfettered since 2013.

This chart of Bitcoin volumes is quite something.

As ever there is debate about the exact numbers but I think we get the idea.

Also we have seen it in the world of football where after two extraordinary trades where £60 million was supposedly paid for Oscar and Carlos Tevez is being paid around £1 per second. Yet suddenly limits on foreign players suddenly were tightened and as a Chelsea fan I was very grateful for that! Plenty of food for thought there for Roman Abramovich as in essence football was how he got plenty of money outside Russia.

GDP

This morning the Financial Times tells us this.

China’s gross domestic product, the world’s second-largest in nominal terms but already the largest at purchasing power parity, grew 6.7 per cent for the full year and at an annual rate of 6.8 per cent in the fourth quarter in real terms, down from 6.9 per cent in 2015. It was the slowest full-year growth figure since 1990 but comfortably within the government’s target range of 6.5-7 per cent. The fourth-quarter performance topped economists’ expectations of 6.7 per cent, according to a Reuters poll.

It is extraordinary how quickly they come up with their GDP numbers, it is almost as if they make them up. This of course is a counterpoint to headlines of the number being a “beat”. I also note that China seems to have learned something from the western capitalist imperialists.

But housing was a bright spot. Property sales grew 22.5 per cent in floor-area terms, the fastest pace in seven-years, while prices in major cities soared, prompting warnings of a bubble. Analysts expect the housing market to slow in 2016, as the government moves to cap runaway house prices that are a source of popular anger.

That is an issue that has caused plenty of trouble in western countries. Also I see one economist has had a bad day.

“The excess money supply in 2016 created problems with bubbles. Going forward, more deleveraging will be necessary. Monetary policy can’t be loosened further,” said Zhang Yiping, economist at China Merchants Securities in Beijing.

Industrial Production and Retail Sales

The first was extraordinary and yet also represents a slow down. From Investing.com.

In a report, National Bureau of Statistics of China said that Chinese Industrial Production fell to 6.0%, from 6.2% in the preceding month.

Many countries would give their right arm for industrial production growth like that but for China the noticeable fact is that it is now less than GDP growth. Meanwhile the economy seems to have shifted towards consumption

In a report, National Bureau of Statistics of China said that Chinese Retail Sales rose to an annual rate of 10.9%, from 10.8% in the preceding month.

The rest of the world would quite like China to make such a switch as it would reduce its trade surplus but can it manage it?

Financial Innovation

We have come to be very nervous of the word innovation after its use by Irish financiers. But take a look at this from the South China Morning Post last week.

Step one: Pledge a mainland asset with a mainland bank for a standby letter of credit (SBLC) which is a promise by the bank to pay. Use the SBLC to get a HK$8.8 billion loan in Hong Kong.

Since it’s a deal to pay off a piece of land publicly auctioned by the Hong Kong government, approval from the mainland regulators will be easy.

Step two: Pledge the Kai Tak land with the banks in Hong Kong. Many may find the bid – 70 per cent above market estimate – rather risky. Yet, it won’t be too difficult to find banks to provide a HK$3 billion loan which is only 40 per cent of the land cost.

Step three: Pledge the HK$3 billion cash with a bank in Hong Kong for a SBLC.

Step four: Use the second SBLC as security at a mainland financial institution to purchase debentures and bonds with annual returns of over 6 per cent or above.

Step five: Pledge the HK$3 billion worth of debentures with mainland banks for another SBLC. Given a routine discount of 30 per cent for financial products, the bank will issue a promise to pay HK$2 billion.

Step six: Use the third SBLC as collateral and get a HK$2 billion loan in Hong Kong. Repeat step three to five and so on so forth.

These steps may sound a bit complicated. But in many cases, these steps are all done among the mainland and Hong Kong branches of the same bank, though occasionally several banks are involved to dodge regulatory hurdles.

By the end of it you can “have” up to 25 billion Hong Kong Dollars of which 14 billion have left China.

Comment

As you can see there is much to mull about China as for example we have a wry smile at this week’s claim at Davos that it is all for free trade. On the surface we are told that everything is fine yet beneath it there is ever more debt and a rush to send money abroad. Later this year the Yuan is likely to fall again and the whole cycle will begin again.

Later we will find out a little of what President Trump plans so it could be quite a day. We already seem to have moved from fiscal stimulus to cuts as we await some concrete policies.

 

Portugal is struggling to escape from its economic woes

Late on Friday (at least for those of us mere mortals who do not get the 24 hour warning) came the news that the ratings agency DBRS had reduced Italy to a BBB rating. These things do not cause the panic they once did for two reasons the first is that the ECB is providing a back stop for Euro area bonds with its QE purchases and the second is that the agencies themselves have been discredited. However there is an immediate impact on the banks of Italy as the Bank of Italy has already pointed out.

Italy’s DBRS downgrade: a manageable increase in funding costs…..Haircuts on collateral posted by Italian banks: the value of the government bonds collateral pool alone would increase by ~8bn. ( h/t @fwred )

However this also makes me think of another country which is terms of economics is something of a twin of Italy and that is Portugal.

When we do so we see that Portugal has also struggled to sustain economic growth and even in the good years it has rarely pushed above 1% per annum. There have also been problems with the banking system which has been exposed as not only wobbly but prone to corruption. Also there is a high level of the national debt which is being subsidised by the QE purchases of the ECB as otherwise there is a danger that it would quickly begin to look rather insolvent. In spite of the ECB purchases the Portuguese ten-year yield is at 3.93% or some 2% higher than that of Italy which suggests it is perceived to be a larger risk. Also more cynically perhaps investors think that little Portugal can be treated more harshly than its much larger Euro colleague.

The state of play

This has been highlighted by the December Economic Bulletin of the Bank of Portugal.

Over the projection horizon, the Portuguese economy is expected to maintain the moderate recovery trajectory that has characterised recent years . Thus, following 1.2 per cent growth in 2016, gross domestic product (GDP) is projected to accelerate to 1.4 per cent in 2017, stabilising its growth rate at 1.5 per cent for the following years.

So it is expecting growth but when you consider the -0.4% deposit rate of the ECB, its ongoing QE programme and the lower value of the Euro you might have hoped for better than this. Or to put it another way not far off normal service for Portugal. Also even such better news means that Portugal will have suffered from its own lost decade.

This implies that at the end of the projection horizon, GDP will reach a level identical to that recorded in 2008.

This is taken further as we are told this.

In the period 2017-19, GDP growth is expected to be close to, albeit lower than, that projected for the euro area, not reverting the negative differential accumulated between 2010 and 2013

You see after the recession and indeed depression that has hit Portugal you might reasonably have expected a strong growth spurt afterwards like its neighbour Spain. Instead of that sort of “V” shaped recovery we are seeing what is called an “L” shaped one and the official reasons for this are given below.

This lack of real convergence with the euro area reflects persisting structural constraints to the growth of the Portuguese economy, in which high levels of public and private sector indebtedness, unfavourable demographic developments and persisting inefficiencies in the employment and product markets play an important role, requiring the deepening of the structural reform process.

After an economic growth rate of 0.8% in the third quarter of 2016 you might have expected a little more official optimism as they in fact knew them but say their cut-off date was beforehand, but I guess they are also looking at numbers like this.

According to EUROSTAT, the Portuguese volume index of GDP per-capita (GDP-Pc), expressed in purchasing power parities represented 76.8% the EU average (EU28=100) in 2015, a value similar to the observed in 2014.

It is at the level of the Baltic Republics, oh and someone needs to take a look at the extraordinary numbers and variation in the measures of Luxembourg!

House Prices

Here we see some numbers to cheer any central banker’s heart.

In the third quarter of 2016, the House Price Index (HPI) increased by 7.6% when compared to the same period of 2015 (6.3% in the previous quarter). This was the highest price increase ever observed and the third consecutive quarter in which the HPI recorded an annual rate of change above the 6%. When compared to the second quarter, the HPI rose by 1.3% from July to September 2016, 1.8 percentage points (p.p.) lower than in the previous period.

What is interesting is the similarity to the position in the UK in some respects as we see that house price growth went positive in 2013 although until now it has been a fair bit lower than in the UK. Of course whilst central bankers may be happy the ordinary Portuguese buyer will not be so pleased as we see yet another country where house price rises are way above economic performance. Indeed a problem with “pump it up” economic theory in Portugal is the existing level of indebtedness.

the high level of indebtedness of the different economic sectors – households, non-financial corporations and public sector – ( Bank of Portugal )

The debt situation

In terms of numbers Portuguese households have been deleveraging but by the end of the third quarter of last year the total was 78.6% of GDP, whilst the corporate non banking sector owed some 110.8% of GDP. At the same time the situation for the public-sector using the Eurostat method was 133.2 % of GDP.

Going forwards Portugal needs new funding for businesses but seems more set to see property lending recover if what has happened elsewhere after house price rises is any guide. Also the state is supposed to be reducing its debt position but we keep being told that.

The banks

It always comes down to this sector doesn’t it? Portugal has had lots of banking woe summarised by The Portugal News here just before Christmas.

The Portuguese state provided €14.348 billion in support to the banking sector between 2008 and 2015, according to a written opinion submitted by the country’s audit commission, the Tribunal de Contas, last year and made public on Tuesday.

That’s a tidy sum in a relatively small country and we see that the banking sector shrunk in size by some 3.4% in asset terms in the year to the end of the third quarter of 2016. In terms of bad debts then we are told that “credit impairments” are some 8.2% of the total although the recent Italian experience has reminded us again that such numbers should be treated as a minimum.

Last week the Financial Times reminded us that the price of past troubles was still being paid.

Shares in Millennium BCP fell by more than 13 per cent in early trading on Tuesday after Portugal’s largest listed lender approved a capital increase of up to €1.33bn in which China’s Fosun will seek to lift its stake from 16.7 per cent to 30 per cent.

Oh and this bit is very revealing I think.

The rights issue, which is bigger than BCP’s market value,

Comment

Let us start with some better news which is from the labour market in Portugal.

The provisional unemployment rate estimate for November 2016 was 10.5%

This represents a solid improvement on the 12.3% of 2015 although as so often these days unemployment decreases comes with this.

These developments in productivity against a background of economic recovery fall well short of those seen in previous cycles……. Following a slight reduction in 2016, annual labour productivity growth is projected to be approximately 0.5 per cent over the projection horizon.

Also there is the issue of demographics and an ageing population which the Bank of Portugal puts like this.

the evolution of the resident population,
which has presented a downward trend,

I like Portugal and its people so let us hope that The Portugal News is right about this.

Portugal has been named as the cheapest holiday destination in the world for Britons this year. The country’s Algarve region came top in the Post Office’s annual Holiday Costs Barometer, which takes into account the average price of eight essential purchases, including an evening meal for two, a beer, a coffee and a bottle of suncream, in 44 popular holiday spot around the world.

That’s an interesting list of essential purchases isn’t it? But more tourism would help Portugal although the woes of the UK Pound seem set to limit it from the UK.

 

 

 

 

The economic problem that is Italy continues

Today brings the economic situation in Italy into focus as it readies itself for a ratings review. Friday the 13th may not be the most auspicious of days for that! However I should be more precise in my language as the Italian government will know as they get told 24 hours before. So as we live in a world where things leak, today will be a day where some traders will be more equal than others so take care. But there are plenty of worries around due to the fact that one of the central themes of this website which is Italy’s inability to maintain any solid rate of economic growth continues. To be more specific even in the good times it struggled to have GDP (Gross Domestic Product) growth of more than 1% per annum. This it was particularly ill-equipped to deal with the credit crunch and was left with weak economic foundations such as its banks.

Some better news

This was to be found in yesterday’s production numbers.

In November 2016 the seasonally adjusted industrial production index increased by 0.7% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.9.

The calendar adjusted industrial production index increased by 3.2% compared with November 2015

As you can see these were good numbers although not so good for economists whose expectations so often misfire. As the Financial Times pointed out there was a positive change in response to this.

Economists at Barclays have doubled their projected fourth quarter growth forecast for the eurozone’s third largest economy to…0.2 per cent…….. GDP growth is now expected to clock in at 0.2 per cent from an earlier projection of 0.1 per cent in the three months to December,

If you really want to big this up then you can say that the expected growth rate has doubled! Of course the issue is that it is so low and that even this would be a reduction on the 0.3% achieved in the third quarter of 2016. For a little more perspective imagine the outcry if a post EU vote UK had grown like that, twitter would have been broken.

The Labour Market

The data here is far from positive however as on Monday we were told this.

In November 2016, 22.775 million persons were employed, +0.1% compared with October. Unemployed were 3.089 million, +1.9% over the previous month……..unemployment rate was 11.9%, +0.2 percentage points in a month and inactivity rate was 34.8%, -0.2 percentage points over the previous month.

This is the Italian equivalent of a Achilles Heel and separates it from the general Euro area performance where the unemployment rate has been falling and is now at 9.8%. In fact it was one of only four European Union states to see an annual rise in its unemployment rate and we should make a mental note that Cyprus was another as this does not coincide with the message that the bailout was a triumph. Returning to Italy there was more bad news in the detail of the numbers.

Youth unemployment rate (aged 15-24) was 39.4%, +1.8 percentage points over October and youth unemployment ratio in the same age group was 10.6%, +0.7 percentage points in a month.

I hope these sort of numbers do not lose their ability to shock us and also note that time matters here as Italy is in danger of seeing a lost generation as well as a lost decade. So many must have no experience of what it is like to work.

Consumer Inflation

The last week or so has seen quite a few nations recording a pick-up in inflation in December so we see yet another area where Italy is different.

In December 2016, according to preliminary estimates, the Italian harmonized index of consumer prices (HICP) increased by 0.4% with respect to the previous month and by 0.5% with respect to December 2015 (from +0.1% in November 2016).

Yes there was a rise but to a much lower level and in terms of Italy’s own CPI prices fell in 2016 overall albeit by only 0.1%. So as we observe low rates of economic growth we see that Italy is in fact quite near to deflation which for me would be signaled by falling output and prices.

Italian consumers are unlikely to be keen on the rising inflation level such as it is because it was mostly fuel and food driven.

House Prices

Here is another difference as you might think that an official interest-rate of -0.4% and 1.5 trillion Euros or so of bond purchases in the Euro area would lead to house price rises. That is of course true in quite a few places but not in Italy.

In the third quarter of 2016: – the House Price Index (see Italian IPAB) increased by 0.1% compared to the previous quarter and decreased by 0.9% in comparison to the same quarter of the previous year (slightly down from -0.8 registered in the second quarter of 2016);

So not much action at all and in fact Italy has been seeing house price disinflation. The official index has done this after being set at 100 in 2010. It has gone 102.4 (2013), 100.1 (2014), 98.6 (2015) and 97.4 in the third quarter of last year.

So good for first time buyers and in many ways I think more welcome than the UK situation but surely not what the Italian President of the ECB Mario Draghi had planned.

The banks

This is a regular theme as well and I covered the Monte Paschi bailout on the 30th of December and apart from a debate as to how bad the bad loans are there is little change here. Yes the same bad loans which we were told were such great value only a couple of months or so ago. Also Unicredit is continuing with its 13 billion Euro capital raise confirming the view I expressed on Sky Business News just over 5 years ago. Eeek! Where did the time go?

http://www.mindfulmoney.co.uk/mindful-news/unicredit-collapse-the-invasion-of-zombie-banks/

We do have some news on this subject and it does raise kind of a wry smile.

UBI Banca, Italy’s fifth-largest bank by assets, has been cleared to buy for €1 the rump of three lenders rescued by the state in the latest step in Italian bank consolidation. UBI made the offer for Marche, Etruria and Carichieti to the state bank resolution fund on the condition the so-called good banks are stripped of €2.2bn in bad loans. ( Financial Times).

Oh and 1 Euro may turn out to be very expensive if you read my 30th of December post and the relationship of Finance Minister Padoan with reality and honesty.

Pier Carlo Padoan, finance minister, told lawmakers in Rome he was “convinced” the deal was good for the bank in question and confidence in the Italian banking system.

The discussion these days turns a lot to those bad loan ratios and how much of them have been dealt with. As ever there appears to be some slip-sliding-away going on.

Comment

The simplest way of looking at Italian economic performance this century is to look at economic growth and then growth per head. Sadly we see that GDP of 1555.5 billion Euros in 2000 ( 2010 prices) was replaced by a lower 1553.9 billion in Euros in 2015. But the per head or per capita performance was much worse as the population rose from 57.46 million in 2000 to 60.66 million at the end of 2015.

It is that economic reality which has weakened the banks (albeit with not a little corruption thrown in) and also led to the problems with the national debt about which we have also learned more today.

Italian General Government Debt (EUR) Nov: 2229.4B (prev 2223.8B) ( h/t @LiveSquawk )

The bond vigilante wolf is being kept from the door by the amount of bond purchases being made by the ECB.

What hope is there? Perhaps that the unofficial or unregulated economy is larger than we think. Let us hope so as Italy is a lovely country. But in contrast to Germany which I analysed on Monday the level of the Euro looks too high for Italy.

 

 

 

The UK economy is doing pretty well but inflation is on the cards

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures

Production

These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.

Trade

We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.

Construction

Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.

Comment

So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

Is Germany an economic miracle or a deflationary force?

There has been a raft of economic data out of the Federal Republic of Germany this morning but before we get to that there are two major themes I wish to point out. These come from its membership of the Euro which has given its exporting industry in particular an enormous competitive boost. To get an idea of the scale of these we merely need to consider where the Deutschmark would be trading now if it existed. The musical theme is “higher and higher it’s a living thing” by ELO. If we look at the most similar currency which is the Swiss Franc we see that a new Deutschmark would have soared like a bird and created all sorts of problems for the German Bundesbank in trying to cope with it and German industry. If the Swiss pattern was repeated then the Bundesbank would also be an enormous hedge fund with a central bank on the side. As for the exchange rate well it would be more like 1.50 to the US Dollar ( and perhaps higher) rather than the 1.05 that Euro membership has brought,

In addition Germany has seen low and more recently negative interest-rates with the deposit rate of the European Central Bank currently -0.4%. If there is anywhere that sees this translated into lower borrowing rates for businesses and consumers in the Euro area then Germany will be at the top of the list. Whilst I doubt that negative interest-rates themselves help much Germany has seen low interest-rates for quite some time now. In an example of the sort of “Not Fair” sung about by Lilly Allen we also see that the German government has benefited from some 304 billion Euros ( and rising) of its debt being bought by the ECB. It is seldom asked how wise or indeed necessary this is/was but for now let me simply point out that the ability to issue debt at low and negative yields has added further to Germany’s ability to run a budget surplus.

The trade problem

This is usually presented as an economic triumph for Germany and in many ways it is but with it problems have been created and we see these in this mornings data release.

Germany exported goods to the value of 108.5 billion euros and imported goods to the value of 85.8 billion euros in November 2016. These are the highest monthly figures ever calculated both for exports and for imports. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 5.6% and imports by 4.5% in November 2016 year on year.

So not only a large trade surplus in goods but one which is growing so much it is a record. If we widen our outlook to services then the position changes but by a relatively small amount.

services (-1.8 billion euros)

If we look at the Euro area we see that Germany continues to be a deflationary influence on the other nations.

In November 2016, Germany exported goods to the value of 63.2 billion euros to the Member States of the European Union (EU), while it imported goods to the value of 56.9 billion euros from those countries.

This is not explicitly due to the exchange rate of course but makes us wonder what other gain have been provided by a lower exchange-rate such as possible economies of scale for its vehicle producers. If we move to outside the Euro area than the numbers speak for themselves.

Exports of goods to countries outside the European Union (third countries) amounted to 45.2 billion euros in November 2016, while imports from those countries totalled 28.9 billion euros. Compared with November 2015, exports to third countries increased by 7.6% and imports from those countries by 3.9%.

So we see not only a large and growing surplus but one that seems to be accelerating and here of course the value of Euro membership can be explicitly seen.

When the credit crunch hit there was a lot of talk about the German trade surplus being a factor ( along with the Chinese and Japanese ones) yet we see that as we sadly see so often if anything it has grown. The initial impact is to raise German GDP via net exports but the way that it happens year after year means that demand is sucked out of other countries. If you throw in the budget surplus I mentioned earlier then you have plenty of fuel for my argument that the theme that Germany keeps losing with regards to matters such as ECB policy needs the counterweight that in areas which it considers most important Germany continues to get what it wants.

Production

This morning has seen another consequence of this.

In November 2016, production in industry was up by 0.4% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

This follows a 0.5% monthly increase in October but to see the overall picture we need to look deeper. If we look at the manufacturing output index then it was 100.2 in November 2008 and was 110.5 in November of last year. So we see growth over what has been a very difficult period for western manufacturing. Now those two months make it look better than I think it is but in general 2016 is better than 2008 whereas if we look at my country the UK we see a different situation.

In Quarter 3 2016, production and manufacturing output remained below their Quarter 1 2008 levels by 8.0% and 5.7%, respectively.

There has been good news this morning from both Rolls Royce and Jaguar Land Rover with their 2016 figures but it is plain that the UK has quite a bit of ground to catch up.

The outlook

The future is bright if the Markit business surveys are any guide. According to them Germany had a solid last quarter in 2016 and 2017 looks okay as well.

With services expectations also improving in December, the outlook for 2017 is bright – IHS Markit is forecasting solid GDP growth of 1.9% for the year as a whole.

Comment

If you are looking for support for the theme of Germany being something of an economic miracle then one would look at the trade position combined with this which was reported by Eurostat earlier.

the lowest unemployment rates in November 2016 were recorded in the Czech Republic (3.7%) and Germany (4.1%).

As we move to youth unemployment we see a further example but also a hint that perhaps a deflationary consequence has been seen elsewhere.

In November 2016, the lowest rate was observed in Germany (6.7%), while the highest were recorded in Greece (46.1% in September 2016), Spain (44.4%) and Italy (39.4%).

If we look back at the history of the Euro we see that it has benefited Germany hugely and that monetary policy has in general been set for it. There are doubts rising from the latest phase of negative interest-rates and 1.5 trillion Euros of QE ( Quantitative Easing) which have seen consumer inflation rise to 1.7% in some German regions with the likelihood it will push higher as 2017 progresses. Or as Die Welt puts it.

 

Actually in a link to my next part they are discussing Mesut Ozil who of course is trying to get a large pay rise from Arsenal football club which has to be inflationary. But many think that an increase in wages in Germany would improve things as highlighted by this below.

2017 price-wage loop check: wage bargaining rounds kick off in Germany with unions asking for 6% pay rise for 800k regional public servants. ( h/t @MxSba )

Of course in both cases asking is one thing and getting is another. But it has long been argued that higher wages in Germany would set off a beneficial cycle as follows. Workers would be able to consume more ( the original Ford motor car strategy as discussed in the comments a few days ago) thereby boosting imports and shrinking the trade gap as well thereby benefiting both the German and overseas economies. As Germany is estimated to be 5.5% of world economic output this could have a solid effect in world terms.

As ever life is unlikely to be that simple as for example what if the higher wages set of an inflationary push? Or make companies uncompetitive? But in general I think it is hard to argue that a nudge higher would be what economists call a Pareto gain.

The big problem that is little productivity growth in the western world

It was only yesterday that we found ourselves looking at an apparent productivity miracle in China, or perhaps if official statistics are true! Yet in the western world we find ourselves wondering what has happened to it? I recall the Bank of England publishing a paper looking at an 18% productivity gap. Some care ( as ever ) is needed with their work as it assumed that we could carry on as we did before the credit crunch whereas some industries like banking were clearly misleading us. But the truth is that it does look like there has been a change even if we discount the projection of past performance forwards.

In some places it exists

This caught my eye as I was doing some research on the subject.

Welcome to 2017! The future is here. Workers at Fukoku Mutual Life Insurance are being replaced with an artificial intelligence system. ( @izzyroberts )

So we can see changes in service industries as well where 34 employees are to be replaced by an AI ( artificial intelligence) system . This of course will boost productivity especially the labour measure but may end up with us worrying about unemployment. The more conventional view is the use of robots and automation in the manufacturing and industrial sector.

The apparent problem

This has been highlighted by John Fernald of the US Federal Reserve and here is a summary from the Wall Street Journal.

His research found that the information technology boom of the 1990s helped businesses become more efficient until about 2003. But that boost began fading by 2004, and now the benefits of tech innovation flow more to leisure activities, such as social media and smartphone apps……..Total factor productivity grew an average 1.8% a year from the end of 1995 through 2004, but growth has slowed since then to an average 0.5% annually.

This type of view changes things and is a critique of the Bank of England projecting the past forwards work but the immediate impact is to move productivity falls from a consequence of the credit crunch to one of the causes of it. Also as we look forwards it has its own consequence which is something we have discussed many times here.

He puts the new normal for U.S. economic growth at 1.5% to 1.75% a year—roughly half the typical range of 3% to 4% from the end of World War II to 2005.

Again care is needed as a clear challenge here is how we measure productivity. There is clearly a large amount of technical innovation going on right now but it has shifted into areas that do not feature in conventional productivity analysis. These days most of the gains come for leisure rather than business.

Today’s UK data

Firstly let is have some good news which is that we have some productivity growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.4% from Quarter 2 (Apr to June) 2016 to Quarter 3 (July to Sept) 2016;

Although it has been driven not by what might be expected.

Productivity grew in the services industries but not in the manufacturing industries; services productivity is estimated to have grown by 0.3% on the previous quarter, while manufacturing productivity is estimated to have fallen by 0.2% on the previous quarter.

So heartening in itself although an old problem may be resurfacing as you see this from an accompanying release.

Tower Hamlets (79% above the UK average) was the local area with the highest labour productivity in 2015

Welcome back the City of London, let us hope the gains are genuine and not just an illusion this time around.

As to the overall issue the UK ONS seems as keen as the Bank of England to try to assume that the credit crunch was some form of blip.

Productivity in Quarter 3 2016, as measured by output per hour, stood 15.5% below its pre-downturn trend – or, equivalently, productivity would have been 18.4% higher had it followed this pre-downturn trend.

This is what is called the “productivity puzzle” but a bit like the Bitcoin price moves over the past 24 hours or so we can again consider the genius of the simple “It’s Gone” from South Park on the banking crisis. For those who have not followed it the bull market surge in Bitcoin was followed by a plunge in an hour which put it in a bear market, then a rebound then another drop. Of course I need to add so far to that……

Does the type of innovation in these alternative electronic currencies show up anywhere in the productivity data?

Andy Haldane

The Bank of England’s Chief Economist had some thoughts on productivity yesterday. Of course he has his own issues as he confessed to past mistakes – although not yet about his “Sledgehammer” which will hit many people in 2017 – yet again. If we measured his own productivity it would be very negative but let us move onto his analysis.

He blamed decades of education policies – that had left numeracy levels in England only just above Albania – for holding back improvements in productivity. He said the lack of numeracy skills was stark in comparison with other countries, which placed more emphasis on workers having more than a basic level of maths……….He added that the UK’s lack of numeracy skills across more than half the working population was a key reason for its lack of productivity growth since the financial crisis.

This raises a wry smile with me because I feature fairly regularly in the business live section of the Guardian and the original contact point was my pointing out that an article was innumerate. Perhaps it made a change from people pointing our spelling errors! In broad terms I welcome this issue although we need to decide in this technological era what level of numeracy people actually need. I remember reading a report from the 1860s where we were unhappy with our education system though and we did not do too bad back then.

Sadly the Bank of England has not provided a speech but we do have his past views which in their bi-modal, bifurcated day are a sort of tale of two cities. From 2014.

The upper peak of the labour market is clearly thriving in both employment and wage terms. The mid-tier is languishing in both employment and real wage terms. And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole. This has been a jobs-rich, but pay-poor, recovery.

Productivity as well? It is hard to avoid that thought.

A feature of our times

I will simply ask you to look at the time period here and will leave you to draw your own conclusions.

 

Comment

There is much to consider here. But it is clear to me that the problem for us in what we like to call the first world began well before the credit crunch. Secondly as so often we find ourselves with data simply unfit for the task. We can look at that several ways of which the technical one is that if we do not bother to put the earnings of the self-employed into the average earnings numbers then we are likely to be clueless about their productivity. More hopefully we need to include the technological changes in the area of leisure in some form as other wise we are likely in the future to get another “surprise” when a big move happens in the business world as a result.

Meanwhile if we return to Andy Haldane the media have failed to point out that he has been directly responsible for a fall in productivity. I do not mean the reduction in annual Bank of England meetings from 12 to 8 as that was the “improvement” driven by its dedicated follower of fashion Mark Carney. What I mean is the way that zombie companies have been propped up by his Sledgehammer QE and even worse corporate bond QE which also props up foreign companies. This contributes to situations like this having a particular dark side.

Despite having fallen by almost 10% since the crisis, real wages among the top 10% are still over 20% higher than in 1997. But wages for the bottom 20% have fallen by almost 20% since 2007 and are essentially back to where they were in 1997.

What about the 0.1%?

 

 

 

 

The Demonetisation saga in India rolls on and on

As we emerge ( at least in England & Wales) blinking into 2017 then the main economic action is in the East. For example new currency controls for retail investors in China. Such factors are in my opinion what has been behind the subject of my last post of 2017 which was Bitcoin. This broke the 1k barrier in US Dollar terms and is now US $1020.68 according to Coindesk. A factor in this rise must be what is ongoing in India which is what has become called Demonetisation which I first pointed out on the 11th of November last year.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

Something that was immediately troubling was that the official view was along the lines of “please move along, there is nothing to see here”.

There is enough cash available with banks and all arrangements have been made to reach the currency notes all over the country. Bank branches have already started exchanging notes since November 10, 2016.

The initial communique mentioned the 24th of November implying that it would pretty much be over by then and that the Indian economy would boom afterwards.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

How is it going?

Manufacturing

The Markit/Nikkei PMI or business survey had a worrying headline yesterday,

Manufacturing sector dips into contraction amid money crisis

Indeed it went further in the detail.

Panel members widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in fewer levels of new orders received. Concurrently, manufacturers lowered output accordingly.

Actually pretty much everything seemed to be going wrong here as input inflation rose and employment fell.

Meanwhile, input costs increased at a quicker rate……Cash shortages and lower workplace activity resulted in job shedding and falling buying levels during December.

So whilst small changes in a PMI tell us little a drop from above 54 in October to 49.6 in December poses a question. This is reinforced by the other PMIs for manufacturing we are seeing that have overall improved (China for example).

Actually the industrial production numbers were weak even before Demonetisation according to dnaindia.

For the April-October period, industrial output declined by 0.3% as against a growth of 4.8% a year ago, as per the data released by Central Statistics Office (CSO) today……..The manufacturing sector, which constitutes over 75% of the IIP index, recorded a contraction 2.4% in October.

All this adds to the problems recorded in the services sector back in early December.

Services activity declines as cash shortages hit the sector

So according to these surveys there was a clear deflationary impact from Demonetisation leading to this.

Nikkei India Composite PMI Output Index dipped from October’s 45-month high of 55.4 to 49.1 in November, thereby pointing to a slight contraction in private sector activity overall.

There were hopes for this to be short-lived back then but for now those seem more to be of the Hopium variety.

A response?

Well if Prime Minister Modi was watching the cricket he may have thought of mimicking England and the UK as he has announced a pumping up of the housing market. From dnaindia.

In a bid to boost rural and urban housing post demonetization, Prime Minister Narendra Modi on Saturday announced interest subsidy of up to 4% on loans taken in the new year under the Pradhan Mantri Awaas Yojana.

Bank of England Governor Mark Carney hasn’t been to India has he? Anyway I do hope that the next bit actually happens unlike in the UK where we seem to announce the Ebbsfleet development every year like it is in a Star Trek style time warp.

Announcing a slew of measures, Modi in his national address on New Year’s eve also said 33% more homes will be built for the poor under this scheme in rural areas.

I wish India better luck than the UK where schemes under the official label of “Help” have in fact contributed to house prices becoming ever more unaffordable for those wishing to get on what is called the housing ladder.

What about other credit?

According to Gadfly of Bloomberg the banks are now awash with cash.

Almost all the 15.44 trillion rupees ($227 billion) of currency outlawed by Prime Minister Narendra Modi has entered banks as deposits, with the biggest, State Bank of India, receiving $24 billion. This “unprecedented” surge in liquidity led SBI to cut lending rates by 90 basis points on Sunday. Other government-run banks followed suit.

But in a familiar trend for the credit crunch era businesses do not seem to be that keen on borrowing more.

The average daily value of new investment proposals announced since the cash ban has slumped by three-fifths, according to the Centre for Monitoring Indian Economy.

In fact a consequence of the economic weakness following Demonetisation is that both companies and individuals in India are less able to borrow.

Supply chains greased by cash payments are broken. From diamond-polishing to shoemaking and construction, layoffs are increasing. As borrowers, both the average Indian worker and his employer are much more subprime today than they were just two months ago. Using this group to pull up credit growth, which has plunged to a 25-year low of 5.8 percent, is both impractical and risky.

Whilst in terms of deposits the Indian banks are in the opposite situation to Monte Paschi of Italy they too have capital issues. This may explain the problem with business lending which invariably ties up more bank capital than other forms of bank lending.

The Real Economy

If we move to actual experiences we see signs of trouble, trouble,trouble as India Spend reports.

Now, the government’s decision to withdraw Rs 14 lakh crore–86% in value of India’s currency in circulation–has dealt a hard blow to 80,000 workers, whose economy was defined by cash. Before notebandi, despite a growing downturn, the town soldiered on.

This is the town of Malegaon which has an economy based on the power-loom industry which has gone on a 3 day week.

In the weeks following demonetisation, power looms, known to work 16-18 hours in a day for six days a week, were working only three days a week–Saturday, Sunday and Monday–halving the wages of thousands of workers.

 

Why? Well here it is.

Most of the transactions in the power-loom sector are in cash–power loom owners buy raw material in cash, disburse wages in cash, and  sell in cash.

Thus we see how the problem feeds through the economic chain in what is a clear government driven credit crunch which hits weak industries like this one the hardest. Even more sadly the same is true of people. From @bexsaldanha.

“Business is down so we work on the farm more,” Megha Patil, Hivali village, Bhiwandi Taluka

Goods supplier Santosh Jadhav: From Wada to Vikramgad, supply chain to 203 Kiranas has broken down. Nobody has money.

Comment

There are obvious issues with the unofficial economy in India and attempts to reduce it are welcome. Except in any move you need to look at the likely side-effects and these were always going to be large from removing over 80% of the cash money in circulation. I warned about the problems back on November 11th.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Actually the gold trade has not been boosted and as The Times of India points out there is more than a little irony in the reason why.

“The business was down by more than 70% in December, primarily because of the cash crunch and weakened purchasing power of consumers and investors. Many don’t still invest in gold except for by cash transactions. Besides, the liquidity crunch is also impacting trade,” said Shanti Patel, president, Gems and Jewellery Trade Council.

So whilst very little is easy in a country where changes are even harder than turning an oil supertanker but so far the message is not good.

Number Crunching

We learn from the table below that Helicopter Money would be much easier for the Swiss Air Force than the Indian one.

https://twitter.com/BTabrum/status/816208447846907904