The growing debt problem faced by Italy

Yesterday saw one of the themes of this website raised by a rather unusual source. The European Commission released this document yesterday.

Today’s 27 Country Reports (for all Member States except Greece, which is under a dedicated stability support programme) provide the annual analysis of Commission staff of the situation in the Member States’ economies, including where relevant an assessment of macroeconomic imbalances.

Greece is omitted presumably because it is all to painful and embarrassing although of course one of those presenting this report Commissioner Pierre Moscovici keeps telling us it is a triumph. Reality tells us a different story as this from Macropolis illustrates.

The employment balance stayed negative in January 2017, with net departures climbing to 29,817 from 9,954 a year ago, data from the Labour Ministry’s Ergani information system revealed on Tuesday.

But as we note that 13 countries in the European Union were investigated for imbalances or just under half with 12 found to have them ( oddly the troubled Finland was excluded) the Commission found itself in an awkward spot with regards to Italy. Here is the label it gave it.

excessive economic imbalances.

Which led to this.

a report analysing the debt situation in Italy

So let us investigate.

Italy’s National Debt

Firstly we get a confession of something regularly pointed out on here.

in particular low inflation, which made the respect of the debt rule particularly demanding;

No wonder the ECB is pressing on with its QE (Quantitative Easing) program and as I pointed out only yesterday seems set to push consumer inflation above target which will help the debtors. Also in that section was something awkward as you see it is a statement of Italy’s whole period of Euro membership.

the unfavourable economic conditions,

We have an old friend returning although of course pretty much everyone has ignored it even Germany.

namely: (a) whether the ratio of the planned or actual government deficit to gross domestic product (GDP) exceeds the reference value of 3%; and (b) whether the ratio of government debt to GDP exceeds the reference value of 60%, unless it is sufficiently diminishing and approaching the reference value at a satisfactory pace.

Yep the Stability and Growth Pact is back although these days in the same way as the leaky Windscale became the leak-free Sellafield it is mostly referred to as the Fiscal Compact. The real issue here for Italy though is the debt numbers are from a universe far,far away.

Italy’s general government deficit declined to 2.6 % of GDP in 2015 (from 3% in 2014), while the debt continued to rise to 132.3% of GDP (from 131.9 % in 2014), i.e. above the 60% of GDP reference value. For 2016, Italy’s 2017 Draft Budgetary Plan7 projects the debt-to-GDP ratio to peak at 132.8%, up by 0.5 percentage points from the 2015 level. In 2017, the Draft Budgetary Plan projects a small decline (of 0.2 percentage points) in the debt-to-GDP ratio to 132.6%.

We get pages of detail which skirt many of the salient points. So let me remind them. firstly a debt-to-GDP target of 120% was established back in 2010 for Greece to avoid embarrassing Italy (and Portugal). Since then both have cruised through it which poses a question to say the least for this.

Italy conducted a sizeable fiscal adjustment between 2010 and 2013, which allowed the country to exit the excessive deficit procedure in 2013

So as soon as it could Italy returned to what we might call normal although whilst it runs fiscal deficits they are lower than the UK for example. Whilst the EU peers at them they are not really the causal vehicle here. Regular readers of my work will not be surprised to see my eyes alight on this bit.

the expected slow recovery in real GDP growth

This is the driving factor here as we note that even in better times the Italian economy only grows by around 1% a year ( 1.1% last year for example) yet in the bad times it does shrink faster than that as the -3.2% annual growth rate of the middle of 2012 illustrates. The Commission describes it like this.

Italy’s GDP has not grown compared to 15 years ago, as against average annual growth of 1.2% in the rest of the euro area.

Putting it another way the economy seems set to get back to where it was at the opening of 2012 maybe this spring but more likely this summer. In such an environment any level of borrowing will raise not only the debt level but also its ratio to GDP. Thus the pages and pages of detail on expenditure would be much better spent on looking at and then implementing economic reform.

A fiscal boost

This has come form the policies of Mario Draghi and the ECB.

taking advantage of the fiscal space created by lower interest expenditure, which declined steadily from the peak of 5.2% of GDP in 2012 to 3.9% in 2016.

Of course debt costs have lowered across the world but the ECB has contributed a fair bit to this gain of over 1% per annum in economic output. I doubt Italy’s politicians admit this as they rush to spend it and bathe themselves in the good will.

Monte dei Paschi

Another old friend so to speak but it does illustrate issues building for Italy as the Commission admits. Firstly to the debt numbers explicitly.

For instance, in 2017, both the deficit and debt figures could be revised upwards following the EUR 20 billion (or 1.2 % of GDP) banking support package earmarked by the
government in December 2016.

But also implicitly as we mull current and future economic performance.

At the current juncture, following the protracted crisis, banks are burdened by a large stock of non-performing loans and may not be able to fully support the
recovery.

We left MPS itself on the 30th of December as it was socialised and in state ownership. You might reasonably think it would have been solved over the New Year break. Er no as this from the Financial Times today highlights.

Rome’s proposal to recapitalise MPS has been in limbo since December because the ECB, the bank’s supervisor, and the European Commission, which polices state aid, have different views on their responsibilities and the merits of taxpayer bailouts.

There was always going to be trouble over whether this turned out to be a bailout, a bailin or a hybrid of the two. Has any progress at all been made?

The two-month stand-off leaves fundamental questions over the rescue proposals, including the level of state support allowed, the amount of losses that creditors will suffer and the depth of restructuring needed to make the bank viable.

The creditor issue is one that resonates because ordinary Italian depositors were persuaded to buy the banks bonds in a about as clear a case of miss selling as there has been. The trouble is that the guilty party the bank’s management cannot pay on the scale required and nor can the bank inspite of it being in “optimal condition” according to Finance Minister Padoan.

Indeed some may be having nightmares about the return of a phrase that described so much economic destruction in Greece.

An Italian official said talks were on track.

Comment

This is a situation which continues to go round in circles. Europe concentrates on fiscal deficits and now apparently the national debt but ignores the main cause which is the long-term lack of economic growth. There is a particular irony that at every ECB policy press conference the Italian Mario Draghi reads out a paragraph asking for more economic reform and the place where it happens so little is his home country.

The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost investment, productivity and potential output growth in the euro area.

Yet when the European authorities get involved we see as in the MPS saga that they “dilly and dally” as Claudio Ranieri might say. Exactly the reverse of what they expect from the Italian government and people. The next issue for the banking sector is that for all its faults the UK for example began dealing with them in 2008 whereas Italy has looked the other way and let it drag on. That poor battered can is having to be picked up.

My suggestion would be an investigation into what is now called the unregulated economy to see how much has escaped the net. Maybe people do not want to do so because they fear that it has increased but what is there to be afraid of in the truth?

Tip TV Finance

http://tiptv.co.uk/boes-deflection-strategy-not-yes-man-economics/

The ECB faces a growing policy dilemma

Today I want to look at what was one of the earliest themes of this blog which is that central banks will dither and delay before they reduce their policy easing and accommodation. Or to put it another way they will be too late because they are afraid of moving too soon and being given the blame should the economy hic-cup or turn downwards. Back in the day I did not realise how far central banks would go with the Bank of Japan seemingly only limited by how many assets there are in existence in Japan as it chomps on government bonds and acts as a Tokyo whale in equity markets. Actually it has made yet more announcements today including this from Governor Kuroda according to Marketwatch.

“There is not much likelihood that we will further lower the negative rate” from the current minus 0.1%, Kuroda said in parliament, citing Japan’s accelerating growth.

Last time he said something like that he cut them 8 days later if I recall correctly!

However the focus right now is on Europe and in particular on the ECB ( European Central Bank). as it faces the policy exit question I posed on the 19th of January.

If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise?

What has changed?

Yesterday brought news on economic prospects which will have simultaneously cheered and worried Mario Draghi and the ECB. It started with France.

The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 56.2, compared to January’s reading of 54.1. The latest figure pointed to the sharpest rate of growth since May 2011.

Welcome news indeed and considering the ongoing unemployment issue that I looked it only a few days ago this was a welcome feature of the service sector boom.

Staffing numbers rose for the fourth consecutive month during February. The increase was underpinned by a solid rate of growth in the service sector,

Unusually for Markit it did not provide any forecast for expected GDP (Gross Domestic Product) growth from this which is likely to have been caused by its clashes with the French establishment in the past. It has regularly reported private-sector growth slower than the official numbers so this is quite a change.

Next up was Germany and the good news theme continued.

The Markit Flash Germany Composite Output Index rose from January’s fourmonth low of 54.8 to 56.1, the highest since April 2014 and signalling strong growth in the eurozone’s largest economy. Output has risen continuously since May 2013.

The situation is different here because of course Germany has performed better than France in recent times illustrated by its very different unemployment rate. I note that manufacturing is doing well as it benefits from the much lower exchange rate the Euro provides compared to where any prospective German mark would be priced. Markit is much more willing to project forwards from this.

The latest PMI adds to our expectations that economic growth will strengthen in the first quarter to around 0.6% q-o-q, marking a strong start to 2017.

Whilst these are the two largest Eurozone economies there are others so let us add them into the mix.

“The eurozone economy moved up a gear in February. The rise in the flash PMI to its highest since April 2011 means that GDP growth of 0.6% could be seen in the first quarter if this pace of expansion is sustained into March.

There are actually two cautionary notes here. The first is that these indices rely on sentiment as well as numbers and as they point out March is yet to come. But the surveys indicate potential for a very good start to 2017 for the Eurozone.

As the objectives of central banks have moved towards economic growth there is an obvious issue when they look good and it is to coin a phrase “pumping up the volume”.

Also there was a hopeful sign for a chronic Euro area problem which is persistent unemployment in many countries.

February saw the largest monthly rise in employment since August 2007. Service sector jobs were created at a rate not seen for nine years and factory headcounts showed the second-largest rise in almost six years.

What about inflation?

Just like it fell more quickly and further than the ECB expected it has rather caught it on the hop with its rise. The move from 1.1% in December to 1.8% in January means it is just below 2% or where the “rules based” ECB wants it. There is an update later but even if it nudges the number slightly the song has the same drum and bass lines. Indeed yesterday’s surveys pointed to concerns that more inflation is coming over the horizon.

Inflationary pressures meanwhile continued to intensify. Firms’ average input costs rose at the steepest rate since May 2011, with rates accelerating in both services and manufacturing. The latter once again recorded the steeper rise, linked to higher global commodity prices, the weak euro and suppliers regaining some pricing power amid stronger demand.

In the past such news would have the ECB rushing to raise interest-rates which leaves it in an awkward position. The only leg it has left to stand on in this area is weak wage growth.

Asset prices

Mario Draghi’s espresso will taste better this morning as he notes this.

GERMANY’S DAX RISES ABOVE 12,000 FIRST TIME SINCE APRIL 2015 ( h/t Darlington_Dick)

Although even the espresso may provide food for thought.

Oh I don’t know…Robusta coffee futures creeping back towards 5-1/2 year highs

That pesky inflation again. Oh sorry I mean the temporary or transient phase!

As to house prices there is a wide variation but central bankers always want more don’t they?

House prices, as measured by the House Price Index, rose by 3.4% in the euro area and by 4.3% in the EU in the third quarter of 2016 compared with the same quarter of the previous year.

Of course should any boom turn to bust then the rhetoric switches to it was not possible to forecast this and therefore it was a “surprise” and nobody’s fault. The Bank of England was plugging that particular line for all it’s worth only yesterday.

The Euro

Much is going on here and it has been singing along to “Down, Down” by Status Quo again. For example it has moved very near to crossing 1.05 versus the US Dollar this morning which makes us wonder if economists might be right and it will reach parity. Such forecasts are rarely right so it would be its own type of Black Swan but more seriously we are seeing a weaker phase for the Euro as it has fallen from just over 96 in early November 2016 to 93.4 now. Here economists return to their usual form as this has seen the UK Pound £ nudge 1.19 this morning or further away from the parity so enthusiastically forecast by some.

A factor in this brings us back to QE and ECB action. A problem I have reported on has got worse and as ever it involves Germany. The two-year Schatz yield has fallen as low as -0.87% as investors continue to demand German paper even if they have to pay to get it. This is creating quite a differential ( for these times anyway) with US Dollar rates and thereby pushing the Euro lower.

Comment

There are obvious issues here for the ECB as it faces a period where economic growth could pick-up which is of course good but inflation will be doing the same which is not only far from good it is against its official mandate. It does plan to trim its monthly rate of bond buying to 60 billion Euros a month from 80 billion but of course it still has a deposit rate of -0.4%. Thus the accelerator is still being pressed hard. But as we note that the lags of monetary policy are around 18 months then it may well find itself doing that as both growth and inflation rise. Should that lead to trouble then a so-called stimulus will end up having exactly the reverse effect. Yet the consensus remains along the lines of this from Markit yesterday.

No change in policy
therefore looks likely until at least after the German
elections in September.

 

 

Greece meets its final countdown one more time

A constant sad theme of this website has been the way that Greece got into economic trouble and then had a so-called “shock and awe” rescue which made everything worse and plunged it into what can now be called a great depression. Last week’s official national accounts detail just continued the gloom.

The available seasonally adjusted data indicate that in the 4 th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 3 rd quarter of 2016, while it increased by 0.3% in comparison with the 4 th quarter of 2015.

I pointed out last week that the trumpeting of European Commissioner Moscovici only a day before was in very bad taste.

After returning to growth in 2016, economic activity in is expected to expand strongly in 2017-18.

You see Monsieur Moscovici and his colleagues have a serial record of saying a recovery is just around the corner. For example the 0.3% annual increase in GDP compares with 2.9% forecast in the spring of 2015.  There is a familiar theme here because if we look at the forecasts from the spring of 2016 they forecast more or less the same ( 2.7%) for 2017. This repeated failure where an optimistic forecast bears no relationship to reality has gone on since 2012 which was when the original 2010 bailout forecasts told us Greece would return to economic growth and from 2013 onwards would grow by you’ve guessed it by 2%+ per annum. As PM Dawn told us.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine.

The truth was that Greece had to be forecast as growing as otherwise the national debt numbers would look out of control and could not be forecast to be 120% of GDP in 2020. That was a farcical benchmark which exploded as it was chosen so as not to embarrass Portugal and Italy who cruised through it anyway. Greece of course blasted through it and the major reason was the economic depression.

The Great Depression

I will keep this simple so GDP in the third quarter of 2008 was the peak for Greece at 60.8 billion Euros and at the end of 2016 it was 44.1 billion Euros. So a decline of 27.5% which certainly qualifies as a Great Depression.

Austerity

Macropolis has pointed out the scale of the austerity applied to Greece and let us start with taxes.

The Greek economy has been burdened with 35.6 billion euros in all sorts of taxes on income, consumption, duties, stamps, corporate taxation and increases in social security contributions. When totting all this up, it is remarkable that the economy still manages to function.

Of course you could easily argue that in more than a few respects it does not function as we switch to the expenditure or spending ledger.

During the same period, the state has also found savings of 37.4 billion euros from cutting salaries, pensions, benefits and operational expenses.

So 5 months worth of economic output at current levels. Also like a dog chasing its tail they cry has gone up for what can be called “Moar, moar”.

The IMF’s Thomsen, now the director of its European Department, recently argued that Greece doesn’t need any more austerity but brave policy implementation. Somehow, though, the discussion has ended up being about finding another 3.5 billion euros in taxes and cuts to pension spending.

Of course dog’s have the intelligence to eventually tire of chasing their tale whereas the Euro area establishment continue with the same old song.

The official view

The ESM or European Stability Mechanism is the main supplier of finance to Greece these days and its head Klaus Regling has this on repeat.

Then, public creditors eased lending conditions significantly. This reduced the economic value of the country’s debt by around 40 per cent. As a result, Greece enjoys budgetary savings of about €8 billion annually — the equivalent of about 4.5 per cent of gross domestic product — and will continue to do so for years to come.

Sometimes what is true can be misleading. You see it is summed up in the word timing. Greece had an austerity program front loaded onto it and it was hit hard by it as I have described. Later the Euro area changed tack and made the loans much cheaper but by then it was too late as Greece was plunging into an economic depression at a rate exceeding 8% per annum in 2011 and much of 2012.

In spite of the calamitous situation Klaus told the Financial Times in late January  that the future was bright.

Greek debt levels are no longer cause for alarm

Of course Klaus has to churn out such a line in an attempt to distract attention from this.

The European Financial Stability Facility and the European Stability Mechanism, the eurozone’s rescue funds, have disbursed €174 billion to Greece.

This brings me to a point where Bloomberg are to some extent peddling what might be labelled fake news today.

The 2-year yield is now 180 basis points higher than the 10-year yield

You see Greek bond yield twitter if I may put it like that refers to something which exists but is not the source of funding for Greece any more a reflects a market which as I have pointed out many times barely trades. Even Bloomberg points this out.

volumes are low, with just 26 million euros trading during January on the inter-dealer platform.

With volumes so low it is easy for those with vested interests to manipulate such a market.

Trouble ahead

Where a crunch can come is when a bond needs redeeming. This is where all the proclamations to triumph and success met a hard reality of a lack of cash or another form of credit crunch. Eyes are already turning to July on that front.

Greece faces a few maturities in the coming months, but the heavy lifting is in July, when 6.2 billion euros of debt matures.

This is the capital issue I highlighted on the 30th of January.

We can bring in that poor battered can now because the Euro area and the IMF thought they had kicked it far enough into the future not to matter whereas the IMF is now having second thoughts.

The Euro area can talk all it likes about interest repayments but this ignores the fact that it cannot repay the capital which might make Euro area taxpayers mull another of the promises of Klaus Regling.

We would not have lent this amount if we did not think we would get our money back.

In a couple of months time another 1.4 billion Euros is due. This is owed to the ECB and we know that the first rule of it’s debt fight club is that every last cent must be repaid.

The IMF

My theme about the IMF has been that it has been twisted by politicians so that it no longer is an institution dealing with trade balance problems. The Greek data for 2016 bear this out as with all the improvements Greece should be exporting more especially as many of its economic partners had a better economic year.

The total value of exports-dispatches, for the 12-month period from January to December 2016 amounted to 25,411.4 million euros (28,198.4 million dollars) in comparison with 25,879.3 million euros (28,776.8 million dollars) for the corresponding period of the year 2015, recording a drop, in euros, of 1.8%

So simply no as we mull again the lack of economic reform in Greece and note that the trade issue got worse and not better.

The deficit of the Trade Balance, for the 12-month period from January to December 2016 amounted to 18,551.2 million euros (20,310.3 million dollars) in comparison with 17,745.3 million euros (19,439.6 million dollars) for the corresponding period of the year 2015, recording an increase, in euros, of 4.5%.

Comment

Today’s Eurogroup meeting in Greece is being badged as a “last chance saloon” which of course is a phrase that long ago went into my financial lexicon for these times as it occurs so regularly. Still did the band Europe know how much free publicity the future would provide for their biggest hit?

It’s the final countdown.
The final countdown

Meanwhile as its economic prospects are kicked around like a football Greece itself is pretty much a bystander. If only it was a final countdown to a default and devaluation meaning it would leave the Euro. Meanwhile some reports are bizarre as this from the fast FT twitter feed last week proves.

Greece made a stunning exit from three years of deflation and low price growth in January

Greek workers and consumers however will be rueing any rises in prices as we wonder how higher prices in the UK can be a disaster according to the FT but higher prices in Greece are “stunning”?

Podcasts

I have been running a private trial of putting these updates out as podcasts as the world continues to change and move on. I thought I would ask how many of you use podcasts?

The unemployment rate in France continues to signal trouble

It is time for us to nip across the Channel or perhaps I should say La Manche and take a look at what is going on in the French economy. This morning has brought news which reminds us of a clear difference between the UK and French economy so let us get straight to the French statistics office.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016.

Thus we note immediately that the unemployment rate is still in double-digits albeit only just. Here is some more detail.

In metropolitan France only, the number of unemployed decreased by 31,000 to 2.8 million people unemployed; thus, the unemployment rate decreased by 0.1 percentage points q-o-q, standing at 9.7% of active population. It decreased among youths and persons aged 50 and over, whereas it increased for those aged 25 to 49. Over a year, the unemployment rate fell by 0.2 percentage points.

So unemployment is falling but very slowly and it is higher in the overseas departments. It is also rising in what you might call the peak working group of 25 to 49 year olds. It was only yesterday we noted that the UK unemployment rate was much lower and in fact less than half of that above.

the unemployment rate for people was 4.8%; it has not been lower since July to September 2005

Thus if we were looking for the key to French economic problems it is the continuing high level of unemployment. If we look back to pre credit crunch times we see that it was a little over 7% it then rose to 9.5% but later got pushed as high as 10.5% by the consequences of the Euro area crisis and has only fallen since to 10% if we use the overall rate. Thus we see that there has only been a small recovery which means that another factor is at play here which is time. A lot of people will have been unemployed for long periods with it would appear not a lot of hope of relief or ch-ch-changes for the better.

Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The long-term unemployment rate is not far off what the total UK unemployment rate was for December (4.6%) which provides a clear difference between the two economies. Here is the UK rate for comparison.

404,000 people who had been unemployed for over 12 months, 86,000 fewer than for a year earlier

It is not so easy to get wages data but the non-farm private-sector rise was 1.2% in the year to the third quarter. So there was some real wage growth but I also note the rate of growth was slowing gently since the peak of 2.3% at the end of 2011 and of course inflation is picking up pretty much everywhere as the US “surprise” yesterday reminded pretty much everyone, well apart from us. Unless French wage growth picks up it like the UK will be facing real wage falls in 2017.

Productivity

There is an obvious consequence of the UK producing a broadly similar output to France with a lower unemployment rate if we note that productivity these days is in fact labour productivity. There are always caveats in the numbers but the UK Office for National Statistics took a look a year ago.

below that of Italy and France by 14 and 15 percentage points respectively ( Final estimates for 2014 show that UK output per worker was:)

My worry about these numbers has always been Japan which for its faults is a strong exporter and yet its productivity is even worse than the already poor UK.

above that of Japan by 14 percentage points

Economic growth

This remains poor albeit with a flicker of hope at the end of 2016.

In Q4 2016, GDP in volume terms* accelerated: +0.4%, after +0.2% in Q3. On average over the year, GDP kept rising, practically at the same pace: +1.1% after +1.2% in 2015. Without working day adjustment, GDP growth amounts to +1.2 % in 2016, after +1.3 % in 2015.

However the pattern is for these flickers of hope but unlike the UK where economic growth has been fairly steady France sees quite wide swings. For example GDP rose by 0.6% in Q1 so the economy pretty much flatlined in Q2 and Q3 combined. Whether this is a measurement issue or the way it is unclear. We do know however that it seems to come to a fair extent from foreign trade.

All in all, foreign trade balance contributed slightly to GDP growth: +0.1 points after −0.7 points. ( in the last quarter of 2016).

But as we look for perspective we do see an issue as for example 2016 should have seen two major benefits which is the impact of the lower oil price continuing and the extraordinary stimulus of the ECB ( European Central Bank). Yet economic growth in 2015 and 2016 were both weak and show little signs of any great impact. If we switch to the Euro then its trade weighted value peaked at 113.6 in November 2009 and has fallen since with ebbs and flows to 93.5 now so that should have helped overall. In the shorter term the Euro has rotated around its current level.

Production

With its more dirigiste approach you might expect the French economy to have done better here but as I have pointed out before that is not really so. If we look at manufacturing France saw growth in 2016 but we see a hint of trouble in the index for it being 103 at the end of 2016 on an index based at 100 in 2010. So overall rather weak and poor growth. Well it is all rather British as we note the previous peak was 118.5 in April 2008. Actually with its 13% decline that is a lot worse than the UK.

manufacturing (was) 4.7% lower when compared with the pre-downturn peak in February 2008.

Of course there are also links as the proposed purchase of Opel ( Vauxhall in the UK) by Peugeot reminds us.

Oh and those mulling the de-industrialisation of the West might want to note that the French manufacturing index was 120.9 back in December 2000.

Debt and deficits

This has received some publicity as Presidential candidate Fillon said this only yesterday. From Bloomberg.

Reviving a statement he made after becoming prime minister in 2007, Fillon said France is essentially bankrupt and warned that it can face situations comparable to those of Greece, Portugal and Italy. “You think it can’t happen here but it can,” he said.

As to the figures the fiscal deficit at 3.5% of GDP is better than the UK but of course does fall foul of the Euro area 3% limit. The national debt to GDP ratio is 97.5% and has been rising. On the 7th of this month I pointed out that France could still borrow very cheaply due to the ECB QE program but that relative to its peers it was slipping. That has been reinforced this week as for the first time for quite a while the Irish ten-year yield fell to French levels.  It may seem odd to point this out on a day when France has been paid to issue some short-tern debt but the situation has gone from ultra cheap to very cheap overall and there is a cost there.

Comment

I pointed out back on the 2nd of November last year that there were more similarities between the UK and French economies than we are often told but that there are some clear differences. We have looked at the labour market today in detail but there is also this.

There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal.

Oh and of course house prices if we look at the UK boom which began in the middle of 2013 we see that France has in fact seen house prices stagnate since then as the index was 103.03 ( Q2 2013) back then compared to 102.82 in the third quarter of 2016

Good news for the UK economy and GDP

Today we embark on a raft of UK economic data but before we even reach it the Financial Times has returned to the most familiar theme in UK economic life.

There is a very cool-looking apartment on sale across the street from Harrods in London. It has three bedrooms, beautiful high ceilings, striking contemporary art on the walls (not included in the sale) and a roomy kitchen done out in glossy white wood and chrome. It is not cheap at £7.25m, but it is an awful lot cheaper than it was last year.

The flat was first listed on March 1 2016 for £8.25m. In July, about three weeks after the EU referendum, its price was cut; then it was cut again in December. Today it is available for about 12 per cent — or a full £1m — less than the original asking price.

Actually that looks like a PR puff piece or indeed advertising dressed up as journalism. But we do move onto an area where the FT has caught up with us in here which is the fact that house prices have been seeing falls in central London.

A quick glance at the property website Zoopla reveals that reductions of 15 to 20 per cent for London homes priced above £1m are not uncommon. According to its research department, more than a third of homes on sale in Kensington and Chelsea have had their asking prices reduced by an average of 7.97 per cent.

The FT typically tries to blame Brexit but then finds someone who thinks it has provided a boost! That comes from this.

After the result was announced, and the pound fell to its lowest level against the dollar for 31 years, the spending power of those buyers with dollars in their pockets escalated wildly. Up about 11 per cent on the currency play alone.

Which means overall we see this.

However, once you factor in the decline in London house prices over the intervening six months, you are looking at some serious markdowns indeed. Knight Frank calculates an effective dollar discount of 22 per cent, between December 2015 and December 2016.

So there you have it the message from the Financial Times is to sing along with the band Middle of the Road about central London property.

Ooh-We, Chirpy, Chirpy, Cheep, Cheep
Chirpy, Chirpy, Cheep, Cheep, Chirp
Let’s go now

If we move on from what in some cases is the equivalent of specific property pimping there are issues here. One is simply the price as we mull if even if a one bedroom property is in Covent Garden it can be considered cheap. Also we need to compare the recent falls which estate agents emphasis with the previous rises which they do not. Next comes the issue that the flipside of a lower £ is that existing owners have lost money in their own currency. Also looking forwards the real issue for many is what you expect the UK Pound £ to do next as the future of course matters much more than the past in that regard.
There is much for me to mull on my next cycle ride into the City as once I pass Battersea Dogs Home then here I am.

Some units at Nine Elms, a new residential development in Battersea, are being marketed at about £1,300 per sq ft, after already being given sizeable reductions, according to Zoopla. For £1,300 per sq ft, you could buy a historic apartment overlooking the Duomo in Florence, or a glossy new-build apartment in Miami Beach.

Is that cheaply expensive or expensively cheap?

Boom Boom UK

It is nice to end the week with some really good news for the UK economy so let us get straight to it.

In December 2016, total production was estimated to have increased by 1.1% compared with November 2016; the only contribution to the increase came from manufacturing……manufacturing provided all the growth, increasing by 2.1%.

So an upwards push to production from manufacturing which did this.

The increase in total production was due to broad-based increases in manufacturing. Pharmaceuticals (which can be highly erratic) provided the largest contribution to the growth, increasing by 8.3%. Other large contributions to the increase came from basic metals and other manufacturing and repair not elsewhere classified, which increased by 4.5% and 3.7% respectively.

So in an, if I may put it this way Trumpton era we find that we are en vogue by boosting manufacturing? We need to dig a little deeper though as pharmaceuticals have had a good 2016 but via a volatile path.

in December 2016 compared with December 2015, total production output increased by 4.3%. All main sectors increased, with the largest contribution provided by manufacturing

They seem a little shy of telling us that manufacturing rose by 4% so let me help out. That was driven by pharmaceuticals being up by 19.1% which illustrates their volatility. This left us with positive numbers for 2016 for both production (1.2%) and manufacturing (0.7%).

If we continue with the good news theme then we have some hope of a further upwards revision to UK GDP for last year. This is the reply I received from our statisticians in what was an excellent service.

IOP and Construction combined have an impact of 0.04%. This is nearly all from IOP. ( @StatsKate )

For newer readers I have little or no faith in the official construction numbers which in the words of Taylor Swift have seen “trouble, trouble,trouble” but for completeness here they are.

Compared with December 2015, construction output increased by 0.6%, the main contribution to this growth came from new housing work.

Trade

Even these had a good news tinge to them this morning.

The UK’s deficit on trade in goods and services was £3.3 billion in December 2016, a narrowing of £0.3 billion, which is contributing to the narrowing in Quarter 4 2016.

So let us look further.

The UK trade deficit on goods and services narrowed to £8.6 billion in Quarter 4 (Oct to Dec) 2016, following a sharp widening of the deficit in Quarter 3 (July to Sept) 2016; this narrowing was predominantly due to an increase in exports of goods to non-EU countries.

Have UK industry and businesses got the new post EU leave vote vibe? I think that it is too pat a conclusion but we did see this.

there was a much higher quarter-on-quarter growth in exports to non-EU countries in Quarter 4 2016, following a fall in Quarter 3…….Exports of goods to non-EU countries rose by 17.3% to £43.8 billion between Quarter 3 2016 and Quarter 4 2016.

So some of it was a simple rebound.

Comment

Today has seen some rather good news for the UK economy as in spite of a drag from the continuing maintenance of the Buzzard oil field production was pushed higher by strong manufacturing data driven by the pharmaceutical industry. Added to this construction at least did not fall and on a quarterly basis the trade figures were better. So there is upwards pressure on the preliminary GDP report although we cannot say exactly how much yet.

There are two main clouds in our silver lining. These are simply  that we have yet another trade deficit in an extremely long series and some perspective on production.

Since then, both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 7.6% and 4.2% respectively.

A Bank of England for the 0.0000000000000000000001%

Yesterday saw the announcement that Charlotte Hogg was to be promoted to Deputy Governor and it raised this issue.

Dear Mark Carney does promoting a daughter of a Viscount and a Baroness come under the Bank of England Diversity banner?

It certainly comes under the minority banner as I am no expect on Debretts but do wonder if she is in to coin a phrase, a class of one? Oh and it appears that Kristin Forbes is singing along to “We gotta get out of this place” by Blue Oyster Cult.

So if you hint at an interest-rate rise your current lifespan at the Bank of England appears to be 48 hours!

The Forward Misguidance of Mark Carney and the Bank of England continues

Yesterday was a rather extraordinary day at the Bank of England even by its standards. I do not mean in terms of the policy announcements as they were not only unchanged but were always likely to be that way. This is of course because it boxed itself in with its pronouncements of economic doom last summer leading to its Bank Rate cut and extra QE (Quantitative Easing). There was actually a technical announcement on the QE front about another Operation Twist style move.

the Committee agreed to re-invest the £11.6 billion of cash flows associated with the redemption of the January 2017 gilt held by the Asset Purchase Facility

If you think about an economy which the Bank of England now thinks will have 2% economic growth in 2017 and inflation heading above target soon that is simply completely inappropriate and wrong. It is a consequence of its silly “Sledgehammer” rhetoric which Mark Carney plainly feels is too embarrassing to reverse now.

Economic growth forecasts

The Bank of England and Mark Carney seem to be getting worse and worse at this. From yesterday’s MPC (Monetary Policy Committee) Minutes.

The preliminary estimate of GDP growth for 2016 Q4 had been 0.6%, the same rate of growth as had been registered in the previous two quarters, and 0.2 percentage points higher than expected at the time of the November 2016 Inflation Report. This, together with improvements in business survey output and expectations indicators, had led Bank staff to raise their GDP growth nowcast for 2017 Q1 to 0.5%, also 0.2 percentage points higher than in November.

Such things matter when the Forward Guidance had led to policy changes as we saw in August. In fact the situation is ever more woeful than that. Even the Financial Times which of course has lauded Mark Carney as a “rockstar” central banker could not avoid pointing out this reality.

The Bank of England upgraded UK growth forecasts significantly for the second time in six months on Thursday in the latest indication the central bank’s once-dire outlook for the economy after June’s Brexit vote has been proven overly pessimistic.

The bank said it now predicts gross domestic product will grow 2 per cent this year, the same as last year and up from 1.4 per cent forecast in November. Shortly after the referendum, the BoE predicted the economy would expand just 0.8 per cent.

The simple fact is that the UK consumer and if you look into the detail our female consumers behaved like they have in the past and carried on regardless. It is for the Bank of England to explain why it ignored UK economic history. Perhaps the way it is now packed with people I have described as Carney’s cronies?

Was this predictable?

Yes it was as I pointed out back then. From August 3rd last year on the day of ignominy for the Bank of England.

I would vote for unchanged policy as I waited to see how we respond to the lower value of the UK Pound £ which on the old rule of thumb has provided a move equivalent to a 2%  Bank Rate cut.

I repeated this view on BBC Radio Four’s Moneybox on the 17th of September when I debated with ex Bank of England staffer Professor Tony Yates who said “they did pretty much the right thing”. However it was kind yesterday of Mark Carney to confirm that I was indeed right all along.

Third, financial conditions in the UK remain supportive, underpinned by low risk-free rates, the 18% fall in sterling since its November 2015 peak, and lower credit spreads.

Mark Carney tries to take the credit for this

Perhaps the worst part of yesterday’s Inflation Report was the bit where Mark Carney tried to take the credit for the performance of the UK economy.

In part this reflects Bank of England policy actions, which have also helped lower the impact of uncertainty on activity.

He omitted to point out his own doom laden pronouncements which would hardly have helped uncertainty and he had another go at that yesterday.

This stronger projection doesn’t mean the referendum is without consequence………More broadly, the level of GDP is still expected to be 1½% lower in two years’ time than projected in May, despite the substantial easing of monetary, macroprudential and fiscal policies.

If we return to Governor Carney’s claims we see that we had a “bazooka” from a lower pound compared to a “pea shooter” from his Bank Rate cut as I pointed out on Moneybox. Indeed the Governor got himself into something of a mess at the press conference as he tried to take some of the credit for consumer resilience (debt fuelled growth) and then denied that there was much debt fuelled growth! So let us leave him in his own land of confusion.

Ivory Tower alert

We got some of this too as the woeful Bank of England forecasting effort saw this addition.

Specifically, the MPC now judges that the rate of unemployment the economy can achieve while being consistent with sustainable rates of wage growth to be around 4½%, down from around 5% previously.

This was such a hot potato that the subject was handed over to Deputy Governor Ben Broadbent to explain. Ben was obviously uncomfortable as he began speaking behind his hand in the manner of Jose Mourinho. He then tried to tell us he had been right all along which of course begged the question of why there was a change? Anyway we then did get a brief burst of honesty.

Forecasting is a hazardous business

It is for Ben!

Oh and remember when their Forward Guidance was that 7% unemployment was a significant level? Whatever happened to that….

Inflation

Another problem is brewing here and this is in addition to the fact that it is going “higher and higher”. This from the Bank of England yesterday was simply wrong.

Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time.

As I have written many times on here that is too low as I expect it to rise above 3% due to the impact of the lower UK Pound £ and the higher price of crude oil. I recall Kristin Forbes of the Bank of England saying that she thought inflation would be pushed some 1.75% higher but now she seems to have done something of a U-Turn and decided it will be more like 0.75%. As the UK Pound £ has fallen further in the meantime that is quite a big change.

Comment

There is one aspect of Bank of England Forward Guidance which has in fact proved correct.

the appropriate level of Bank Rate is likely to be materially below the 5% level set on average by the Committee prior to the financial crisis.

I think we can say 0.25% is materially below 5%. But the rest of it has proven to be woeful. After all Mark Carney’s hints of a Bank Rate rise would fit an economy over 3 years into a growth phase and with inflation set to run above target. But of course all his hints and teases were followed by exactly the reverse or a Bank Rate cut.

As to the inflation forecast well this morning has brought the beginnings of a further critique of that as well. From the BBC.

Npower has announced one of the largest single price rises implemented by a “Big Six” supplier. The company will raise standard tariff electricity prices by 15% from 16 March, and gas prices by 4.8%. A typical dual fuel annual energy bill will rise by an average of 9.8%, or £109.

Also there is the media inspired great lettuce and broccoli crisis of 2017.

Some supermarkets are rationing the amount of iceberg lettuce and broccoli customers can buy – blaming poor growing conditions in southern Europe for a shortage in UK stores.

Tesco is limiting shoppers to three iceberg lettuces, as bad weather in Spain caused “availability issues”.

Morrisons has a limit of two icebergs to stop “bulk buying”, and is limiting broccoli to three heads per visit.

Asda said courgette stocks were still low after a UK shortage last month.

I guess we can expect higher prices here too as we mull whether the weather has ever affected food availability in the past! As a public service announcement there did not appear to be any shortage at Lidl at Clapham Junction yesterday. What will the Bank of England do about rising inflation? Well as you can see it takes a while to say “nothing”

At its February meeting, the MPC unanimously judged that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual, and that the current stance of monetary policy remained appropriate to balance the demands of the Committee’s remit.

If you are trading the US non-farm payroll numbers today then good luck….

 

 

 

The recent economic success of Spain makes a refreshing change

Back in the days of the Euro area crisis Spain found itself being sucked into the whirlpool. The main driver here was its housing market and the way that it had seen an enormous boom which turned to dust. Pick your theme as to whether you prefer empty towns or an airport that was never used. If we look back to my post yesterday on GDP I immediately find myself thinking that developments which are never used should be counted in a separate category. Of course the housing problems also caused trouble for the Spanish banks.

GDP

We do not yet have the data for the latest quarter but in recent times short-term forecasts by the Bank of Spain have been pretty accurate.

In Spain, economic activity has continued to post a high rate of increase in recent months. Specifically, in Q4, GDP is expected to have grown by 0.7%, unchanged on the rate observed in Q3 (see Chart 1) and underpinned by the strength of domestic spending.

We do have a link in that Spain seems to follow the pattern of the UK economy more than many of its Euro area neighbours and hence there might be for once some logic in using the same currency. But the main point is that such growth would continue what has been a much better phase for Spain. This meant that the official data for the third quarter told us this.

 Growth in relation to the same quarter of the previous year stood at 3.2%,

If we look back we see that the Spanish economy was hit hard by the initial impact of the credit crunch with the peak quarterly contraction being of the order of 1.5% of GDP. Then the economy bounced back but was then sent into decline as the Euro area crisis raged and quarterly economic growth did not turn positive again until 2013 moved in to 2014. However since then economic growth has been strong. If the fourth quarter does turn out to be 0.7% then it will follow 0.7%, 0.8%,0.8%,0.8%,0.9%,0.8% and 1%. Maybe a minor fading but I think that would be harsh on a country which has put in a strong performance.

If we look back for some perspective then let us compare with what sadly is often the laggard which is Italy. From Spain’s Royal Institute.

the contrast between cumulative growths is significant: 50% since 1997 in Spain versus 10% in Italy. Moreover, according to EU forecasts, in 2018 Spain will surpass Italy in per capita GDP (in PPP terms) for the first time ever.

Employment

The Euro area crisis has been characterised by high levels of unemployment so it was nice to see this in the GDP report of Spain.

In annual terms, employment increases at a rate of 2.9%, one tenth more than in The second quarter, which represents an increase of 499 thousand jobs
Equivalent to full-time in one year.

Yesterday we got a further update on this front from Spain’s statistics agency.

Employment has grown in 413,900 people in the last 12 months. The annual rate is 2.29%……….In the last year employment has risen in all sectors: in the Services there are 240,400 more occupied, in Industry 115,700, in Agriculture 37,000 and in Construction 20,800.

Not everything was perfect as the numbers dipped by 19,400 on a quarterly basis but overall the performance has been such that we can report this.

The number of unemployed falls this quarter in 83,000 people (-1.92%) and is in 4,237,800. In seasonally adjusted terms, the quarterly variation is -3.78%. In The last 12 months unemployment has decreased by 541,700 people (-11.33%).

Or if you prefer.

The unemployment rate stands at 18.63%, which is 28 cents lower than in The previous quarter. In the last year this rate has fallen by 2.26 points.

So we have a ying of lower unemployment combined with a yang of the fact that it is still high. If we return to the comparison with Italy then according to the Royal Institute the situation is better than it first appears to be.

From 1990 to 2014 female participation has risen from 34% to 53% in Spain and from 35% to only 40% in Italy (seeWorld Bank data). Hence, although there is a much lower unemployment rate in Italy, the latter’s inactivity rate is much higher than Spain’s.

The other point I would make is that whilst it is pleasing that Spain is creating more jobs the fact that the growth rate in them is similar to the economic growth means that it too will have its productivity worries.

Looking ahead

The Bank of Spain is reasonably optimistic in its latest Bulletin.

Hence, after standing in 2016 at 3.2% (the same rate as that observed a year earlier), average GDP growth is expected to ease to 2.5% in 2017 (see Table 1). In 2018 and 2019, the estimated increase in output would stand at 2.1% and 2%, respectively.

As to the private-sector business surveys Markit tells us this about services.

Rate of expansion in activity remains marked in December

And this about manufacturing.

The Spanish manufacturing PMI signalled that the sector ended 2016 on a high, with growth back at the levels seen at the start of the year.

Fiscal Position

The situation here has been summed up by El Pais this morning like this.

After missing its deficit targets for five straight years, Spain on Thursday made a commitment in Brussels to make additional adjustments “if necessary.”

If you look at its economic performance you might be wondering if Spain got it right although of course that is far from the only issue at hand. The current state of play is shown below.

Spain believes that the tax hikes slapped on companies, alcohol, tobacco and sugary drinks, as well as rises in a range of green taxes – together with strong economic growth – will be enough to keep the deficit at 3.1% of GDP. But Brussels is forecasting 3.3% instead.

If we move to the national debt it is in the awkward situation it has breached the 100% of GDP barrier. The reason this is awkward is that as described Spain has seen good levels of economic growth and the ECB has bought a lot of Spanish government debt keeping debt costs relatively low. It has bought some 150.3 billion Euros worth so far as of the end of last week and the ten-year yield is at 1.6% meaning that in spite of recent rises debt costs are very low. Thus the ratio has risen at a time when two favourable winds have been blowing in Spain.

House Prices

As this was a signal last time I can report that as of the end of the third quarter they were rising at an annual rate of 4% so relatively moderate by past standards. However as the last quarter of 2015 saw a quarterly 0% this seems set to rise. Price rises may also be capped by the fact that the bad bank Sareb is selling off some of the stock that it inherited ( believed to be around 105,000 homes). Mind you there does appear to be considerable rental inflation if this from The Spanish Brick is any guide.

The price of rental dwellings has increased in Spain by 5.8% during the second quarter of 2016, being the price of the square meter 7.8 euros per month. On an inter-annual rate, it is an 8.5% increase, according to the main property portal in Spain. ( BankInter)

Comment

There has been plenty of good economic news for Spain in recent times and we should welcome that. After all it makes a nice change from the many down beat stories that are around. But if we use the phrase “escape velocity” so beloved of Bank of England Governor Mark Carney we see that work remains to be done. If we look back and set 2010 at 100 then GDP peaked at 104.4 in the second quarter of 2008 but only reached 102.4 in the third quarter of 2016 so another just under 2% is required to scale the previous peak. Spain will need to do that relatively quickly to prevent a type of “lost decade” but even as it does so, which I expect it to do it then looks back on a decade which overall has been a road to nowhere overall.

Should Spain continue to follow the British economic pattern then worries for the UK of rising inflation affecting the economy may have a knock-on effect. As to literal links the UK Office for National Statistics has helped out a little today.

Spain is host to the largest number of British citizens living in the EU (308,805); just over a third (101,045) of British citizens living in Spain are aged 65 years and over.