UK GDP is a case of The Good, The Bad and The Ugly

Today is an example of be careful what you wish for. No doubt the UK Office for National Statistics thought it would be clever to produce monthly GDP data. But now in addition to the usual problems they find them not only being scanned beyond their capabilities but for the unwary comparing them to the quarterly and annual ones creates quite a of confusion. Indeed we can go through them in Spaghetti Western style.

The Good

This comes from this part of the release where we how have had three months of economic growth in a row.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020 as lockdown measures continued to ease, following growth of 8.7% in June and 2.4% in May.

In terms of detail we are told this.

“Education grew strongly as some children returned to school, while pubs, campsites and hairdressers all saw notable improvements. Car sales exceeded pre-crisis levels for the first time with showrooms having a particularly busy time.

“All areas of manufacturing, particularly distillers and car makers, saw improvements, while housebuilding also continued to recover.”

The latter component will, of course,please the Bank of England. I have to confess a wry smile at the mention of distillers, have we been driven to drink? As to car sales this was reinforced elsewhere.

wholesale, retail and repair of motor vehicles subsector (in particular, the motor vehicles industry), which recovered to above its February 2020 level after seeing record low levels of output in April and May.

This is an area which was affected by the lockdown as when I took my car in for its MOT in August I was told that in April last year they had done 110 and this year 18. Another area which was similarly affected also boomed in July.

Monthly construction output increased by 17.6% in July 2020 compared with June 2020, rising to £11,922 million, because of growth in all construction sectors.

Then and slightly confusingly not directly linked to the GDP numbers ( which are output not expenditure ones) these will not be included.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £5.9 billion to £6.4 billion in the three months to July 2020, as imports fell by £8.5 billion and exports fell by a lesser £2.7 billion.

I point it out as it is rare for the UK to record a trade surplus which continues as we look for more perspective.

The total trade balance, excluding non-monetary gold and other precious metals, increased by £35.8 billion to a surplus of £3.7 billion in the 12 months to July 2020.

The Bad

Our perspective shifts as we switch to something approaching the more normal quarterly measure for GDP.

Gross domestic product (GDP) fell by 7.6% in the three months to July 2020 following two consecutive quarterly falls, as government restrictions on movement dramatically reduced economic activity.

In case you are wondering how we can grow for 3 individual months but shrink over the total it is because we are comparing the latter with the previous 3 months which include some pre pandemic data.

The Ugly

This comes if we directly compare with where we were or more strictly where we thought we were before the Covid-19 pandemic hit.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020, following growth of 8.7% in June 2020. Despite this, the level of output did not fully recover from the record falls seen across March and April 2020 and was still 11.7% below the levels seen in February 2020,

So we have picked up but the peak is still a fair way ahead. Or if you prefer.

July 2020 GDP is now 18.6% higher than its April 2020 low. However, it remains 11.7% below the levels seen in February 2020,

There is a sub-plot to this which is unusual for the UK.

In July 2020, the Index of Services is 12.6% below February 2020, the last month of “normal” trading conditions prior to measures introduced as a result of the coronavirus (COVID-19) pandemic…..There was a rise of 6.1% in the Index of Services between June 2020 and July 2020.

The area which is normally a strength and pulls the numbers higher has in fact under performed. One feature of this is hardly a surprise although we can expect a pick-up from the “eat out to help out” policy when we get the August numbers.

Total services output decreased by 8.1% for the three months to July 2020, compared with the months to April 2020; this was led by accommodation and food service activities, which fell by 62.7%.

On the other side of the coin production has been helping in relative terms.

In July 2020, the Index of Production (IoP) was 7.0% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic…..Production output rose by 5.2% between June and July 2020, with manufacturing providing the largest upward contribution, rising by 6.3%; there were also rises from electricity and gas (2.7%), water and waste (2.4%) and mining and quarrying (0.7%).

It was led by this.

The monthly increase of 6.3% in manufacturing output was led by transport equipment, which rose by 18.5%; all of the 13 subsectors displayed upward contributions.

However it had been in a weak spell anyway and then was hit hard so care is needed.

Comment

There are a lot of contexts and warnings required here many of which are driven by the unreliability of monthly GDP data. The unreliability will be worse right now due to the pandemic as we note something I was pretty much alone in reporting on August 12th.

This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

More was recorded as less which is a UK peculiarity and made our GDP numbers look worse by maybe 5% on the fall. But now we are seeing the other side of some of that as we note this from the July data.

The largest contribution to monthly growth is education, rising by 21.1%.

Now let me look at the mess which is health.

For example, the suspension of dental and ophthalmic activities (almost 6% of healthcare output), the cancellation and postponement of outpatient activities (13% of healthcare output), and elective procedures (19% of healthcare output) will likely weigh heavily on our activity figures.

If course for a spell Covid-19 treatment was booming well if we counted it.

 Further, our estimates may be affected by the suspension of some data collections by the NHS in England, which include patient volumes in critical care in England.

Oh and if you are struggling with quarterly numbers please run me by how you can get monthly GDP numbers?

For example, the quarterly activity estimates are only made available with a lag, necessitating a form of activity nowcasts.

That is a bit like the services monthly trade data which come mainly from a quarterly survey.

So we did not contract by as much as we thought and have not rebounded by quite as much either.

Looking ahead there are some further strengths for August as we have noted the potential rise in eating out and the Markit PMI reporting this.

A further surge in service sector business activity in August
adds to signs that the economy is enjoying a mini boom as
business re-opens after the lockdowns,

But the PMIs have been downgraded in importance quite a bit as time has passed. Looking further ahead there is this.

The UK has secured a free trade agreement with Japan, which is the UK’s first major trade deal as an independent trading nation, and will increase trade with Japan by an estimated £15.2 billion ( Sky News)

Oh and these things always promise more trade…..

Back to now whilst it was nice to have a bit of variety and be able to report a UK trade surplus it is also true it came from a bad route which is lower imports due to a weaker economy.

 

 

France decides to Spend! Spend! Spend!

Yesterday brought something that was both new and familiar from France. The new part is a substantial extra fiscal stimulus. The familiar is that France as regular readers will be aware had been pushing the boundaries of the Euro area fiscal rules anyway, This is something which has led to friction with Italy which has come under fire for its fiscal position. Whereas France pretty much escaped it in spite of having its nose pressed against the Growth and Stability Pact limit of 3% of Gross Domestic Product for the fiscal deficit. Actually that Pact already feels as if it is from a lifetime ago although those who have argued that it gets abandoned when it suits France and Germany are no doubt having a wry smile.

The Details

Here is a translation of President Macron’s words.

We are now entering a new phase: that of recovery and reconstruction. To overcome the most important in our modern history, to prevent the cancer of mass unemployment from setting in, which unfortunately our country has suffered too long, today we decide to invest massively. 100 billion, of which 40 billion comes from financing obtained hard from the European Union, will thus be injected into the economy in the coming months. It is an unprecedented amount which, in relation to our national wealth, makes the French plan one of the most ambitious.

So the headline is 100 billion Euros which is a tidy sum even in these inflated times for such matters. Also you will no doubt have spotted that he is trying to present something of a windfall from the European Union which is nothing of the sort. The money will simply be borrowed collectively rather than individually. So it is something of a sleight of hand. One thing we can agree on is the French enthusiasm for fiscal policy, although of course they have been rather less enthusiatic in the past about such policies from some of their Euro area partners.

There are three components to this.

Out of 100 billion euros, 30 billion are intended to finance the ecological transition.

As well as a green agenda there is a plan to boost business which involves 35 billion Euros of which the main component is below.

As part of the recovery plan, production taxes will be reduced by € 10bn from January 1, 2021, and by sustainable way. It is therefore € 20bn in tax cuts of production over 2021–2022.

That is an interesting strategy at a time of a soaring fiscal deficit to day the least. So far we have ecology and competitiveness which seems to favour big business. Those who have followed French history may enjoy this reference from Le Monde.

With an approach that smacks of industrial Colbertism

The remaining 35 billion Euros is to go into what is described as public cohesion which is supporting jobs and health. In fact the jobs target is ambitious.

According to the French government, the plan will help the economy make up for the coronavirus-related loss of GDP by the end of 2022, and help create 160,000 new jobs next year.  ( MarketWatch)

Is it necessary?

PARIS (Reuters) – French Finance Minister Bruno Le Maire believes that the French economy could perform better than currently forecast this year, he said on Friday.

“I think we will do better in 2020 than the 11% recession forecast at the moment,” Le Maire told BFM TV.

I suspect Monsieur Le Maire is a Beatles fan and of this in particular.

It’s getting better
Since you’ve been mine
Getting so much better all the time!

Of course things have got worse as he has told us they have got better. Something he may have repeated this morning.

August PMI® data pointed to the sharpest contraction in French construction activity for three months……….At the sub-sector level, the decrease in activity was broad based. Work undertaken on commercial projects fell at the
quickest pace since May, and there was a fresh decline in civil engineering activity after signs of recovery in June and July. Home building activity contracted for the sixth month running, although the rate of decrease was softer than in July. ( Markit)

We have lost a lot of faith in PMi numbers but even so there is an issue as I do not know if there is a French equivalent of “shovel ready”? But construction is a tap that fiscal policy can influence relatively quickly and there seems to be no sign of that at all.

Indeed the total PMI picture was disappointing.

“The latest PMI data came as a disappointment
following the sharp rise in private sector activity seen
during July, which had spurred hopes that the French
economy could undergo a swift recovery towards precoronavirus levels of output. However, with activity
growth easing considerably in the latest survey period,
those hopes have been dashed…”

So the data seems to be more in line with the view expressed below.

It is designed to try to “avoid an economic collapse,” French Prime Minister Jean Castex said on Thursday. ( MarketWatch)

Where are the Public Finances?

According to the Trading Economics this is this mornings update.

France’s government budget deficit widened to EUR 151 billion in the first seven months of 2020 from EUR 109.7 billion a year earlier, amid efforts to support the economy hit by the coronavirus crisis. Government spending jumped 10.4 percent from a year earlier to EUR 269.3 billion, while revenues went down 6.3 percent to EUR 142.25 billion

I think their definition of spending has missed out debt costs.

As of the end of June the public debt was 1.992 trillion Euros.

Comment

I have avoided being to specific about the size of the contraction of the economy and hence numbers like debt to GDP. There are several reasons for this. One is simply that we do not know them and also we do not know how much of the contraction will be temporary and how much permanent? We return to part of yesterday’s post and France will be saying Merci Madame Lagarde with passion. The various QE bond purchase programmes mean that France has a benchmark ten-year yield of -0.18% and even long-term borrowing is cheap as it estimates it will pay 0.57% for some 40 year debt on Monday. That’s what you get when you buy 473 billion Euros of something and that is just the original emergency programme or PSPP and not the new emergency programme or PEPP. On that road the European Union fund is pure PR as it ends up at the ECB anyway.

The Bank of France has looked at the chances of a rebound and if we look at unemployment and it looks rather ominous.

However, the speed of the recovery in the coming months and years is more uncertain, as is the peak in the unemployment rate, which the Banque de France forecasts at 11.8% in mid-2021 for France……….Chart 1 shows that in France, Germany, Italy, and the United States, once the unemployment rate peaked, it fell at a rate that was fairly similar from one crisis to the next: on average 0.55 percentage point (pp) per year in France and Italy, 0.7 pp in Germany, and 0.63 pp in the United States.

There is not much cheer there and they seem to have overlooked that unemployment rates have been much higher in the Euro area than the US. But we can see how this might have triggered the French fiscal response especially at these bond yields.

But Giulia Sestieri is likely to find that her conclusion about fiscal policy is likely to see the Bank of France croissant and espresso trolley also contain the finest brandy as it arrives at her desk.

Ceteris paribus, the lessons of economic literature suggest potentially large fiscal multipliers during the post-Covid19 recovery phase

Mind you that is a lot of caveats for one solitary sentence.

The ECB would do well to leave the Euro exchange-rate alone.

Over the past 24 hours we have seen something of a currency wars vibe return. This has other links as we mull whether for example negative interest-rates can boost currencies via the impact of the Carry Trade? In which case economics 101 is like poor old HAL 9000 in the film 2001. As so often is the case the Euro is at the heart of much of it and the Financial Times has taken a break from being the house paper of the Bank of England to take up the role for the ECB.

The euro’s rise is worrying top policymakers at the European Central Bank, who warn that if the currency keeps appreciating it will weigh on exports, drag down prices and intensify pressure for more monetary stimulus. Several members of the ECB’s governing council told the Financial Times that the euro’s rise against the US dollar and many other currencies risks holding back the eurozone’s economic recovery. The council meets next week to discuss monetary policy.

There are a range of issues here. The first is that we are seeing an example of what have become called ECB “sauces” rather then sources leak suggestions to the press to see the impact. Next we are left mulling if the ECB actually has any “top policymakers” as the FT indulges in some flattery. Especially as we then head to a perversion of monetary policy as shown below where lower prices are presented as a bad thing.

drag down prices

So they wish to make workers and consumers worse off ( denying them lower prices) whilst that the economy will be boosted bu some version of a wish fairy. Actually the sentence covers a fair bit of economic theory and modern reality so let us examine it.

The Draghi Rule

Back in 2014 ECB President Draghi gave us his view of the impact of the Euro on inflation.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

There is a problem with the use of the word “permanent” as exchange-rate moves are usually anything but, However since the nadir in February when the Euro fell to 95.6 it has risen to 101.9 or 6.3 points. Thus we have a disinflationary impact of a bit under 0.3%. That is really fine-tuning things and feels that the ECB has been spooked by this.

In August 2020, a month in which COVID-19 containment measures continued to be lifted, Euro area annual
inflation is expected to be -0.2%, down from 0.4% in July……..

Perhaps nobody has told them they are supposed to be looking a couple of year ahead! This is reinforced by the detail as the inflation fall has been mostly driven by the same energy prices which Mario Draghi argued should be ignored as they are outside the ECB’s control.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest
annual rate in August (1.7%, compared with 2.0% in July), followed by services (0.7%, compared with 0.9% in
July), non-energy industrial goods (-0.1%, compared with 1.6% in July) and energy (-7.8%, compared with -8.4% in
July).

The Carry Trade

This is the next problem for the “top policymakers” who appear to have missed it. Perhaps economics 101 is the only analysis allowed in the Frankfurt Ivory Tower, which misses the reality that interest-rate cuts can strengthen a currency. Newer readers may like to look up my articles on why the Swiss Franc surged as well as the Japanese Yen. But in simple terms investors borrow a currency because it terms of interest-rate (carry) it is cheaper. With an official deposit rate of -0.5% and many negative bond yields Euro borrowing is cheap. So some will borrow in it and cutting interest-rates just makes it cheaper and thereby even more attractive.

As an aside you may have spotted that a potential fix is for others to cut their interest-rates which has happened in many places. But with margins thin these days I suspect investors are playing with smaller numbers. You may note that this is both dangerous and a consequence of the QE era so you can expect some official denials to be floating around.

The Euro as a reserve currency

This is a case of be careful what you wish for! I doubt the current ECB President Christine Lagarde know what she was really saying when she put her name to this back in June.

On the one hand, the euro’s share in outstanding international loans increased significantly.

Carry Trade anyone? In fact you did not need to look a lot deeper to see a confession.

Low interest rates in the euro area continued to support the use of the euro as a funding currency – even after adjusting for the cost of swapping euro proceeds into other currencies, such as the US dollar.

The ECB has wanted the Euro to be more of a reserve currency so it is hard for it then to complain about the consequences of that which will be more demand and a higher price. Perhaps they did not think it through and they are now singing along with John Lennon.

Nobody told me there’d be days like these
Nobody told me there’d be days like these
Nobody told me there’d be days like these
Strange days indeed — strange days indeed

Economic Output

Mario Draghi was more reticent about the impact of a higher Euro on economic output which is revealing about the ECB inflation obsession. But back in 2014 when there were concerns about the Euro CaixaBank noted some 2008 research.

Since January 2013, the euro’s nominal effective exchange rate has appreciated by approximately 5.0%. Based on a study by the ECB,an increase of this size reduces exports by 0.6 p.p. in the first year and by close to 1.0 p.p. cumulative in the long term.

With trade being weaker I would expect the impact right now to be weaker as well. Indeed the Reserve Bank of Australia has pretty much implied that recently with the way it has looked at a higher Aussie Dollar which can’t impact tourism as much as usual for example, because there is less of it right now.

Comment

One context of this is that a decade after the “currency wars” speech from the Brazilian Finance Minister we see that we are still there. This is a particular issue for the Euro area because as a net exporter with its trade and balance of payments surplus you could argue it should have a higher currency as a type of correction mechanism. After all it was such sustained imbalances that contributed to the credit crunch and if you apply purchasing power parity to the situation then according to the OECD the exchange rate to the US Dollar should be 1.42 so a fair bit higher. There are always issues with the precision of such calculations but much higher is the answer. Thus reducing the value of the Euro from here would be seeking a competitive advantage and punishing others.

Next comes the way that this illustrates the control freakery of central bankers these days who in spite of intervening on an extraordinary scale want to intervene more. It never seems to occur to them that the problems are increasingly caused by their past actions.

The irony of course is that the elephant in the room which is the US Dollar mat have seen a nadir with the US Federal Reserve averaging inflation announcement. If so we learn two things of which the first is that the ECB may work as an (inadvertent) market indicator. The second is that central banks may do well to leave this topic alone as it is a sea bed with plenty of minefields in it. After all with a trade-weighted value of 101.53 you can argue it is pretty much where it started.

 

 

 

 

Australia sees a GDP plunge whilst it prepares for a trade war

This morning has brought us much more up to date on the state of economic play in a land down under. Even what we have come to call the South China Territories could not keep up its record of economic expansion this year.

Gross Domestic Product (GDP) fell a historic 7.0% this quarter, as the COVID-19 pandemic and the corresponding movement restrictions continued to impact economic activity. The June quarter release records the first annual estimate of GDP for 2019/20, which fell 0.2%,ending Australia’s longest streak of continuous growth, 28 years. ( Australia Statistics)

We find ourselves in curious times as we note two things. Firstly that this is a depression which will only end when output regains the lost ground. Also that a quarterly fall of 7% is a relatively good performance which does question some of the things we keep being told as locked down Australia has done better than the more laissez faire Sweden. Curiously the media seem to be concentrating on this being a recession ( GDP fell by 0.3% in the first quarter) which seems to be quite an under playing of it.

The Detail

We see a familiar pattern of a sharp decline in private demand.

Private demand detracted 7.9 percentage points from GDP, with household final consumption expenditure driving the fall. Public demand partly offset the fall, contributing 0.6 percentage points, as government increased spending in response to COVID-19.

Indeed so much of what has happened was a consumption plunge.

Household final consumption expenditure fell a record 12.1%, detracting 6.7 percentage points from GDP. Household expenditure fell 2.6% for the 2019/20 financial year, the first annual fall in recorded history.

The next bit is intriguing as we have seen elsewhere rises in purchases of food as a type of stockpiling.

Spending on services fell 17.6% reflecting temporary shutdown of businesses and movement restrictions. Spending on goods fell 2.8% driven by record falls in operation of vehicles and clothing and footwear, while spending on food recorded the biggest decline since June 1983.

There was something of a space oddity in the trade data however. One might reasonably think that as China was something of an epicentre for the pandemic then supplying it with resources was not going to be a winner. But net trade provided a boost.

The record fall in imports (-12.9%) was greater than the fall in exports (-6.7%). Imports of goods fell 2.4%, reflecting reduced imports of consumption and capital goods. Imports of services fell 50.5% with travel services falling 98.7% in response to travel bans. Exports of goods fell 3.5%, driven by falls in non-rural and rural goods due to a fall in global demand. Exports of services fell 18.4%, reflecting the travel bans.

Whilst no-one will be surprised at the travel data we know that national accounts struggle to measure services trade with any degree of accuracy. It seems more than a little curious that in a pandemic physical trade was barely affected whereas services and especially imports of services were hammered. If we put the number below back we get close to what Sweden did.

Net exports contributed 1.0 percentage point to GDP

There was another curiosity in the shop.

Health care and social assistance value added experienced its greatest fall since September 1997, down 7.9% in June quarter. The fall was driven by a decline in both private and public health services with reduced demand for medical aids, hospital services and allied health services as face to face visits to practitioners were limited.

The last bit is really rather Orwellian as a reduction in supply is reported as a reduction in demand! This issue of course goes way beyond Australia as whilst some health care areas were flat out others pretty much shut down. It looks quite a mess frankly.

Savings and Wages

There are two separate trends here as some did well.

The household saving to income ratio rose to 19.8%, the highest rate since June 1974. This was driven by the record fall in consumption. Gross disposable income rose 2.2%, driven by an historic 41.6% increase in social assistance benefits, due to both an increase in the number of recipients and additional COVID-19 support payments.

But the wages numbers suggest the well-off may have done okay but the poorest did not. The emphasis is mine.

Compensation of employees fell a record 2.5% this quarter. Average compensation per employee rose an 3.1% this quarter reflecting a compositional shift in the work force with reduced employment in part-time and lower paid jobs.

Reserve Bank of Australia

It seems that the RBA has its eyes on the housing market.

Investment in new and used dwellings fell 7.3% in the quarter due to weakened demand and COVID-19 restrictions, the largest fall since December 2000. ( Australia Statistics)

This is because yesterday it announced new moves to pump it up as it copies the Bank of England.

Under the expanded Term Funding Facility, authorised deposit-taking institutions (ADIs) will have access to additional funding, equivalent to 2 per cent of their outstanding credit, at a fixed rate of 25 basis points for three years. ADIs will be able to draw on this extra funding up until the end of June 2021………To date, ADIs have drawn $52 billion under the Term Funding Facility and further drawings are expected over coming weeks. Today’s change brings the total amount available under this facility to around $200 billion.

The first point is that “banks” are so unpopular now that they have apparently had their name changed to “authorised deposit-taking institutions ” or ADIs. That is curious when we are discussing lending rather than depositing. I see the RBA looking at its impact like this.

There is a very high level of liquidity in the Australian financial system and borrowing rates are at historical lows.

Let us go straight to the heat of the action as the RBA is repeating a policy designed to get mortgage interest-rates lower. We see why it has announced an expansion as we note mortgage rates. Variable rates for new borrowers were 3.5% in July last year and were 2.92% this. So we have two contexts of which the first is that they have not moved much when we consider the Cash Rate was also cut to 0.25% and we are seeing QE (of which more later). Also they are relatively high if we look internationally.

The picture looks better for the RBA if we look at fixed-rate mortgages. If we look at ones for up to three-years we see that it fell over the year to June from 3.43% to 2.3% making fixed-rates look attractive to say the least. Apologies for the way they have one set of numbers for the year to July and another to June but I think we get the picture.

There is a chart comparing these rates with swap rates so the cost of the banks intermediation is in fact 2% of the 2.3%.

Comment

There are some particularly Australian features here. Let me address the issue of a boost from trade via this I spotted from @chigrl

India, Australia and Japan on Tuesday agreed to launch an initiative to ensure the resilience of supply chains in the Indo-Pacific, with the move coming against the backdrop of tensions created by China’s aggressive actions across the region.

The creation of the “Supply Chain Resilience Initiative” was mooted by Japan amid the Covid-19 crisis, which has played havoc with supply and manufacturing chains,  ( Hindustan Times)

I doubt that will be welcomed by Australia’s largest customer and that has clear trade implications.

Next let me return to the RBA. As I am a polite man I will call this quite a cheek.

 Government bond markets are functioning normally, alongside a significant increase in issuance.

In fact they are so normal they had to buy a barrel load…….Oh hang on.

Over the past month, the Bank bought a further $10 billion of Australian Government Securities (AGS) in support of its 3-year yield target of 25 basis points. Since March, the Bank has bought a total of $61 billion of government securities. Further purchases will be undertaken as necessary.

Number Crunching

The Governor of the Bank of England Andrew Bailey will be interviewed by the Treasury Select Committee and I have put in a question request.

With Apple now worth more than the UK FTSE 100 will someone please ask the Governor why he is buying Apple Corporate Bonds?

Is the US economy slowing again?

Yesterday brought news that upset something of a sacred cow of these times. And no I do not mean the fact that Lionel Messi not only still has in his possession but actually uses a fax machine. That perhaps trumps even his transfer request. Across the Atlantic came news which challenged the growing consensus about economies soaring up, up and away after the Covid-19 pandemic. So let me hand you over to the Conference Board.

The Conference Board Consumer Confidence Index® decreased in August, after declining in July. The Index now stands at 84.8 (1985=100), down from 91.7 in July. The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – decreased sharply from 95.9 to 84.2. The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – declined from 88.9 in July to 85.2 this month.

As the consumer is a large part of the US economy a further decline in August poses a question for the recovery we are being promised. Indeed those promising such a recovery forecast it would be 93 so they seem to be inhabiting a different universe. They managed to miss consumers reporting that things had got substantially worse in August. The expectations index decline was more minor but it is on the back of a much lower current reading.

The accompanying explanation put some more meat on the bones.

“Consumer Confidence declined in August for the second consecutive month,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index decreased sharply, with consumers stating that both business and employment conditions had deteriorated over the past month. Consumers’ optimism about the short-term outlook, and their financial prospects, also declined and continues on a downward path. Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.”

That made me look into the detail for the jobs market which confirmed why consumers think that things have got worse.

Consumers’ appraisal of the job market was also less favorable. The percentage of consumers saying jobs are “plentiful” declined from 22.3 percent to 21.5 percent, while those claiming jobs are “hard to get” increased from 20.1 percent to 25.2 percent.

The change in the “plentiful” number is within the margin of error but the “hard to get” shift is noticeable. There was a similar shift in business conditions where there was what seems a significant increase in the “bad” category.

The percentage of consumers claiming business conditions are “good” declined from 17.5 percent to 16.4 percent, while those claiming business conditions are “bad” increased from 38.9 percent to 43.6 percent.

As you can see below this is a long-running series and so it comes with some credibility.

In 1967, The Conference Board began the Consumer Confidence Survey (CCS) as a mail survey
conducted every two months; in June 1977, the CCS began monthly collection and publication. The CCS
has maintained consistent concepts, definitions, questions, and mail survey operations since its
inception.

The alternative view was provided by MarketWatch.

What they are saying? “I have to admit that I do not take this latest reading at face value,” said chief economist Stephen Stanley of Amherst Pierpont Securities. “If you believe the number, then consumers are feeling worse in August than they were in the depths of the lockdown. I can’t imagine that anyone believes that.”

Perhaps he was one of those who thought it would be 93.

The Housing Market

We can now shift to a look at the market which will have every telescope at the US Federal Reserve pointing at it.

Sales of new single-family houses in July 2020 were at a seasonally adjusted annual rate of 901,000, according to
estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.
This is 13.9 percent (±20.0 percent)* above the revised June rate of 791,000 and is 36.3 percent (±27.4 percent)
above the July 2019 estimate of 661,000.

There may well have been a cheer at the Fed as the news was released. In absolute terms the main rise was in the south but in percentage terms it was the Mid-West that led with a more than 50% rise on the previous average for this year.

However there is a catch.

For Sale Inventory and Months’ Supply
The seasonally-adjusted estimate of new houses for sale at the end of July was 299,000. This represents a supply of
4.0 months at the current sales rate.

That does not add up until we remind ourselves that like the GDP data the numbers are annualised. If you check the actual data sales rose from 75,000 in June to 78,000 in July compared to a nadir of 52,000 in April.

So we see that for all the hype actual new homes sales rose by around 40,000 in response to this reported by Yahoo Finance.

The weekly average rates for new mortgages as of 20th August were quoted by Freddie Mac to be:

  • 30-year fixed rates increased by 3 basis points to 2.99% in the week. Rates were down from 3.56% from a year ago. The average fee remained unchanged at 0.8 points.
  • 15-year fixed rates rose by 8 basis points to 2.54% in the week. Year-on-year, rates were down from 3.03%. The average fee fell from 0.8 points to 0.7 points.
  • 5-year fixed rates increased from 2.90% to 2.91% in the week. Rates were down by 41 points from last year’s 3.32%. The average fee fell from 0.4 points to 0.3 points.

House Prices

Our central bankers would also be scanning for house price data.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 4.3% annual gain in June, no change from the previous month.

Actually it is a 3 month average so if you prefer it is a second quarter number so apparently as the economy plunged house prices rose. Some detail as to what happened where is below.

“June’s gains were quite broad-based. Prices increased in all 19 cities for which we have data, accelerating in five of them. Phoenix retains the top spot for the 13th consecutive month, with a gain of 9.0% for June. Home prices in Seattle rose by 6.5%, followed by Tampa at 5.9% and Charlotte at 5.7%. As has been the case for the last several months, prices were particularly strong in the Southeast and West, and comparatively weak in the Midwest and (especially) Northeast.

Comment

The consensus view is along the lines of this from the end of last week.

  • The New York Fed Staff Nowcast stands at 14.6% for 2020:Q3.
  • News from this week’s data releases decreased the nowcast for 2020:Q3 by 0.2 percentage point.
  • Negative surprises from the Empire State Manufacturing survey and housing starts data drove most of the decrease.

A strong rebound in the economy is the expectation but the consumer confidence report poses a question about some of that. Then we note that the housing data looks less positive once we allow for the annualisation and indeed seasonal adjustment in a year which is anything but normal.

That provides some food for thought for the US Federal Reserve as it gets ready to host its annual “Jackson Hole” symposium. I have put it in quote because this year the trip is virtual rather than real. Should they announce as they have been hinting that the new policy will be to target average inflation – which will be a loosening as the measure of official inflation is below target – we are left wondering one more time if Newt from the film Aliens will be right again?

It wont make any difference

The Investing Channel

Even if this quarter sees economic growth of 7% Germany has gone back in time to 2015

Today has brought the economic engine of the Euro ares into focus as we digest a barrage of data from and about Germany. We find that the second effort at producing economic output figures for the second quarter has produced a small improvement.

WIESBADEN – The gross domestic product (GDP) fell sharply by 9.7% in the 2nd quarter of 2020 on the 1st quarter of 2020 after adjustment for price, seasonal and calendar variations. According to the Federal Statistical Office (Destatis), the GDP drop in the 2nd quarter of 2020 was not quite as steep as reported in the first release of 30 July 2020 (-10.1%).

This means that the comparison with last year improved as well.

11.3% on the same quarter a year earlier (price-adjusted)

The last figure is revealing in that it reminds us that the German economy had been in something of a go-slow even before the Covid-19 pandemic hit. Also we note that the hit was in broad terms double that of the credit crunch.

The slump in the German economy was thus much larger than during the financial and economic crisis of 2008/2009 (-4.7% in the 1st quarter of 2009) and the sharpest decline since quarterly GDP calculations for Germany started in 1970.

The Details

With a lockdown in place for a fair bit of the quarter this was hardly a surprise.

As a consequence of the ongoing corona pandemic and the restrictions related with it, household final consumption expenditure fell sharply by 10.9% in the 2nd quarter of 2020.

What is normally considered to be a German strength fell off the edge of a cliff as investment plunged.

Gross fixed capital formation in machinery and equipment even dropped by as much as 19.6%.

Which made the annual picture this.

 Gross fixed capital formation in machinery and equipment fell sharply by 27.9% after already dropped considerably by 9.5% in the 1st quarter.

Also a platoon of PhD’s from the ECB will be on their way to work out what has gone on here?

Gross fixed capital formation in construction also declined markedly (-4.2%) in the 2nd quarter, which was due in particular to the exceptionally strong 1st quarter (+5.1%).

The ECB PhD’s may be able to write a working paper describing what their bosses would consider a triumph. Or at least, something described as a triumph on the crib sheet provided to ECB President Christine Lagarde.

Gross fixed capital formation in construction, which was 1.4% higher than in the 2nd quarter of 2019, also had a supporting effect year on year.

Looking at the annual comparison it has not been a good year for net exporters.

Foreign trade fell dramatically also compared with a year earlier. Exports of goods and services fell by 22.2% (price-adjusted) in the 2nd quarter of 2020 year on year. Imports did not drop as strongly (-17.3%) over that period.

Something else which you might reasonably consider to be not very Germanic has been in play.

Only final consumption expenditure of general government had a stabilising effect; it was 1.5% higher than in the previous quarter and prevented an even larger GDP decrease………( and the annual data)  In contrast, an additional 3.8% in government final consumption expenditure prevented the economy from crashing even more.

We know that the unemployment numbers have been actively misleading in the pandemic but I note that the hours worked data gives a similar picture to GDP.

The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 10.0% over the same period.

This had an inevitable consequence for productivity.

Labour productivity per person in employment slumped by as much as 10.2% compared with the 2nd quarter of 2019.

Savings

I thought I would pick this out as it is a clear development in the Covid era.

The relatively stable incomes, on the one hand, and consumer reticence, on the other, resulted in a substantial rise in household saving. According to provisional calculations, the savings ratio nearly doubled to 20.1% in the 2nd quarter of 2020 year on year (2nd quarter 2019: 10.2%).

Looking Ahead

This morning’s IFO release tells us this.

Sentiment among German business leaders is continuing to improve. The ifo Business Climate Index rose from 90.4 points (seasonally adjusted)  in July  to 92.6 points in August. Companies assessed their current business situation markedly more positively than last month. Their expectations were also slightly more optimistic. The German economy is on the road to recovery.

Although a somewhat different context was provided by this.

In manufacturing, the business climate improved considerably. Companies’ assessments of their current situation jumped higher. Nevertheless, many industrial companies still consider their current business to be poor. The outlook for the coming months was again more optimistic. Order books are filling once more.

That showed a welcome improvement but only to a level considered to be poor so it is hardly surprising they are optimistic relative to that. Indeed trade seems to have engaged reverse gear.

In trade, the upward trend in the business climate flattened noticeably. Companies were somewhat more satisfied with their current situation. However, their pessimism regarding the coming months was almost unchanged. In wholesale, the business climate in fact fell back.

Perhaps they are getting a little more like us in the UK as the services sector seems to be on the road to recovery.

In the service sector, the Business Climate Index rose strongly. Service providers were decidedly happier with their current business situation. Their outlook for the coming six months also improved further.

Considering the GDP numbers you might think that construction would be more upbeat.

In construction, the business climate continues to improve. Construction companies were again happier with their current situation. However, their expectations are still pessimistic, albeit less so than last month.

Comment

If we take the example below where would that leave Germany?

Germany IFO expects GDP growth of around 7% in Q3 ( DailyFX.com )

If we take the unadjusted figure of 93.46 for the second quarter then we will rise to 100 or if you prefer we will have stepped back in time to 2015. So the “Euro boom” and all the ECB backslapping will have been wiped out. The 7% economic growth recorded over the period will be ground that will have to be re-taken. That will be not so easy as we see renewed but hopefully more minor Covid-19 outbreaks in other parts of the Euro area.

I am a little unclear how @Economist_Kat gets to this.

#Germany: #ifo survey results for August are consistent with the economy moving into Boom territory.

Perhaps too much kool-aid. According to a @LiveSquawk the official view is that things can only get better.

German FinMin Scholz: Economy Developing Better Than Expected

Meanwhile official policy has the pedal to the metal with an official interest-rate for banks at -1% and two QE bond buying schemes running at once. We also have fiscal policy being deployed on a grand scale, especially for Germany. There is little scope for it to do more.

 

 

 

 

 

My Response to the plan to neuter the UK Retail Price Index inflation measure

A feature of the last 8 years or so has been the increasingly desperate attempts by the UK establishment to scrap and now neuter the Retail Price Index measure of inflation. Why? That is easy as HM Treasury would save a lot of money via paying out less money for inflation linking on benefits and pensions and be able to present higher economic growth (GDP)  figures They have had some success with the latter as replacing the RPI with the CPI in the GDP calculations has raised annual growth estimates by up to 0.5% according to the statistician Dr. Mark Courtney.

Having failed to scrap the RPI some bright spark came up with the idea of keeping the name by changing it so much it would in fact become a cypher or copy of the CPIH inflation measure including the much derided fantasy imputed rents. This “cunning plan” ( Blackadder style) has been backed by the Office of National Statistics and the UK Statistics Authoriity who have danced like puppets on the end of a string held by HM Treasury. In my financial lexicon for these times you will find “independence” defined as independently deciding to agree with those who decide your career path

Let me explain further via my reply.

Response

The saddest part of this enquiry is that we keep going down the same road and now I note that it is apparently only to choose when change should happen rather than if. The reason for that is because since 2012 we keep having enquiries and the official view has kept losing them and/or found itself ignored. The former happened in 2012 when the vote was 10-1 against and the latter happened in 2015 when Paul Johnson recommended the CPIH inflation measure which has been so widely ignored, in spite of the increasingly desperate efforts by the Office of National Statistics (ONS) to promote it.

If I kept losing on this scale maybe I too would want to take away the possibility of yet another defeat, but it is no way to run a proper public consultation.

2012

Back in 2012 I wrote to that inflation consultation as follows.

Accordingly making changes on a rushed and ill considered basis as is being proposed in this document will affect many people adversely and lead to a loss of confidence in and credibility of long-term contracts in the UK financial system.

That remains true for many pensioners both present and future and index-linked Gilts, as does this suggestion of mine.

For an investigation to be launched into both RPI and CPI as inflation measures and for there to be no change until BOTH have been thoroughly investigated and debated.

No such investigation has ever taken place and we have ended up in a situation where confidence in work produced by the ONS has been shaken and the UK Statistics Authority has been asleep at the wheel.

2020

A powerful indictment of what has happened in this period was provided by Jill Leyland at the recent Royal Statistical Society webinar on this issue. From the Webinar transcript.

In the 50 years of my working life, I’ve been a user of ONS statistics or, in the past, CSO statistics. And, for most of those years, ONS at its best is a world leader. At its best it is open-minded, has a sense of discovery, it is innovative, it listens, it has expertise. But the RPI saga since 2010 has been a very sorry one. Sometimes ONS has looked like a rabbit in the headlights.

I do hope that there will be a change Not just for all the reasons that Tony Cox and I have mentioned, but because I think the ONS is better than what it has proposed at the moment.

That was some message from a former vice president of the Royal Statistical Society,and fellow of the ONS. In her polite and considered way it is a devastating critique of the last decade which has become a lost decade for inflation measurement as the UK statistics establishment has continued to bash its head not only on the same wall but the same brick.

Are there problems with the RPI?

Jill Leyland also highlighted this.

I believe, and I’m fairly similar to Tony Cox here, that the RPI only has one real flaw. That is the combination of the Carli index with the way that clothing prices are collected. And that could be mended……. Turning back to the one flaw I do see. We are going to have scanner data which will give us a lot more opportunity to use weighted indices and that should come on-stream in the next few years.

So in fact there is only one problem which over the timescale we are looking at can certainly be improved and probably be fixed. Indeed if we look at the evidence provided by Tony Cox of the RPICPI User Group at the same webinar it puts the RPI in a better position than CPI and by implication CPIH.

It is also worth drawing attention to the greater use of weighted information in the RPI when compared to the CPI, which is generally regarded as providing the basis for a more accurate calculation.

In his presentation he showed that the RPI used direct weights for 43% of its composition whilst the CPI only uses it for 32% so it is in fact the RPI which is superior in this area. Indeed Carli is only 27% of the RPI whereas from the official rhetoric you might assume it is pretty much all of it, That, unfortunately has been a feature of ONS work which has been more like propaganda than disinterested and unbiased evidence

RPI Superiority

This comes in the area of owner occupied housing where the RPI wins hands down. It does so without a fight versus the Consumer Price Index or CPI which ignores the whole area, so if it was a boxing match it would be a walkover. In some ways the situation is worse for the CPIH inflation measure as its attempt to apply a fantasy has been exposed as exactly that.

There is a clear problem in assuming owner occupiers pay rent to themselves when they do not. I understand that the report of the 1986 advisory committee concluded that any inflation measure should be generally regarded as relevant to people’s concerns and a fair reflection of their experience. Rental Equivalence fails both tests and there is another problem with it. I’ve been asking about the actual rental figures that have been used and it turns out that they’re weighted back to some extent over the last 16 months,or if you prefer they are smoothed. So, they’re not even the actual rents from that month and are in some respect last year’s.That matters a lot when as happened this week the ONS tells people it has produced inflation figures for July 2020 when in fact a solid portion of the index was not even for 2020.

Those factors were no doubt involved in the way that the Economic Affairs Committee of the House of Lords rejected Rental Equivalence and thereby the CPIH measure itself. After all it is 16.3% of it by weight at the time of writing. My critique above of the methodology also applies to the genuine rent numbers which are another 6.3% of the index. So nearly 23% of the index is in effect based on last year rather than the month declared which is not only misleading but something which brings the whole measure into question.This is reinforced by the fact that the weights themselves have been unstable and therefore uncertain.

Balance

There has not been any and the ONS has produced work which is one-eyed and partial.

Conclusion

The reality is that the RPI is a good measure of inflation which is in many respects SUPERIOR to the officially supported CPI and CPIH. I have described the reasons for this above. This means that the effort to reduce it to a cypher and copy of CPIH is even worse than a mistake as it embarrasses those who make such a case. Thus this consultation should be scrapped and quickly forgotten.

Then we can set about improving the RPI in the way intimated by Jill Leyland and Tony Cox above. In addition we could replace the hidden use of house prices via depreciation with house prices themselves which would be another step forwards.

In the background further work could be done on the Household Costs Index (HCI) and perhaps the ONS could find a way of putting capital costs (yes another official effort to avoid inflation relating to housing) in it. I am a supporter of the concept as for example the idea to include student loans is an advance to match the modern era and reality. But it is not yet ready and may not be for some time.

At the same time the CPIH measure needs to face up to the fact that those who developed this inflation concept in the Euro area have been too embarrassed to put Rental Equivalence in it. Also that the European Central Bank has realised that the underlying CPI measure cannot go on without allowing for owner-occupied housing costs.

Thus it is the CPIH inflation measure which should be put in the recycling bin and if you need someone to do that I volunteer.

Royal Statistical Society

It has been good to see its response be so powerful.

The RSS has today said that it “strongly disagrees” with the Treasury and UK Statistics Authority’s (UKSA) plans for the Retail Prices Index (RPI).

The full reply is on its website.

Weekly Podcast

 

 

The economic problems of Greece are multiplying

Today is a case of hello darkness my old friend, I have come to talk to you again, as we look at Greece. Yet again we find a case of promised economic recovery turning into another decline although on this occasion it is at least nit the fault of the “rescue” party. The promised recovery was described by the Governor of the Bank of Greece back in February.

According to the Bank of Greece estimates, the Greek economy grew at a rate of 2.2% in 2019 while projections point to growth accelerating to 2.5% in 2020 and 2021, as the catching-up effect, after a long period of recession, through rises in investment and disposable income is projected to counterbalance the effect of the global and euro area slowdown.

Apart from the differences in the years used that could have been written back in 2010 and pretty much was. Maybe no-one should ever forecast 2% or so economic growth for Greece as each time the economy then collapses!

Also Governor Stournaras told us this.

The main causes of the crisis, namely the very large “twin” deficits (i.e. the general government and current account deficits) have been eliminated,

So let us take a look.

Balance of Payments

This morning’s release tells us this.

In June 2020, the current account balance showed a deficit of €1.4 billion, against a surplus of €805 million in June 2019.

So the Governor as grand statements like that tend to do found a turning point except the wrong way. Anyone with any knowledge of 2020 will not be surprised at the cause of this.

This development is mainly attributable to a deterioration in the travel balance and, therefore, the services balance, which was partly offset by an improvement in the balance of goods, as imports of goods decreased more than the respective exports. The primary and the secondary income accounts did not show any significant change.

Let us get straight to the tourism numbers.

The travel surplus narrowed, as non-residents’ arrivals and the corresponding receipts decreased by 93.8% and 97.5%, respectively. Moreover, travel payments dropped by 81.3%. The transport balance also declined, by 39.7%, due to a deterioration in the sea and air transport balances.

Nobody will be especially surprised about this falling off a cliff although maybe with restrictions being eased from mid June the numbers may not have been quite so bad. Also there is the kicker of the impact on Greece’s shipping companies.

Switching to the half-year we see this.

In the first half of 2020, the current account deficit came to €7.0 billion, up by €2.9 billion year-on-year, as the deteriorating services balance and secondary income account more than offset an improvement in the balance of goods and the primary income account.

That is awkward for out good Governor as we note a deficit last year but for our purposes there is something ominous in the goods balance improvement.

The deficit of the balance of goods fell, as imports decreased at a faster pace than exports.

Whilst some of that was the oil trade which was affected by the price fall there was also this.

Non-oil exports of goods declined by 3.9% at current prices (-3.4% at constant prices), while the corresponding imports fell by 10.1% (‑9.5% at constant prices).

Which suggests via the relative import slow down that we have a possible echo of what happened in 2010.

Government Deficit

This was the benchmark set by the Euro area authorities and the IMF. Back in the day they were called the Troika and then the Institutions which provides its own script for events. After all successes do not change their names do they? As for now we see this.

In January-July 2020, the central government cash balance recorded a deficit of €12,767 million, compared to a deficit of €2,432 million in the same period of 2019.

Unsurprisingly revenues are down and expenditure up.

During this period, ordinary budget revenue amounted to €22,283 million, compared to €25,871 million in the corresponding period of last year. Ordinary budget expenditure amounted to €32,423 million, from €29,870 million in January-July 2019.

That does not add up as we note the weasel word “ordinary” which apparently excludes public investment which is over 2.5 billion higher so far this year. Also debt costs are about 700 million higher mostly to “The Institutions”. That looks a little awkward but it seems they have decided to give it back.

(Luxembourg) – The Board of Directors of the European Financial Stability Facility (EFSF) decided today to reduce to zero the step-up margin accrued by Greece for the period between 1 January 2020 and 17 June 2020, as part of the medium-term debt relief measures agreed for the country in 2018. The value of the reduction amounts to €103.64 million.

Additionally, as part of the debt relief measures, the European Stability Mechanism (ESM), acting as an agent for the euro area member states and after their approval, will make a transfer to Greece amounting to €644.42 million, equivalent to the income earned on SMP/ANFA holdings.

The air of unreality about this was added to by ESM and EFSF head Klaus Regling who seems to think the Greek economy is recovering.

This is necessary to further support the economic recovery, improve the resilience of the economy and improve the country’s long-term economic potential.

What is he smoking?

ECB

It has stepped in to help with the Greek finances as these days Greece is issuing its own debt again. The ECB is running two QE programmes and the “emergency” PEPP one ( as opposed to the now apparently ordinary PSPP) had at the end of July bought some 10 billion Euros of Greek government bonds,

There was always an implicit gain from ECB QE for Greece in that its bonds would be made to look relatively attractive now it is explicit with the ECB purchases. Indeed it has so far bought more than Greece issued last year.

During 2019, the Hellenic Republic has successfully tapped the international debt capital markets through 4 market
transactions: 3 new bond series (5Y, 7Y, 10Y new issue + tap) for a total amount of € 9bn have been issued, ( Greece PDMA)

Greece was also grateful for the lower borrowing costs.

The average cost of funding for 10-year bonds has decreased from c. 4.4% to c.1.5%, while yields on 3m and 6m T-bills
have recently reached negative values

But I have never heard the ECB being called an insurance and pension fiund before, although it is in line with my “To Infinity! And Beyond! ” theme maybe the longest of long-term investors..

The investor base for Greece Government Bonds (GGBs) has significantly strengthened and broadened with an
increased share of long-term investors, notably insurance and pensions funds.

Just for clarity the PEPP purchases had not begun but the PSPP had.

Debt

The numbers here apparently have changed little but that is because Greece borrowed extra to give itself a cash buffer. So if we allow for that another 7.4 billion Euros were added to the debt pile in the second quarter of this year.

Comment

The saddest part of this is that the present pandemic has added to what was already a Great Depression in Greece. At current prices a GDP of 242 billion Euros in 2008 was replaced by one of 187.5 billion last year. At this point the casual observer might be wondering how a central bank Governor could be talking about a recovery?

But there is more as Greece arrived at the pandemic under another depressionary influence as it planned to run a fiscal surplus and I recall 3.5% of GDP being a target. Now you may notice that the same group of Euro area authorities seem rather keen on fiscal deficits as they have been taking advice from Kylie it would appear.

I’m spinning around
Move outta my way

To my mind the issue revolves around out other main indicator which is the balance of payments. This used to be the role of the IMF before it had French leaders. At the moment the Greek numbers have been hit hard by something it can do nothing about via the impact of lockdown on tourism. Sadly with the rise in cases of Covid-19 elements of that may return, although one of my friends is out there right now doing her best to keep the economy going. We will never know how much better that trajectory of the Greek economy would have been if the focus had been on reform and trade rather than debt and punishment, but we do know it would have been better and maybe a lot better.

 

GDP in Japan goes back to 2010 in another lost decade

Today we get to look East to the land of the rising sun or Nihon as we note its latest economic output figures. According to the Japanese owned Financial Times we should look at them like this.

Japan’s GDP decline less severe than US and Europe

Of course as we are looking at a country where the concept of the “Lost Decade” began in 1990 and is now heading into number 4 of them we need to be careful about which period we are looking at.

Japan’s economy shrank by a record 7.8 per cent in the second quarter of 2020 as it outperformed the US and Europe but lagged behind neighbouring South Korea and Taiwan in its response to coronavirus.

Okay so better than us in the West but not as good as its eastern competitors. Also I note that it relies quite a bit on seasonal adjustment when we have just had an economic season unlike any other as without it GDP fell by 9.9%.

Returning to the seasonally adjusted data we see a consequence of being an exporter at a time like this.

A fall in private consumption accounted for 4.8 percentage points of the decline in Japan’s GDP as the state of emergency reduced spending in shops and restaurants, while a large drop in exports accounted for the remaining 3 percentage points.

This is because exports fell by 18.5% with imports barely affected ( -0.5%) so there was a plunge in exports on a scale large enough to reduce GDP by 3%. Actually let me correct the FT here as it was domestic demand which fell by 4.8% with private consumption accounting for 4.5% and investment for 0.2% and the government sector not doing much at all. You may be pleased to read that Imputed Rent had only a minor impact on the quarterly change.

A cautionary note is that Japanese GDP data is particularly prone to revision or as the FT puts it.

Business investment was surprisingly strong, however, and contributed just 0.2 percentage points to the overall decline in output. That figure is often revised in updates to the data, but if confirmed, it would suggest resilience in the underlying economy and potential for a strong rebound.

International Comparison

Regular readers will know that due to the extraordinary move in the UK GDP Deflator ( the inflation measure for this area) of 6.2% in a single quarter our GDP fall may well have been more like 15%. Somehow the FT which is often very enthusiatic about combing through UK data has missed this.

The second-quarter decline in Japan’s GDP was comparable to a 9.5 per cent fall in the US during the same period, or a 10.1 per cent drop in Germany. It was less severe than the drop of more than 20 per cent in the UK, which was late to act but then imposed a severe lockdown. However, Japan did worse than neighbouring South Korea, where output fell 3.3 per cent in the second quarter, or Taiwan, where GDP was down just 0.7 per cent. Both countries managed to control the virus without extensive lockdowns, allowing their economies to function more normally.

It is typical of a Japanese owned publication to trumpet a form of national superiority though.

Japan’s performance relative to other advanced countries highlights how the effectiveness of a country’s coronavirus response affects the economy, with Japan forced to close schools but able to avoid the strict lockdowns used in Europe.

However, only time will tell whether that was more of a tactical than a strategic success.

Japan is suffering an increase in infections, with new cases running at more than 1,000 a day, but it has not imposed a fresh state of emergency.

Let me wish anyone who is ill a speedy recovery.

Context

The initial one is the economic output has now fallen in the last 3 quarters. Following the rise in Consumption Tax from 8% to 10% a decline was expected but now.of course, it looks really badly timed. Although in the period of the Lost Decade there is a bit of a shortage of good times to do such a thing.

Japan has if we look at the seasonally adjusted series gone back the beginning of 2010 and the middle of 2011 which was the same level.It has never achieved the “escape velocity” talked about by former Bank of England Governor Mark Carney.

Bank of Japan

The problem for it is that it was already doing so much or as the Red Queen put it.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

I noted Bloomberg reporting that it owns so 44% of the Japanese Government Bond market these days. Although there is an element of Alice In Wonderland here as via its stimulus programmes the Japanese government will be issuing ever more of them.

In May, the Japanese government approved a second large-scale ¥117tn ($1.1n or 21% of Japan’s GDP) economic rescue package, matching the size of the first stimulus introduced in April. ( OMFIF).

So there will be plenty more to buy so we can expect full employment to be maintained for the bond buyers at the Bank of Japan.

On a gross basis, the government plans to issue close to ¥253tn ($2.3tn) in government bonds and treasury bills in fiscal year 2020 (ending March 2021). This amount combines issues under all three budgetary plans. Excluding refinancing bonds, the net issuance of government bonds is reduced to almost ¥145tn (about 27% of GDP). This includes close to 4% of front-loaded bond issues from future fiscal years and is the largest net issuance in the post-world war II era.

Next there is its role as The Tokyo Whale to consider.

This phase saw the Bank of Japan buy on up as well as down days and the index it looks to match is the Nikkei 400.

There is also the negative interest-rate of -0.1% which I do not think the Bank of Japan has ever been especially keen on which is why it is only -0.1%. After all the years of propping up the banks we can’t have them failing again can we.

The latest move as is so often the case has echoes of the past so let me hand you over to Governor Kuroda.

The first is the Special Program to support corporate financing. The total size of this program is about 120 trillion yen. It consists of purchases of CP and corporate bonds with the upper limit of about 20 trillion yen and the Special Funds-Supplying Operations, which can amount to 100 trillion yen. Through this operation, the Bank provides funds on favorable terms to financial institutions that make loans in response to COVID-19. This operation also includes a scheme in which the government takes the credit risk while the Bank provides liquidity, thereby supporting financing together.

Comment

Japan is a mass of contradictions as we note that annual GDP was higher in the mid 1990s than it is now. The first switch is that the position per head is much better although that is partly because the population is in decline. Of course in terms of demand for resources that is a good thing for a country which has so few of them. That is not so hot when you have an enormous national debt which will be getting a lot larger via the stimulus effort. There are roads where it will reach 300% of GDP quite soon.

So why have things not collapsed under the weight of debt? One reason is the size of the Bank of Japan purchases in what is mostly (90% or so) a domestic market. Then we also need to note that in spite of it being official policy to weaken the Yen ( one of the arrows of Abenomics) it is at 106.4 versus the US Dollar looking strong in spite of all of the above. This is because even if the foreign investors started to leave the Japanese have large savings abroad and large reserves. As we stand they have had little success in pushing the Yen lower even with all the efforts of the Bank of Japan.

What is needed is some sustained economic growth but if Japan could do that the concept of the Lost Decade would have been consigned to the history books and it hasn’t. So we left with this thought by Graham Parker.

And there’s nothing to hold on to when gravity betrays you ( Discovering Japan)

Podcast on GDP measures

Has nobody else spotted 6% inflation being reported in UK GDP?

Today brings my home country the UK into focus as we get the first picture of how much economic damage the lockdown did in the second quarter of this year. So let us take a look.

UK gross domestic product (GDP) is estimated to have fallen by a record 20.4% in Quarter 2 (Apr to June) 2020, marking the second consecutive quarterly decline after it fell by 2.2% in Quarter 1 (Jan to Mar) 2020.

That was depending on who you looked at better than forecast, for example the CBI was suggesting a 25% drop yesterday with most suggesting 21-22%. I see the someone at the Financial Times will get first dibs on the best cake from the cake trolley today for presenting it like this.

Just in: The UK economy contracted 20.4% in the second quarter, a bigger slump than any other major European economy.

In itself the fall was no surprise as at a time like this we can certainly ignore the 0.4% as we wonder if it is even accurate to whole percentage points? Curiously for a number which is of the level of a depression and a great depression at that the media seem to be lost in a recession obsession.

BREAKING: UK is officially in #recession as the economy shrinks by a record 20.4% in the second quarter of the year. It’s the first time in 11 years that the UK has gone into recession. ( BBC)

Meanwhile back in the real world we were expecting a fall of the order of a fifth and we need to move on to see if and how we are recovering from the impact of the lockdown. After all we did close quite a bit of the economy.

There have been record quarterly falls in services, production and construction output in Quarter 2, which have been particularly prevalent in those industries that have been most exposed to government restrictions.

June

We see that there was indeed quite a bounce back as the economy slowly began to reopen.

Monthly gross domestic product (GDP) grew by 8.7% in June 2020, following growth of 2.4% in May 2020.

I am not sure whether we will ever fully pin it down as for example pubs and bars were allowed to reopen on July 4th but the ones I jogged past on the Battersea Power Station site had people sitting outside drinking some days before that. So officially after these numbers but unofficially?

Speaking of not being sure what was and what was not supposed to be happening the strongest growth came here.

Monthly construction output grew by a record 23.5% in June 2020, substantially higher than the previous record monthly growth of 7.6% in May 2020;

How much?

Monthly construction output increased by 23.5% in June 2020 compared with May 2020, rising to £10,140 million

Which areas?

The record 22.2% (£1,224 million) growth in new work in June 2020 was driven by increases in all new work sectors, with the largest contribution coming from a record 42.3% (£545 million) growth in private new housing.

The Bank of England will be happy to see the housing growth.

Next on the list was manufacturing.

Production output rose by 9.3% between May 2020 and June 2020, with manufacturing providing the largest upward contribution, rising by 11.0%, the largest increase since records began in January 1968.

Driven by.

The monthly increase of 11.0% in manufacturing output was led by transport equipment (52.6%) but this subsector remained 38.2% weaker compared to February 2020; of the 13 subsectors, 11 displayed upward contributions.

The issues with transport production began long before February of course.

Unusually for the UK its main sector was something of a laggard rather than being a leader in June.

There was a rise of 7.7% in the Index of Services between May 2020 and June 2020; of the 50 services industries, 47 grew between May and June 2020, though most remain substantially below their February 2020 level.

The detail provided reminds us that much of the debate about the decline of manufacturing ignores the reality that we have to some extent defined it away. As the repair of cars and bikes involves elements of manufacturing and services in my opinion.

The largest contribution to monthly growth was wholesale and retail trade and repair of motor vehicles and motorcycles, rising by 27.0%; of the 7.7% growth in services, 1.7 percentage points came from wholesale and retail trade and repair of motor vehicles and motorcycles.

We learn a little from looking at the best part of services and noting that even it has a way to go.

The rate of progress for each sector in returning to February 2020 levels can more easily be understood in Figure 8 where, for example, in June, wholesale and retail trade and repair of motor vehicles services was at 93.7% of the February 2020 level, rising from its lowest point between March and May of 65.2% of the February 2020 level.

Also I did say that the Bank of England would be happy and need to correct myself to say until it read the bit below.

In contrast, real estate activities have fallen for the fourth month because of real estate activities; and rentals and commercial property, excluding imputed rent.

For newer readers a fall in imputed rent is just too much for the establishment to cope with. So let’s leave them with their fantasy numbers and move on. Also I am not expecting a major bounce in the category below any time soon.

Head offices and management consultants have also fallen for the fourth consecutive month.

How much of a shift in economic life there will be remains uncertain but offices will be downsized overall and management structures will change.

We also get a reminder that we need to take care using percentages.

Wholesale, retail and repair of motor vehicles had the largest growth of 417.2% as car showrooms were open to the public in England from June 1 and elsewhere later in the month, replacing click and collect sales.

417% of not much is well I am sure you can all figure it out. Also I have emphasised the number that stands out below.

which reported that the average usage in June 2020 was 73% for all motor vehicles, 6% for National Rail and 75% for heavy goods vehicles.

As a child I recall the advertising campaign which told us “this is the age of the train”. well apparently not! This is an awkward conceptual issue as we have been told by the establishment that public transport is the way forwards and yet it has hit the buffers. Has anyone checked on how this would affect HS2?

On a personal level this is one of the reasons why I have been using the Boris Bike system over the past few years. The standard of hygiene in London public transport is, well I think it is best we leave it there.

Comment

So we hope to have experienced the fastest depression in economic history but we do not know that yet. For example we looked at the monthly recovery (June) in manufacturing above but it is still only 86.4173% of the 2016 benchmark and yes I am smiling at the claimed accuracy. As to the recovery more is reported for July.

However, of those businesses currently trading, over half (54%) reported a decrease in turnover during this period compared with what is normally expected for July.

But still well below the previous trend.

Also I said earlier that the numbers might be out by 1% and now I think it might be by 5% so let me explain.

Nominal GDP fell by 15.4% in Quarter 2 2020, its largest quarterly contraction on record.

Okay so a 5% gap on the headline. How? Well there is a bit of an issue with the story we keep being told about there being no inflation.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

Yep it is apparently now 6% and even 32.7% in one area.

I helped Pete Comley with his book on inflation a few years ago with some technical advice and proof reading. I recall him telling me that he had looked into the deflator for the government sector and had discovered they pretty much make it up. Today’s figures support that view.

Podcast on the flaws with GDP