Norway is apparently very happy but what about house prices?

Today we are taking a trip across the North Sea to what we are told is the happiest country on Earth. From the World Happiness Report.

Norway has jumped from 4th place in 2016 to 1st place this year, followed by Denmark, Iceland and Switzerland in a tightly packed bunch. All of the top four countries rank highly on all the main factors found to support happiness: caring, freedom, generosity, honesty, health, income and good governance. Their averages are so close that small changes can re-order the rankings from year to year.

As I note that Finland is 5th this seems to be a Nordic thing although of course it does make one wonder about the criteria as well as how many copies of this were sold there by Pharrell.

Because I’m happy
Clap along if you feel like a room without a roof
Because I’m happy
Clap along if you feel like happiness is the truth
Because I’m happy
Clap along if you know what happiness is to you
Because I’m happy
Clap along if you feel like that’s what you wanna do

There are clear economic influences here as we note that Africa is apparently “waiting for happiness” and intriguingly China is like this.

People in China are no happier than 25 years ago

But returning to Norway there are clear economic influences at play.

Norway moves to the top of the ranking despite weaker oil prices. It is sometimes said that Norway achieves and maintains its high happiness not because of its oil wealth, but in spite of it. By choosing to produce its oil slowly, and investing the proceeds for the future rather than spending them in the present, Norway has insulated itself from the boom and bust cycle of many other resource-rich economies.

There is a mixture of fact and PR release there so let us look further at the Norwegian economy. Oh and being the top of any list these days poses a question.

Economic growth

This from the Norges Bank last week is not especially inspiring.

In 2016, mainland GDP in Norway grew at the slowest rate recorded since the financial crisis. Growth picked up a little between Q3 and Q4 as projected earlier.

Norway Statistics tells us this.

Continued weak growth Mainland Norway: Growth in the gross domestic product (GDP) for mainland Norway was 0.3 per cent in the 4th quarter of 2016, slightly up from the 3rd quarter.

The annual rate of growth was 1.1% and if we look into the detail there was something familiar for these times.

Consumption of goods increased by 0.6 per cent, after having mostly fallen since the 3rd quarter of 2015. Increased car purchases contributed to more than half of the rise in household consumption of goods.

A hint of easy monetary policy which these days often appears in the car sector. Also something else seems rather familiar.

The declining wage growth that we have seen in recent years will continue, and estimates for 2016 show that the average annual wage growth was 1.7 per cent.

If we return to the Norges Bank report we see that real wages have fallen.

The consumer price index (CPI) rose by 3.6% between 2015 and 2016, while consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) rose by 3.0% in the same period.

A lot of the impact here has been from the oil and gas sector.

What about monetary policy then?

Here we go.

Norges Bank’s Executive Board has decided to keep the key policy rate unchanged at 0.5%. The Executive Board’s current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead.

So like so many other central banks they ignore inflation being above its target ( which is 2.5%) and concentrate on economic growth.

In the wake of the decline in oil prices since summer 2014, the key policy rate in Norway has been reduced in several steps. Monetary policy is expansionary and supportive of structural adjustments in the Norwegian economy,

So far the oil price and industry has been a silent elephant in the room but if we defer that to later let us look at the dangers from low interest-rates which are domestic debt and house prices.

House Prices

Today’s data release tells us this.

On average, prices for new dwellings have increased by 10.4 per cent in the 4th quarter of 2016 compared to the same quarter in 2015…….Prices for existing flats, small houses and detached houses have increased by 15.9, 9.9 and 7.6 per cent respectively from the 4th quarter of 2015 to the 4th quarter of 2016.

If we look into the detail we see that the prices for flats ( multi dwelling apartments) are driving this move. Let us remind ourselves that this compares with wage growth of 1.7% and real wages which are falling and it comes on the back of previous rises. The flats index was at 80 in the first quarter of 2011 and has risen to approximately 117. If we look back for what has happened in the credit crunch are we see that house prices have doubled since 2005 ( to be precise the index is 199.3).

What about debt?

The Norges Bank puts it like this.

Persistently low interest rates may lead to financial system vulnerabilities. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable. By taking into account the risk associated with very low interest rates, monetary policy can promote long-term economic stability.

That lest sentence is a contradiction in terms designed to fool the unwary I think. We see that borrowing was on the march.

Net incurrence of loans increased from NOK 167 billion to NOK 186 billion, while net investments in deposits decreased from NOK 65 billion to NOK 55 billion.

Debt growth was 5.6% in 2016 and that left the debt to income ratio at 2.35.  Back to the Norges Bank.

Growth in household debt accelerated through the latter half of 2016, and debt is still growing faster than household income. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable.

The mortgage rate series at Norges Bank was at 3.98% as 2013 ended and 2.49% as 2016 ended so we can see the pattern although the low was 2.35% last August. It is not a surprise to see money supply growth be firm.

The twelve-month growth in the monetary aggregate M3 was 6.5 per cent to end-January, up from 5.4 per cent the previous month.

The debt situation for the government is rather unique. It does have some but if you put in the sovereign wealth fund then net financial assets must be around treble annual GDP.

Comment

If we look at the elephant in the room then the oil and gas sector accounts for around 22% of Norway’s economic output. If we add in the fishing industry then Norway is especially gifted in terms of natural resources. The catch in recent times has been the fall in the price of crude oil which sees the Brent benchmark just above US $51 per barrel as I type this. In terms of an annual comparison the price is higher and Norway is one of the countries which most welcomes that but it is a far cry from the US $100+ of a couple of years ro so ago. This has been picked up in the unemployment data where the unemployment rate headed towards 5%. It has now fallen to 4.4% but there are other worries here.

the seasonally-adjusted unemployment decreased by 0.4 percentage points, or 12 000 persons………the seasonally adjusted number of employed persons decreased by 22 000 persons from September to December.

Meanwhile the central banks eases and pumps up the housing market. Maybe us Brits have set a bad example but what must first-time buyers and the younger generation think of this as a strategy?

Let me leave you with something very Norwegian.

A total of 30 800 moose were shot during the hunting year 2016/2017; a decrease of 300 animals from the previous hunting year and a decrease of 22 per cent from the record hunting year 1999/2000.

 

Can we make any sense of the GDP data for Ireland?

Firstly let me wish everyone a Happy St.Patrick’s day as we also wait for England versus Ireland in the Six Nations rugby tomorrow. In that spirit let us immediately open with some good news. From the Irish Central Statistics Office or CSO.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

On a seasonally adjusted basis, constant price GDP for the fourth quarter of 2016 increased by 2.5 per cent compared with the previous quarter while GNP increased by 3.2 per cent over the same period.

What grew? Well pretty much everything.

Building and construction recorded an 11.4 per cent increase in real terms and manufacturing recorded a 1.8 per cent increase . The distribution, transport, software and communications sector increased by 7.8 per cent while the agriculture sector increased by 6.2 per cent, and other services by 6.0 per cent. Public administration and defence recorded an annual increase of 4.4 per cent.

Looking ahead

The good news theme continues as we peruse the business surveys.

The latest Investec Services PMI Ireland report shows that business activity continued to increase sharply during February, with the rate of expansion only slightly weaker than January’s seven-month high. The headline PMI came in at 60.6, versus 61.0 in the previous month.

As we look around we do not get many readings in the 60s so let us look at manufacturing.

The latest Investec Manufacturing PMI Ireland report shows a further solid improvement in business conditions, albeit the pace of growth has slowed for a second successive month. The headline PMI was 53.8 in February, down from 55.5 in the preceding month.

So good numbers especially in the services sector although with the nature of these surveys they are less reliable than in larger countries as we have seen before on occasion in Ireland with the example of a cut in pharmaceutical production ( Lipitor going off-patent) which was missed.

Also in the circumstances this raised a wry smile.

On the latter, we note that panellists again highlighted the UK as a particular source of demand.

Unemployment

A consequence of the better economic data has been this.

The seasonally adjusted unemployment rate for February 2017 was 6.6%, down from 6.7% in January 2017 and down from 8.4% in February 2016.

This represents quite an improvement on the 10.1% of February 2015 and a vast improvement of the 15.2% of January 2012. It is not yet back to the pre credit crunch lows, however, which were around 2% lower.

Inflation

Here is an interesting combination with the good news above as you see central bankers will have a mind block because Ireland has not had inflation for some time.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), increased by 0.3% compared with February 2016.

Actually I am slightly exaggerating but if we use the Irish CPI and base it at 100 in 2011 then it was 101.5 in 2016. Even worse for the inflationoholics who run central banks and of course the media who copy and paste such views it was possible for relative prices to change.

The sub index for Services rose by 2.0% in the year to February, while Goods decreased by 1.5%.

So if low/no inflation has been good for Ireland how does it feel about the European Central Bank determination to push it higher? I forecast good news from this back on the 29th of January 2015.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains.

Trouble

In spite of the official news being good there are signs of what Taylor Swift would call “Trouble, trouble,trouble” if you look below the headlines. The Irish Times pointed out this last December.

The fact that more than 6,000 people, including children, are now officially “homeless” and living in emergency accommodation in hotels, guesthouses and charity shelters is offensive……….It flows from policy decisions and political collusion that created a deeply unequal society.

Focus Ireland counted 7148 and pointed out that the number was up 40% over the past year and was likely to be under recorded. There are other issues in this sector as we look at the sale of property by the bad bank NAMA. Firstly the excellent NAMA Wine Lake is critical of the accountancy at play here.

NAMA acquired €74bn of loans for €32bn. The NAMA “profit” is on the €32bn acquisition price. We bailed out the banks for the €74bn-€32bn.

How is that going?

NAMA lost £190m on £4.5bn par value Project Eagle sale. How much will NAMA lose on (average of) €50m loans it will sell in next 24 hours?

Also there is the issue of all this apparently surplus property being traded around whilst people are homeless on an increasing scale.

House Prices

These are of course ignored by the consumer inflation numbers although of course not by anyone wanting to buy a house. Signs of problems are clear.

In the year to January, residential property prices at national level increased by 7.9%. This compares with an increase of 7.9% in the year to December and an increase of 5.6% in the twelve months to January 2016.

If we look for some perspective we see this.

From the trough in early 2013, prices nationally have increased by 49.6%. In the same period, Dublin residential property prices have increased 65.2%………..Overall, the national index is 31.8% lower than its highest level in 2007. Dublin residential property prices are 32.4% lower than their February 2007 peak,

What might be wrong with the official data?

There is an obvious concern with GDP (Gross Domestic Product) rising by 21% in one quarter as it did at the opening of 2015. I have covered this before so this time let us examine the view of the Central Bank of Ireland from its Quarterly Bulletin.

However, this masked offsetting trends in the components of GDP, in particular investment and trade, which were not closely aligned with indicators of activity in the domestic economy, but were mainly accounted for by the off-shore activities of multinational firms.

If we return to the official data what did happen to recorded investment in Ireland in 2016?

On the expenditure side of the accounts (Table 3), capital formation rose strongly by 45.5 per cent during 2016.

There is more.

The potential for volatility in the measurement of Irish GDP reflects the fact that parts of the output recorded in Irish GDP now reflects activity which takes place in other countries.

When you consider that the numbers are supposed to represent Ireland and its economy this confession is really rather extraordinary.

In the trade data, for example, changes in the level of contract manufacturing abroad by multinational firms can have a significant impact on exports and imports.

If we look at the data for the last quarter of 2016 there is this.

On the expenditure side there was a decline in net exports of €17,396m (93.7 per cent) during the quarter, largely driven by higher imports (37.2 per cent).

Actually the higher investment and import numbers often represent the same things.

The central bank also looked at the economic impact of Aircraft Leasing where the sums are enormous even for these times.

Assuming that the industry in Ireland is to continue to account for some 50 per cent of the leased output (as per current estimates), this would imply approximately €1.4 trillion ($1.5 trillion17)in new assets – either acquired or via finance leases inward – held by the sector in Ireland

Yet in terms of actual action this generates ” a certain degree of employment and tax revenues ” in reality so how much then? Over 1200 and 300 million Euros a year which are no doubt very welcome but poses a question for measurement.

Comment

The Irish situation opens more than one can of worms. Has the economy grown in recent years? I think so but the data poses lots of questions and let me highlight this with something from the CSO. In response to the issues above it thinks that Net National Product or NNP may help because it allows for depreciation and thus takes out much of the cross-border flows. So is Ireland’s annual economic output 255.8 billion Euros ( GDP) or 202.6 billion Euros (GNP) or 141.1 billion Euros (NNP)? The numbers are for 2015 but also was economic growth 32.4% (GDP) or 24% or 6.4%?

Also how do we relate the national debt to economic output? Perhaps as we have discussed before the best measure is to compare it to tax revenue.

 

What are the economics of Scottish independence?

Yesterday saw the First Minster of Scotland fire the starting gun for a second vote on independence from the UK for Scotland as the pace of possible change ratchets up yet another notch. With it came am intriguing view of how long a lifetime is these days! Although I am also reminded of the saying that “a week is a long time in politics”. However as ever I look to steer clear of the political melee and look at the economics. So how is the Scottish economy doing?

Economic growth

The Scottish government has published this data.

When rounded to one decimal place, at 2016 Q2 annual GDP growth in Scotland was 0.9 percentage points lower than in the UK. At 2016 Q3, annual GDP growth in Scotland was 1.2 percentage points lower than in the UK. Between 2016 Q2 and 2016 Q3, the gap between annual Scottish and UK GDP growth increased by 0.3 percentage points in favour of the UK (when rounded to one decimal place).

As you can see the recent performance has been around 1% per annum slower than the UK and may well be accelerating. With the UK economy overall having grown by 0.7% in the last quarter of 2016 that seems likely to have continued but of course there are always dangers in any extrapolation. If we look back we see that in the pre credit crunch period GDP growth was similar then Scotland did worse and then better as presumably the oil price boom benefited it ( although the oil sector itself is excluded). Then until the recent phase Scotland did mildly worse than the rest of the UK.

Looking ahead

The Scottish government plans to improve this and with an eye on future policy has set a European Union based objective.

To match the GDP growth rate of the small independent EU countries by 2017.

How is that going so far?

The latest data show that over the year to 2016 Q3 GDP in Scotland grew by 0.7% whilst GDP growth in the Small EU was 3.5% (measured on a rolling four quarter on four quarter basis). When rounded to one decimal place, this resulted in a gap of 2.8 percentage points in favour of Small EU. This compares to an annual increase in GDP to 2016 Q2 of 1.0% in Scotland, and an increase of 4.2% in the Small EU – resulting in a 3.3 percentage point gap in favour of Small EU (when rounded to one decimal place).

As you can see the gap here is much wider and leaves Scotland with a lot of ground to recoup. If you look at the list that may well get harder.

The small independent EU countries are defined as: Austria, Denmark, Finland, Ireland, Portugal and Sweden. Luxembourg has been re-included in the newest update due to a change in availability of data.

Ireland is proving a hard act to follow.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

It is an awkward fact that the 21% economic growth registered by Ireland in the first quarter of 2015 lifted the target away from Scotland and it continues to offer something hard to catch. Of course such large moves also challenge the credibility of the Irish data series.

What about employment?

Good but not as good as England currently.

Scotland’s employment rate of 73.6 per cent for Q4 2016, is the second highest across all UK countries, 1.3 percentage points below England. This indicates a worsening position compared with a year ago when Scotland had the highest employment rate across all UK countries, 0.2 percentage points above England (the second highest).

Natutral Resources

Crude Oil and Gas

Plainly Scot;and has considerable resources here although unless there are new discoveries these seem set to decline over time. There have also been big changes in the crude oil price as FullFact reported last October.

It is correct that crude oil prices are currently at around $50 a barrel. Back at the time of the first Scottish independence referendum in September 2014 oil was selling for just over US $90 a barrel.

Energy policy, and how oil revenue would be invested, was part of  the Scottish government’s vision for an independent Scotland……….”With independence we can ensure that taxation revenues from oil and gas support Scottish public services, and that Scotland sets up an Energy Fund to ensure that future generations also benefit from our oil and gas reserves. “

I think that FullFact were being very fair here as there were forecasts from Alex Salmond that the oil price would rise towards US $130 per barrel if my memory serves me right. Whereas it is now US $51 or so in terms of Brent crude oil. So the oil sector has seen something of a recession affecting areas like Aberdeen although there would have been gains for other Scottish businesses and consumers from lower prices.

The Fiscal Position

This has been affected both by the lower oil price and also by the recent trend to lower economic growth than the rest of the UK. The former was highlighted by this from the 2015-16 data.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.

This led to these numbers being reported.

Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP).

Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).

For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).

This adds to an issue I reported on back in my Mindful Money days in November 2013.

So there is something of a shark in the water here. If we add in the fact that Scotland spends more per head than the rest of the UK then the IFS ( Institute for Fiscal Studies) considers that the fiscal position is more dangerous. Both the UK and Scotland spend more than they get in from tax but the Scottish position is more reliant on a fading source of tax revenue. This is what leads to the following conclusion.

As it turns out that source of revenue has ended at least for now and seems to be capped by the shale oil wildcatters for the next few years. All rather different to this.

But a current strength of the numbers is revenue from North Sea oil which was 18.6% of tax revenue in 2011-12 for Scotland.

Of course there would be quite a debate over the share of the UK national debt that would belong to Scotland but the fiscal position is presently poor.

What currency?

This poses a few questions so let me repeat the issues with using the UK Pound.

1. The Bank of England will presumably set interest-rates to suit England (and Wales and Northern Ireland). This may or may not suit Scotland.

2. The value of the pound will mostly be determined by the much larger English economy in some respects similar to the way that Germany dominates the Euro. That has not worked out well for many of the Euro nations.

3. This is to say the least awkward, if further bank bailouts are required. Will the Bank of England be the “lender of last resort” in Scotland? How does this work when it has an independent treasury? Just as a guide, individual nations in the Euro area had their own central banks which survive to this day partly because of this issue.

4. There is also the issue of currency reserves and intervention which presumably also stay with the Bank of England.

5. What about the money supply of Scotland which will again presumably be controlled by the Bank of England and set for the rest of the UK?

6. Has anybody bothered to ask the citizens of the rest of the UK if they are willing to take the risk of having Scotland in a currency but not a political or fiscal union? This would take place just as the Euro is demonstrating many of the risks of such an arrangement. But added to it for the rest of the UK would be new oil or gas discoveries pushing up the value of the pound and thereby making their businesses and industry less competitive.

Comment

Scotland plainly has economic strengths with its natural resources and financial services industry. However since the last vote there has been a deterioration in economic circumstances as we have seem growth fall below that of the rest of the UK. This has led to a problem with the fiscal deficit and it is hard not to think of the criteria for joining the European Union.

New Member States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession.

We do not know what the national debt would be but the fiscal deficit is around treble the 3% of GDP target per annum in the Euro accession rules. Of course Euro members have often ignored it but they have been much stricter on prospective entrants. Quite a Euro area style austerity squeeze would seem likely and that has been associated with recessions and quite severe ones at that.

Charlotte Hogg’s Resignation

Back on the 1st of March I pointed out the lack of competence on monetary policy she displayed in front of the UK Treasury Select Committee. Today it was announced that she offered to resign last week but Mark Carney would not take it. Now he has.

http://www.bankofengland.co.uk/publications/Documents/news/2017/charlottehoggletter130317.pdf

 

http://www.bankofengland.co.uk/publications/Documents/news/2017/028.pdf

 

 

 

The relationship between ECB policy and the economic performance of France

Today the Governing Council of the ECB (European Central Bank) meets to announce its monetary policy decisions. It does so in a very different environment to its more recent meetings because of the way that the economic winds of change have blown. What I mean by this is that the economic outlook is the brightest it has seemed for a while now. Also consumer inflation has risen to pretty much on target which poses a question for ECB policy going forwards as I have been pointing out for a while now, most recently last Friday. There is a clear contrast with the United States where expectations of an interest-rate rise this month are pretty much 100% now. Yet there is a problem as we note this from @fwred on the Atlanta Fed forecast for US economic growth.

Potentially HALF the growth rate of the euroarea in Q1.

This has led to hints of a change today this morning.

doesn’t plan to announce a new round of TLTROs, according to people familiar with the matter” ( @bondzilla )

So if true it will scrap a bank subsidy.

However I wish to take the opportunity of the second anniversary of the major QE program of the ECB to take a look at the impact it has had on France and its economy. It has provided a deposit rate of -0.4% a balance sheet heading towards 4 trillion Euros and thereby a lower level for the Euro although of course we can never judge any policy in isolation. The QE purchases have meant that 269 billion Euros of French government bonds have been bought easing its fiscal policy via the fact that it has some negative bond yields and only has a ten-year bond yield of 1,03%. So whilst that has become increasingly expensive vis a vis Germany it is also as Middle of the Road pointed out some years ago.

Chirpy, Chirpy, Cheep, Cheep, Chirp

The French economy

Lets look at it with a different twist as the particularly francophile Financial Times has looked at the French economic situation. It has done so on a political beat but for me the issue is monetary policy as over the period in question ( since 2012) it has been monetary policy that has been the main economic player in town.

The winner of this year’s election will inherit an economy that has been growing slowly but steadily since the 2008 financial crisis……..However, as the chart below shows, despite modest growth the country has underperformed relative to the likes of Germany, the UK and the US. Nevertheless, towards the end of Mr Hollande’s term things began to pick up. Growth last year reached 1.1 per cent, the fastest pace during his tenure — though it still fell well below the EU average of 1.8 per cent.

Let me just correct a factual error with this from the French statistical office.

On average over the year, GDP rose by 1.1%, practically as much as in 2015 (+1.2%).

So in annual terms not the fastest rate although it is quicker than 2012,13 and 14. In a way cheering an economic growth rate of ~1% poses its own question in an era where we have tentatively described the new normal as 2%. But if we skip the UK and US there is an issue in a currency union where growth is consistently below the average and the country which is considered with France at the heart of the Euro project which is Germany. The solution for that would be regional policy but quite how that would manifest itself I am not sure.

Unemployment

The numbers here continue to be awkward to say the least.

unemployment continued to creep up to a high of more than 10 per cent, prompting the president — late in his tenure — to take more decisive steps to tackle what he labelled an “economic emergency”……..unemployment figures have shown only marginal improvements over the past year,

There are other worrying features of the French labour market as well.

The reforms have so far failed to break France’s two-tier labour market. Last year, 86.4 per cent of total hiring was into temporary jobs — and of those, 80 per cent were for contracts shorter than one month. Meanwhile, long-term unemployment remains stubbornly high: more than 45 per cent of the unemployed in France have been without a job for more than a year, the highest proportion since records began in 2003.

It is not a good time to be young in the French labour market either.

France’s youth unemployment rate is roughly double that of the UK and continues to rise — in contrast with a decline in most advanced economies. The story is similar for foreigners and those with lower levels of education.

Accordingly the quantity number unemployment remains poor in spite of all the monetary easing and a chill wind blows through if we add in the reforms promised because the situation has not changed all that much. Also “emergencies” seem to last these days don’t they as I think also of the UK “emergency” Bank Rate of 0.5% which somehow went even lower to 0.25%!

If you are employed in a permanent job in France you have better conditions and perhaps better pay than in the UK. But for those outside such a position the outlook is worse, although some aspects seem the same as “contracts for less than one month” are not a million miles away from zero hours contracts in principle.

The state

This is larger in France than in many other places.

But France still has one of the highest public spending ratios among advanced countries — at 57 per cent of GDP. Within that, health, social and pensions expenditure as a share of GDP remain comparatively high and have risen since 2012.

Of course there are beneficial consequences of this as many French people are proud of their health system. Whilst the ECB continues with its QE bond purchases the fact that the national debt to GDP ratio is 97.5% matters little but of course unless France finds some economic growth we are left with what happens if the ECB stops buying?

House Prices

Let me throw in something which is not mentioned by the FT. If you look at French houses prices they were in the autumn of 2016 where they were in the last quarter of 2007. I do not know about you but with all that has gone on in the credit crunch era that seems so much healthier than the UK situation. What do readers think?

There is a catch though ( as ever…) as we consider the mortgage books of the French banks.

Regulation and Taxation

The Financial Times struggled here to present an optimistic picture.

Despite attempts at simplification, French companies “are still faced with a high regulatory burden and fast-changing legislation”, according to a recent European Commission report………At 48 per cent, the labour tax wedge was the fifth highest in the OECD in 2015 and French corporation tax remains the highest in Europe.

Comment

There is much to consider here and there are of course problems with using GDP as a yardstick. It is a long way from perfect but in essence monetary policy in the Euro area has been trying to drive it higher using the excuse that it is bringing inflation back on target. But for France there has been an improvement but only to a growth rate of around 1% so far. The opening of 2017 looks better but can that be sustained for the several years required? Along that road the ECB would have all sorts of questions to answer if it maintained its stimulus.

Something that should particularly benefit French business is the corporate bond buying program but as it has bought more than 10% of Euro area corporate bonds already how long can it go on? For a start it is anti-competitive especially if you do not qualify.

 

The claims of Grecovery turned into a continuing economic depression for Greece

Today has started with something that has become all to familiar over the past 7 or so years. From Kathimerini.

Greek farmers protesting against bailout-related income cuts are clashing with riot police outside the agriculture ministry in central Athens.

Police fired tear gas to prevent farmers from forcing their way into the ministry building, while protesters responded by throwing stones.

This is of course the human side of the austerity regime which has been applied to Greece again and again and again.

Protesters are angry at increases in their tax and social security contributions, part of the income and spending cuts Greece’s left-led government has implemented to meet bailout creditor-demanded budget targets.

Yet sadly there is also a theme where some as in those at the higher echelons of society are more equal than others. From Keep Talking Greece.

Greece’s ministers, lawmakers, mayors and other high-ranking public officials are able to enjoy generous tax reductions reaching up to 2,000 euros per year.

Even worse this was tucked away in a 2016 bill which did this.

The provision was included in the law to decrease or even cut the poverty allowance to thousands of low-pensioners.

Many of the problems could have been avoided if Greece had found a way to tax the wealthy. Yet they seem to continue on their not very merry way.

It appears that the former head of gas grid operator DESFA, Sotiris Nikas, granted himself a promotion that boosted his retirement lump sum by 100,000 euros to 258,000 euros, ( Kathimerini)

What about economic growth?

There was a familiar pattern to those who have followed the Greek economic depression as  From Keep Talking Greece.

Greece’s Prime Minister Alexis Tsipras was confident that the times of recession were over and that “Greece has returned back to growth” as he told his cabinet ministers……..After seven years of recession, Greece has returned to positive growth rates he underlined.

Reality was not a friend to Mr. Tsipras as soon after the Greek statistics office released this.

The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016, against the decrease of 0.4% that was announced for the flash estimate

Which meant this.

In comparison with the 4th quarter of 2015, it decreased by 1.1% against the increase of 0.3% that was announced for the flash estimate of the 4th quarter.

If we look at the pattern then it has turned out to be what economists call an “L” shaped recovery or in fact no recovery at all. What I mean by this is that the Greek economy as measured by GDP (2010 prices) peaked at 63.3 billion Euros as the output for the second quarter of 2007 and then fell to  46 billion Euros per quarter as 2013 started and is still there. Remember all those who proclaimed that so-called “Grecovery” was just around the corner? Well it was a straight road and in fact had a gentle decline as the latest quarter had a GDP of 45.8 billion Euros. Thus the Greek economic depression over the last decade has involved a contraction of economic output of 28%.

If you prefer that in chart form here it is.

Yet the Institutions as the Troika are now called stick their collective heads in the sand.From Amna on the 7th of February.

The recent IMF report saying that Greece’s debt load is unsustainable was “unnecessarily pessimistic,” Eurogroup President Jeroen Dijsselbloem said on Tuesday.

The banks

Where an economy is really in trouble then we can find a banking system which has had a type of heart attack and the Greek banking system did as Kathimerini points out.

the huge pool of NPLs ( Non Performing Loans) in Greece that now add up to 107 billion euros after their increase by 1.5 billion in the first couple of months of 2017.

As to the deposits in the banks they have yet to regain the losses of 2015. Care is needed about the many claims that bank deposits have plunged again as the numbers has seen some ch-ch-changes with the order of 6 billion Euros removed. Any way the recent peak at 179.1 billion Euros for domestic residents the the summer of 2014 compares with 130..9 billion Euros in January.

The main growth industry for Greek banks seems to be this.

Eurobank Financial Planning Services (FPS), is the second bad-loan management firm to obtain a license from the Greek authorities to operate in the local market. It follows the permit issued to Cepal, a joint venture by Alpha Bank and Aktua.

On my way to looking at past house prices I found the Bank of Greece 2008 Interim Report which told us this.

the Greek banking system remains fundamentally sound, safe and stable.

Oh and this.

In the euro area, the situation is less worrying than in the United States as far as financial stability is concerned; however, risks of a deterioration do exist.

House prices

It was only yesterday I was looking at the central role of house prices in the UK economy but in spite of a barrage of measures the ECB ( European Central Bank) has failed to influence them much at all.

According to data collected from credit institutions, nominal apartment prices are estimated to have declined marginally on average by 0.6% year-on-year in the fourth quarter of 2016, whilst in 2016 as a whole apartment prices fell on average by 2.2%, compared with an average drop of 5.1% in 2015. ( Bank of Greece )

Ironically that is the sort of medicine which would benefit the UK but for Greece there has been another feature of the economic depression where “apartment prices” have fallen by 40% since 2007.

The shadow economy

The shadow or unrecorded economy has seen a few name changes in recent times but I have been trying to find out more about it in Greece since the crisis began. Yesterday there was a flash of light from Bloomberg.

When Maria’s employer, a large communications company in Athens, gave her additional tasks at one of its new units, it told her she wouldn’t be paid for the work in euros.

“I was informed that this extra payment of 150 euros per month would be in coupons that I can use in supermarkets,” said the 45-year-old, declining to provide her last name for fear of losing her job.

So as the austerity grip tightens more slips through the net.

Payments in kind are among practices companies are using in Greece as they seek to cap payroll costs, undermining efforts to balance the books of the country’s cash-strapped social security system………By some estimates, the so-called black market already accounts for as much as a quarter of Greece’s economy.

What we would like to know is how much the size of the shadow economy has grown. The fact that it has grown seems beyond doubt but how much?

Comment

As the Greek economic depression heads towards the decade mark where even “lost decade” simply does not cut it there have been many themes. A sad one I found in the 2008 Bank of Greece report which told us about structural reform, yes the same structural reform that is still being promised now.

Some time ago I wrote about the “Roads To Nowhere” in Portugal which were empty because of the high tolls charged. Well here is a view on Greece.

It’s often cheaper to fly to Berlin than pay the road tolls for a small car from Thessaloniki (Greece’s 2nd city) to Athens…….The insanely priced and ever growing road toll network in Greece is a major drag on economic development.Roads too expensive for many to use (h/t @teacherdude )

International Women’s Day

Let me mark this with the exchange between Sarah Jane of Sky News and Lord Heseltine.

Lord Heseltine: ‘She’s got a man-sized job to do’ : ‘It’s a woman-size job now’ ( about Prime Minster Theresa May)

This led to some humour from Charlie Reynolds

If I was Michael Heseltine’s mother’s dog I’d watch my step today

 

 

 

 

What are the prospects for UK house prices?

One of the features of the UK economy is the way that its performance is so often tied to house prices. This is mostly because in response to any slow down in the economy the Bank of England eases monetary policy which reduces mortgage rates and encourages people to buy. Buying a house does have tax advantages too as the first house is free of capital gains tax and buy to let investors are able to set the cost of the mortgage interest against their rental income, although last year that was restricted to only basic rate income tax. Next comes the view that as Yazz put it “The only way is up” for house prices which in most memories seems true as lets face it even in response to the credit crunch they did not fall far overall. That does not mean that some areas did not see heavy falls as Northern Ireland did but in general there was a dip but the bank subsidy called the Funding for Lending Scheme soon got things moving again in the summer of 2013. As so often we see an economic divergence where London and the South East boomed and other areas did less well and some saw falls.

This has led to a rather troubled situation in my opinion.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. ( Financial Times)

A clear danger is calling this value when we have relatively few transactions compared to the total stock and of course much fewer than before the credit crunch. We could hardly sell the lot at once! The same issues arise with this below.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016. ( Financial Times )

Next is the issue of divergence or some groups and areas doing better than others.

A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group. ( Financial Times).

“Store of wealth”? Again there is a problem as how could it be realised in total? Of course some do but the majority will not.

Ignored in all that is the issue of first-time buyers and those wanting to trade up who face properties which particularly in the South East are very expensive and in London are unaffordable even for high-flyers. Back on the 8th of December I offered this view.

With real wages coming under pressure from higher inflation and therefore likely to fall in 2017 we should see national house price growth slow and maybe even a fall or two. That’s the best piece of new first time buyers have seen for quite some time.

I do not wish for people to lose money but prices cannot just rise like a hot air balloon without hurting others.

Halifax data

This morning’s data release tells us this.

House prices in the three months to February were 1.7% higher than in the previous quarter; down from 2.3% in January. The annual rate of growth fell to 5.1% from January’s 5.7%, the lowest since July 2013.

So we see a fading of both quarterly and annual growth in house prices recorded by the Halifax. Here is some more perspective on that.

(This) was the lowest annual rate since July 2013 (4.6%). The annual rate is nearly half the 10.0% peak reached in March 2016.

It will be interesting to observe next month because house prices on this measure rose by 2% last March as I recall the dash to buy ahead of the changes in taxation for buy to let properties. If you want some real perspective on UK house prices over time then if 1983=100 they were 711.9 last month.

What about London?

This is an issue wider than the simple fact that I live there ( Battersea) but because it is usually the forerunner of what happens next elsewhere in the UK as effects from central London feed out to outer London and then the South-East and sometimes wider still. This caught my eye yesterday. From City AM.

Here’s an unusual move by a housebuilder: Barratt Homes has bundled together 172 flats at various developments across London and sold them off as rental homes.

The housebuilder said it had sold the units to Henderson Park for £140.5m. The portfolio includes 29 units at Aldgate Place, a joint venture with British Land, 25 in Fulham Riverside and all 118 at its Nine Elms Point tower in Vauxhall, a joint venture with L&Q.

Now if they were selling them at a regular rate they would  be unlikely to be doing such a thing so there is an ominous hint for house prices here. Also that is a lot of flats to rent out which will presumably put pressure on rents received. It would be an irony would it not if the new Rental Equivalence measure of owner occupied housing costs in CPIH registered a fall?! Oh and speaking of sales there was this in City AM in January.

The housebuilder completed on 367 homes in London in the six months to the end of December, down from 842 in the same period the year before. Barratt said it was lowering prices and offering bulk deals to shift homes in the capital.

Meanwhile there is this from Savills blog.

However, despite much higher levels of outstanding debt in London, the equity held by those with a mortgage is also greater than in any other region, reflecting the capital’s high house price growth over the past decade. Just five years ago the average outstanding loan to value for a property subject to mortgage stood at 49 per cent in the capital. It now stands at 42 per cent, the lowest of any region.

What could go wrong?

Regional Issues

Meanwhile elsewhere there are a very different set of problems. From the Savills blog.

This lack of equity is a very real constraint in some markets that have seen very weak house price growth over the past 10 years. For example, in markets such as Blackpool, Blackburn, Burnley and Middlesbrough outstanding loan to values exceed 70 per cent, making it difficult for those looking to move to take on more debt on competitive terms.

Here affordability is better but loan to values limit improvements to mortgage terms as we again wonder about the phrase some being more equal than others.

Comment

The basic trends seem locked in place. UK economic growth has been amazingly steady but the issue will come in the latter half of the year when we are hit by higher inflation levels. These days what was previously regarded as relatively low inflation ( 3%+ on CPI and 4%+ on RPI) has a larger impact because so far on the credit crunch wage growth has not risen with it so we saw a sharp fall in real wages around 2011 for example. It is not impossible that the Bank of England could cut Bank Rate again or produce other house price and bank friendly measures but even they may balk at that with inflation above target. Thus house price growth looks set to fade and the price falls will spread out from Central London. How far across the country they will go depends on the mix between economic growth that 2017 and 18 deliver to us.

Charlotte Hogg

It is a welcome development that a woman has been promoted to the higher echelons of the Bank of England. However this particular one has not had a good start as Deputy Governor due to her apparent amnesia about her brother’s job at Barclays.

Regrettably, my oversight means that my oral evidence to the Committee in this respect was not accurate. I write now to correct that evidence at the earliest opportunity and to place on record my sincere apologies to the Committee.

Here is a link to her full apology.

http://www.parliament.uk/documents/commons-committees/treasury/Correspondence/Charlotte-Hogg-to-Treasury-Committee-Chair-02-03-17.pdf

 

 

 

 

The UK Spring Budget will have good economic news but not for the OBR

Yesterday saw some good news about the UK economy announced by the Chancellor of the Exchequer as he did his pre Budget tour of the television media. The Financial Times has put it like this.

Philip Hammond’s first and last spring Budget will be delivered against a backdrop of economic resilience since the EU referendum last summer.

Most people would welcome this although apparently not the economics editor of the FT Chris Giles.

Economy may be stronger than hoped

The details of this are shown below.

The economy has performed better than the Office for Budget Responsibility expected in the latter half of 2016 and started this year with significant momentum which will raise the growth numbers for this year. Headline growth forecasts for 2017 will be revised sharply higher from 1.4 per cent to close to 2 per cent.

These are of course concepts of which regular readers on here will be well aware and indeed prepared for. I pointed out after the UK leave vote that the fall in the value of the UK Pound would provide a powerful economic stimulus which as of the end of last week was equivalent to a 2.75% cut in the UK Bank Rate ( the official interest-rate). This of course is a bazooka compared to the 0.25% peashooter announced by the Bank of England which it called a “Sledgehammer”. Although of course the second part of the Sledgehammer was due last November but never arrived in another Forward Guidance failure.

Also of note here is the fact that the Office for Budget Responsibility was wrong yet again. So the first rule of OBR club “the OBR is always wrong” works again! In essence the economic growth it took away in November it will now be forced to (mostly) put back. Also whilst the UK has growth momentum for the first half of 2017 it is much less clear for the latter part as the other consequence of a lower exchange-rate arrives which is higher inflation.

The Public Finances

The FT reports on some good news for the UK public finances.

Tax receipts for 2016-17 have proved stronger than was expected at the time of the Autumn Statement and the deficit is likely to be around £12bn smaller than feared in November.

Good except as I look back I note that the OBR told us this only last November.

the budget deficit has been revised up by £12.7 billion this year, thanks primarily to weakness in income tax receipts that largely pre-dates the referendum. The weaker growth outlook means that our pre-policy-measures forecast revision rises to £18.1 billion by 2020-21. Again, weaker income tax receipts are the biggest factor, reflecting the downward revision we have made to productivity and earnings growth;

So has the OBR and our official forecasters run hard for us to stand still?! Yesterday I switched on the television and there on ITV was Robert Peston demonstrating an almost touching faith in the forecasts of the OBR in spite of the fact if anything it manages to be even more wrong than before. The addition of Professor Sir Charles Bean seems unlikely to improve this after the way he signed off the official post EU leave forecast for an immediate recession of between 0.1% and 1% in the next quarter. As to weaker income tax receipts forecast here are the January numbers.

Self-assessed Income Tax and Capital Gains Tax receipts increased by £2.0 billion to £19.8 billion in January 2017 compared with January 2016; this is the highest January on record (monthly recording of self-assessed tax receipts began in April 1999).

So the “improvement” that will be announced is giving back what was taken away in November whilst reality remains mostly unchanged. It is like the television program Soap which used to start with “Confused? You soon will be!”

Debt Interest and QE

I noted that the Chancellor Phillip Hammond pointed out that the UK is spending some £51 billion a year on debt interest. There are a lot of factors at play here so let us go through them. Firstly the government is in my view the main beneficiary of the QE ( Quantitative Easing) bond buying program of the Bank of England. as it pays interest on £432 billion of its debt and then gets it repaid by the Bank of England. This saves it quite a lot of money explicitly and also implicitly because there are regular buyers of UK debt ( insurance companies and pension funds etc.) and they have less to buy which pushes up the price and lowers the yield. For example the UK sold a ten-year Gilt at a yield of only 1.18% around a fortnight ago so for the next 10 years we have borrowed £2 billion cheaply.

However there is a problem from rising inflation and in particular the rise in the Retail Price Index. As it rises and the RPI was 2.6% in January then we will have to pay more in interest here and also find these more expensive to redeem when they are repaid. As they are a bit under a quarter of the market the sums here are not insubstantial.

If you think this through this may be why the new Deputy Governor of the Bank of England Charlotte Hogg was caught off guard by questions about rolling back QE in parliament last week. The UK establishment simply has no plan for this at all as it fears what would happen to debt costs in such a scenario.

HS2

For those unaware this is the grand scheme to improve the UK railways from London to the North first stopping at Birmingham and then going onto Manchester and Leeds. The catch is summarised by this. From the FT.

A law providing for the first phase of the £56bn line was enacted last month and enabling works should start within weeks. The first trains are expected to arrive in Birmingham in 2026.

It is very expensive and will take a long time leading to fears it may be out of date before it even starts. But how does that work with this from its chief Sir David Higgins?

“You look at EasyJet or Ryanair or Eurostar. These services are full all the time. People will want to know they can book in advance, they can always get a seat and it is reliable. It is everyday efficient low prices,”

High costs and low prices anyone? One rather relevant reply points out the over optimistic forecasts for the HS1 line ( to the Channel Tunnel) which have led to problems over time. Also in a scheme badged as a northern regeneration scheme it has not passed people’s attention that the first bit to be built is to London,or is that a “Northern Powerhouse” now?

Comment

No doubt Wednesday’s Budget will throw up a surprise or too. For example Chancellors who major on fiscal rectitude in the public relations spinning like to pull a rabbit from the hat as a “surprise”. Also I am curious as to how and indeed if he will address the fact that the self-employed pay a much lower rate of national insurance as they would reply that they get lower state benefits.

The good news is that the UK economy has performed as we expected on here to the embarrassment of the official forecasters such as the OBR and the Bank of England. So I suggest you have a bit more than a wry smile as the media take their forecasts seriously and perhaps take the advice of some of the replies on here and get some popcorn in.