How is the Swedish experiment going?

These days the headline above no doubt has you thinking about an alternative approach to the Coronavirus pandemic. However, I would also like to remind you that Sweden was at the fore front of applying negative interest-rates to a country and in addition applied them into something of an economic boom. Or if you prefer they applied exactly the reverse of the old saying that the job of a central banker is to take away the punch bowl as the party gets going. Instead they decided to give it a refill.

The first perspective is that for all the past talk of a different approach they now seem to be in the same boat as the rest of us.

During the summer, a recovery was initiated, but in recent months the spread of infection has increased again and restrictions have been tightened in many countries. This setback shows the great uncertainty that the global economic recovery is still facing. The economic prospects for Sweden and abroad have been revised down, and the economy is expected to weaken again in the near term ( Riksbank)

Where do we stand?

This morning Sweden Statistics has updated us.

GDP increased by 4.9 percent in the third quarter, seasonally adjusted and compared with the second quarter. The recovery was mainly driven by increased exports of goods and household consumption following the historic decline in the second quarter. Calendar adjusted and compared with the third quarter of 2019, GDP decreased by 2.5 percent.

This is a relatively good performance compared to what we have become used to and as the paragraph above notes has been driven by this.

Household final consumption increased by 6.3 percent. Consumption of transports, as well as hotel and restaurant services contributed most to this increase……..Exports increased by 11.2 percent and imports increased by 9.2 percent. Overall, net exports contributed upwards to GDP growth by 1.1 percentage points.

The return of the hospitality sector boosted many economies in the third quarter and I note Sweden benefited from trade. Although if we look at the trade detail the numbers were heavily affected by the oil price.

Exports of mineral fuels and electric current decreased by 40 percent in value and by 10 percent in volume. The large difference between the value and volume trends is due to lower prices on petroleum products……….Imports of crude petroleum oils decreased by 45 percent in value and by 17 percent in volume.

The story shifts a little if we take a look at Sweden’s Nordic peers. This morning we have also learnt some more about Finland.

According to Statistics Finland’s preliminary data, the volume 1) of Finland’s gross domestic product increased in July to September by 3.3 per cent from the previous quarter. Compared with the third quarter of 2019, GDP adjusted for working days contracted by 2.7 per cent.

So for all the talk of differences of approach in fact the annual economic change in Finland and Sweden is well within the margin of error. Maybe the real difference here is that they have populations which are spread out.

Looking Ahead

We see that the retail sector saw some growth in October.

In October, the retail trade sales volume increased by 0.5 percent, compared with September 2020. Retail sales in durables increased by 0.9 percent and retail sales in consumables (excluding Systembolaget, the state-owned chain of liquor stores) increased by 0.1 percent.

This meant that the annual picture looked healthy.

In October, the year-on-year growth rate in the volume of retail sales was 3.6 percent in working-day adjusted figures. Retail sales in durables increased by 4.8 percent and retail sales in consumables (excluding Systembolaget) increased by 0.7 percent.

However that was then and this is now according to the Riksbank.

The growth forecasts for the coming six months
have therefore been revised down…. However, high-frequency data show signs that demand is now slowing down again…….GDP is expected to decline again during the fourth quarter and the situation on the labour market to deteriorate further. The forecast assumes that GDP growth will decline also for the first quarter of next year before it
picks up again both abroad and in Sweden during the second quarter.

The Swedes seem yo be preparing for a rough start to next year which does differentiate them as most have yet to get past a contraction in this quarter.

The Riksbank Response

You might think as an enthusiast for negative interest-rates the Riksbank would have rushed to deploy them in 2020. But we have got something rather different.

The repo rate is held unchanged at zero per cent and is expected to remain at this level in the coming years.

So they have cast aside a past central banking orthodoxy but joined in with a new one.The latter is the plan to apply ZIRP ( in this instance literally at 0%) and to say interest-rates will stay there for some years. So not quite as explicit as the US Federal Reserve which has guided towards a period of 3 years but essentially the same tune. The abandoned orthodoxy is the enthusiasm for negative interest-rates which leaves the Riksbank with quite a lot of egg on its face. After all they have applied negative interest-rates in a boom. Then raised them in a period of economic weakness ( unemployment was rising pre pandemic). Now they do not use them in a clear example of a depression.

By contrast they are more than happy to support any borrowing by the Swedish government.

To improve the conditions for a recovery, the Executive Board has decided to expand the envelope for the asset purchases by SEK 200 billion, to a total nominal amount of up to SEK 700 billion, and to extend the asset purchase programme to 31 December 2021. The Executive Board has also decided to increase the pace in the asset purchases during the first quarter of 2021, in relation to the fourth quarter of 2020.

They have also decided to interfere in the private-sector as well.

The Executive Board has moreover decided that the Riksbank will only offer to buy corporate bonds issued by companies deemed to comply with international standards and norms for sustainability.

So another central bank sings along with The Kinks.

And when he does his little rounds
‘Round the boutiques of London Town
Eagerly pursuing all the latest fads and trends
‘Cause he’s a dedicated follower of fashion

If they were an army this would be called mission creep.

Comment

As you can see the Riksbank seems to have pretty much abandoned the interest-rate weapon it previously waved with such abandon. There is an additional nuance to this if we shift from the domestic to the external situation. The Krona has been rising against the Euro. There have been ebbs and flows but the 11.2 of March 2020 has been replaced by 10.2 now. If we note that the Euro has also been firm then the Krona has had a strong 2020 and it is interesting that the Riksbank is ignoring this. Perhaps it thought more QE would help, but as I pointed out earlier this week pretty much everyone is at that game.

But like elsewhere the Riksbank is keen to make borrowing cheaper for its government in a new twist on the word independent. With Sweden being paid to borrow ( ten-year yield is -0.13%) no doubt the government is suitably grateful.

 

 

What is happening to the economy of Germany?

As both the largest economy and indeed the bellweather for the Euro area Germany is of obvious importance. This morning has brought us more up to date in the state of play. Firstly the statistics office has continued to update its data on the quarter just gone.

WIESBADEN – The gross domestic product (GDP) rose by 8.5% in the third quarter of 2020 compared with the second quarter of 2020 after adjustment for price, seasonal and calendar variations. Thus, the German economy could offset a large part of the massive decline in the gross domestic product recorded in the second quarter of 2020 due to the coronavirus pandemic. However, the price-, seasonally and calendar-adjusted GDP was still 4.0% lower in the third quarter of 2020 thanin the fourth quarter of 2019, that is the quarter before the global coronavirus crisis.

That is an improvement of the order of 0.3% on what was previously thought. This does in fact give us a partial V-Shape as you can see below.

In the circumstances that is a reasonably good performance and the statistics office puts it like this.

For the whole EU, Eurostat released a preliminary result of -4.3% for the third quarter of 2020. The United States also recorded a strong decline of their gross domestic product (-2.9%, converted figure) compared with the third quarter of 2019. In contrast, year-on-year GDP growth as published by the People’s Republic of China amounted to 4.9% in the third quarter.

There is another context which is that the German economy had previously been struggling. This began with the 0.2% decline at the opening of 2018 which was claimed to be part of the “Euro Boom”. Economic growth was a mere 1.3% in 2018 which then slowed to 0.6% in 2019 so we can see that there were pre pandemic issues.

The Breakdown

I thought that I would switch to the labour market for this and an ongoing consequence for other areas.

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 4.0% over the same period.

I am using a measure of underemployment as the international definition of unemployment has simply not worked. Next we can switch to wages.

According to first provisional calculations, the compensation of employees was down by just 0.7% year on year, while property and entrepreneurial income fell sharply by 7.8%. On average, gross wages and salaries per employee fell by 0.4%, while net wages and salaries rose slightly by 0.5%.

So we see a familiar situation of income being supported by the furlough scheme although outside it there has been quite a hit. But as there have been restrictions on spending we see a surge in saving.

According to provisional calculations, the savings ratio was 13.5% in the third quarter of 2020.

We wait to see what will be the full economic impact of a surge in involuntary saving but here is the flip side.

Household final consumption expenditure at current prices, however, showed a decrease of 4.0%.

What about now?

This morning has brought the latest update from the Ifo Institute.

Munich, November 24, 2020 – Sentiment among German managers has deteriorated. The ifo Business Climate
Index fell from 92.5 points in October to 90.7 points in November. The drop was due above all to companies’
considerably more pessimistic expectations. Their assessments of the current situation were also a little worse.
Business uncertainty has risen. The second wave of coronavirus has interrupted Germany’s economic recovery.

It is the services sector which has taken the brunt of this.

In the service sector, the Business Climate Index dropped noticeably. For the first time since June, it is back in
negative territory. Assessments of the current situation are much less positive than they were. Moreover,
substantially more companies are pessimistic about the coming months. The indicators for hotels and
hospitality absolutely nosedived.

The one area which has managed some growth is manufacturing.

This month’s bright spot is manufacturing. The business climate improved here, with companies assessing their
current situation as markedly better. Incoming orders rose, albeit more slowly than last month. However,
expectations for the coming months turned notably less optimistic.

Although as you can see the new restrictions due to Covid-19 have affected expectations. But the picture for the overall economy was that things continued to improve in October but have now reversed. So the vaccine news has not impacted expectations there yet and the V-Shape above will see at least a kink. The general view is similar to that given yesterday by the Matkit business survey.

New lockdown measures to curb the spread of
coronavirus disease 2019 (COVID-19) led to an
accelerated decline in services activity across
Germany in November, latest ‘flash’ PMI®
from IHS Markit showed. However, the country’s
manufacturing sector continued to exhibit strong
growth, helping to support overall economic activity.

They did however hint that the Far East is helping German manufacturing.

which the survey shows is
benefitting for growing sales to Asia in particular.

Financial Conditions

These remain extraordinarily easy. There is the -0.5% deposit rate of the ECB with the -1% interest-rate for the banks. Then there is the enormous amount of bond buying which under the original programme ( PSPP) totaled some 562 billion Euros at the end of October. It is a sign of the times that there is another buying programme as well as the ECB tries to muddy the waters and as of the end of September it had bought another 125 billion.

Today Germany issues a two-year bond and it will be paid to do so as the yield is -0.75% as I type this. Furthermore this yield has been negative for over 5 years now as that state of play looks ever more permanent. Indeed with the thirty-year at -0.16% the whole yield curve is negative.

Switching to the Euro exchange-rate things are not so bright. If we take a long-term context Germany joined to get a weaker exchange-rate. However in recent times it has been rising and the effective index is at 121.5 or 21% higher than when the Euro began. Whilst November has seen a dip the index started 2020 at 115.

Comment

The context is that at the end of the third quarter the German economy had grown by 2.7% compared to the 2015 benchmark. But the news restrictions mean that it has “And it’s gone” to quote South Park. There are vaccine hopes for 2021 now but 2020 looks like being a year to forget.

This brings us to the role of the ECB which is already heavily deployed. Can it respond to the latest dip? Not in any timely way as we note the lags in the system. Also for Germany there is not a lot more that can be done in terms of interest-rates or bond yields as all are heavily negative. The wheels of fiscal policy are being oiled by this as well. Looking at it like that only leaves us with the Euro exchange-rate. Can ECB President Lagarde fire a “bazooka” at that? As I pointed out yesterday looking at the UK with all central banks easing that is easier to say than do.

Meanwhile returning to the world of finance there is this.

FRANKFURT (Reuters) – Germany’s blue-chip DAX index will expand to 40 from the current 30 companies with tougher membership criteria, exchange operator Deutsche Boerse said on Tuesday.

In general a good idea as it is too narrow an index for an economy the size of Germany, especially in the light of this.

The most recent departure was payments company Wirecard, which in a blow to Germany’s capital markets, filed for insolvency just two years after its promotion to the index. The payments company owed creditors billions in what auditor EY described as a sophisticated global fraud.

The perils of indexation?

 

 

Can the UK afford all the extra debt?

I thought that it was time to take stick and consider the overall position in terms of the build up of debt. This has come with a type of economic perfect storm where the UK has begun borrowing on a grand scale whilst the economy has substantially shrunk.So an stand alone rise in debt has also got relatively much larger due to the smaller economy. Hopes that the latter would be short and sharp rather faded as we went into Lockdown 2.0. Although as we look to 2021 and beyond there is increasing hope that the pace of vaccine development will give us an economic shot in the arm.

In terms of scale we got some idea of the flow with Friday’s figures.

Public sector net borrowing (PSNB ex) in the first seven months of this financial year (April to October 2020) is estimated to have been £214.9 billion, £169.1 billion more than in the same period last year and the highest public sector borrowing in any April to October period since records began in 1993.

The pattern of our borrowing has changed completely and it is hard not to have a wry smile at the promises of a budget balance and then a surplus. Wasn’t that supposed to start in 2016? Oh Well! As Fleetwood Mac would say. Now we face a year where if we borrow at the rate above then the total will be of the order of £370 billion.

If we switch to debt and use the official net definition we see that we opened the financial year in April with a net debt of 1.8 trillion Pounds if you will indulge me for £500 million and since then this has happened.

Public sector net debt excluding public sector banks (PSND ex) rose by £276.3 billion in the first seven months of the financial year to reach £2,076.8 billion at the end of October 2020, or around 100.8% of gross domestic product (GDP); debt to GDP ratios in recent months have reached levels last seen in the early 1960s.

You nay note that the rise in debt is quite a bit higher than the borrowing and looking back this essentially took place in the numbers for April and May when the pandemic struck. Anyway if we assume they are now in control of the numbers we are looking at around £2.2 trillion at the end of the financial year if we cross our fingers for a surplus in the self assessment collection month of January.

The Bank of England

How does this get involved? Mostly by bad design of its attempts to keep helping the banks. But also via a curious form of accountancy where marked to market profits as its bond holdings are counted as debt.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of October 2020 would reduce by £232.9 billion (or 11.3 percentage points of GDP) to £1,843.9 billion (or 89.5% of GDP).

So on this road we look set to end the fiscal year with a net debt of the order of £2 trillion.

Quantitative Easing

This is another factor in the equation but requires some care as I note this from the twitter feed of Richard Murphy.

Outside Japan QE was unknown until 2009. Since then the UK has done £845 billion of it. This is a big deal as a consequence. But as about half of that has happened this year it’s appropriate to suggest that there have been two stage of QE, so far. And I suggest we need a third.

Actually so far we have done £707 billion if you just count UK bond or Gilt purchases. That is quite a numerical mistake.As we look ahead the Bank of England plans to continue in this manner.

The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.

We see that this changes the numbers quite a lot. There are a lot of consequences here so let me this time agree with Richard Murphy as he makes a point you on here have been reading for years.

The first shenanigan is that the so-called independence of the Bank of England from the Treasury is blown apart by the fact that the Treasury completely controls the APF and the whole QE process. QE is a Treasury operation in practice, not a Bank of England one. ( APF = Asset Protection Fund)

Actual Debt Costs

These are extraordinarily low right now. Indeed in some areas we are even being paid to borrow. As I type this the UK two-year yield is -0.03% and the five-year yield is 0%. Even if we go to what are called the ultra longs we see that the present yield of the fifty-year is a mere 0.76%. To that we can add the pandemic effect on the official rate of inflation.

Interest payments on the government’s outstanding debt were £2.0 billion in October 2020, £4.4 billion less than in October 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

As an aside this also explains the official effort to neuter the RPI measure of inflation and make it a copy of the CPIH measure so beloved of the UK establishment via the way they use Imputed Rents to get much lower numbers. I covered this issue in detail on the 18th of this month.

So far this financial year we have paid £24.1 billion in debt costs as opposed to the £33.9 billion we paid in the same April to October period last year.

Comment

The elephant in the room here is QE and by using it on such a scale the Bank of England has changed the metrics in two respects. Firstly the impact on the bond market of such a large amount of purchases has been to raise the price which makes yields lower. That flow continues as it will buy another £1.473 billion this afternoon. Having reduced debt costs via that mechanism it does so in another way as the coupons ( interest) on the debt it has bought are returned to HM Treasury. Thus the effect is that we are not paying interest on some £707 billion and rising of the debt that we owe.

Thus for now we can continue to borrow on a grand scale. One of the ways the textbooks said this would go wrong is via a currency devaluation but that is being neutered by the fact that pretty much everyone is at the same game. There are risks ahead with the money supply as it has been increased by this so looking ahead inflation is a clear danger which is presumably why the establishment are so keen on defining it away.

I have left until the end the economy because that is so unpredictable. We should see some strength in 2021 as the vaccines kick in.But we have a long way to go to get back to where we were in 2008. On a collective level we may need to face up to the fact that in broad terms economic growth seems to have at best faded and at worst gone away.

Podcast

 

 

A curious treatment of inflation has knocked more than 3% off UK GDP

This morning has brought us up to date on the UK economy in the third quarter of this year. These days we get the numbers with a bit more of a delay than in the past and in this confused pandemic period our official statisticians must be grateful for it. It gives them more time to check matters and collect a fuller set of quarterly data.

Following two consecutive quarters of contraction, UK gross domestic product (GDP) is estimated to have grown by a record 15.5% in Quarter 3 (July to Sept) 2020. This is the largest quarterly expansion in the UK economy since Office for National Statistics (ONS) quarterly records began in 1955.

So we see quite a bounce back, but it is also true that momentum was lost.

The monthly path of GDP in Quarter 3 2020 reveals that there has been a slowdown of growth in August and September as momentum has eased through the quarter. GDP increased by 6.3% in July, driven by accommodation and food services as lockdown restrictions were eased.

That was the peak followed by this.

GDP grew by 2.2% in August, driven by accommodation and food services because of the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme, as well as growth in the accommodation industry as international travel restrictions boosted domestic “staycations”.

Of course, there is a different perspective to the Eat Out to Help Out Scheme as we mull how much it contributed to the second wave of the Covid-19 pandemic and thus reduced GDP later on. Fortunately we continued to grow in September as some thought we might not.

In September, GDP further slowed to 1.1% where professional, scientific and technical activities had the largest contribution and legal activities, accounting and advertising saw strong growth after a muted August.

Actually September saw a swing back in something I drew attention to in the second quarter data where the UK statisticians treated education in a really rather odd way. From August 12th.

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.

That as I pointed out at the time was really quite bizarre and led to around 5% being subtracted from UK GDP. This time around they put some of it back as I note this in the September detail.

Education also had a large positive contribution in September as schools made further advances in returning to a level of teaching similar to before the lockdown started on 23 March 2020, primarily through increased attendance.

The state sector in GDP

This has long been a problem in GDP numbers which rely on prices and therefore hit trouble in areas where you do not have them.With much of UK education and health provision being state provided there is not a price mechanism and instead we see all sorts of often dubious assumptions. As a reminder I recall Pete Comley telling me that he had looked into the inflation measure for this sector ( called a deflator), when I provided some technical advice for his book on inflation  and felt they simply made the numbers up. Well in that vein remember the deflator which surged by 32.7%, well in Question of Sport style what happened next? We get a hint from the nominal data.

Nominal GDP increased by 12.6% in Quarter 3 2020, its largest quarterly expansion on record

So a 2.9% gap between it and the real GDP number with this causing it.

The implied deflator fell by 2.5% in the third quarter, the first quarterly decline since Quarter 4 (Oct to Dec) 2015. This primarily reflects movements in the implied price change of government consumption, which fell by 7.0% in Quarter 3 2020.

So we got a bit under a quarter of it back. The explanation would have been described by the Alan Parsons Project as Psychobabble.

This decrease occurred because the volume of government activity in the third quarter increased at a much greater rate than nominal government expenditure. This is partly because of the unwinding in some of the movements that occurred in the second quarter, which saw a fall in the volume of government activity at the same time as an increase in government expenditure in nominal terms.

This really is a bit of a dog’s dinner.

 In education, the large fall in the volume of education activity in the second quarter followed by the large increase in the third quarter help explain the most recent quarterly movement in the implied deflator.

The same happened to health.

In the third quarter, nominal spending on health was largely unchanged, while volumes increased, which has impacted upon the growth rate of the implied deflator in the third quarter.

Applying normal metrics to abnormal times has them singing along with Kylie Minogue.

I’m spinning around, move out of my way
I know you’re feeling me ’cause you like it like this
I’m breaking it down, I’m not the same
I know you’re feeling me ’cause you like it like this.

We can compare this with others to see the scale of what has happened here. We do not have numbers for the full Euro area but Germany for example saw its deflator rise by 0.5% in the second quarter and then returned to a slightly lower level in the third quarter. So very different. France saw more of a move with its deflator rising by 2.4% but has now reduced it to below the previous level. Spain saw barely any change at all

A Trade Surplus

The UK finds itself maybe not quite in unknown territory but along the way.

In the 12 months to September 2020, the total trade balance, excluding non-monetary gold and other precious metals, increased by £35.9 billion to a surplus of £5.2 billion.

Yes you did see the word surplus which is a rare beast for annual data for the UK and we can continue the theme.

The UK total trade surplus, excluding non-monetary gold and other precious metals, decreased £3.4 billion to £4.2 billion in Quarter 3 (July to Sept) 2020, as imports grew by £17.3 billion and exports grew by a lesser £13.8 billion.

However the theme does hit rougher water with the latest monthly data.

The total trade balance for September 2020, excluding non-monetary gold and other precious metals, decreased by £3.6 billion to a deficit of £0.6 billion; imports increased by £3.6 billion while exports remained flat.

Comment

The pandemic has created all sorts of issues but in terms of economics we find ourselves here, or rather this is where we were at the end of the third quarter.

the level of GDP in the UK is still 9.7% below where it was at the end of 2019. Compared with the same quarter a year ago, the UK economy fell by 9.6%.

In spite of the media obsession with recessions this is a depression and we should call it such. Looking ahead we know that things will be depressed by the four week lockdown we are presently in meaning the economy looks set to shrink again in this quarter. There are some newer official surveys for October which suggest we had lost more growth momentum as restrictions began again.

BICs for 5-18 October 2020, found that of businesses currently trading, 45% reported their turnover had decreased below what is normally expected for October, compared to 48% reporting decreases in September……While it is not clear exactly how strong a relationship there is between GDP and BICs, the business survey data suggests the outlook has improved only modestly, if at all, as we moved into October. ( @jathers_ONS )

However if we return to the overall pattern for 2020 we see that a decision by the Office for National Statistics has depressed the way it records UK GDP and that it is ongoing with less than a quarter being reversed. This makes international comparisons very difficult especially for those unaware of the situation. We need I think to add at least 3% to the UK number when we try to compare internationally.

On a statistical level I regularly find the ONS justifying things on the basis of “international standards” so it needs in my opinion to explain why it has taken such a different path this time.

 

 

 

 

 

Will the Bank of England give us negative interest-rates?

Later today the members of the Monetary Policy Committee ( MPC) of the Bank of England will cast their votes as to what they think monetary policy will be and as I shall explain this is a live meeting. As in I expect changes today. Unfortunately due to a change made by the previous Governor Mark Carney we will not know the result until tomorrow at midday. Remember when all of this began to be called Super Thursday and then invariably turned out to be anything but?! Tomorrow will be one as we also get the Inflation Report to update us on what is expected for the economy. But the crucial point here is that the preference for bureaucratic convenience means that we are at risk of “some animals being more equal than others” as George Orwell put it so aptly. That risk is added to by the way the ship of state is such a leaky vessel these days.

The economy

The Minutes from the September meeting suggested things were better than expected.

UK GDP in July was around 18½% above its trough in April and around 11½% below its 2019 Q4 level. High-frequency payments data suggest that consumption has continued to recover during the summer and is now at around its start-of-year level in aggregate, stronger than expected in the August Report. Investment intentions have remained very weak and uncertainties among businesses are elevated. For 2020 Q3 as a whole, Bank staff expect GDP to be around 7% below its 2019 Q4 level, less weak than had been expected in the August Report.

Since then some of that has remained true as for example UK Retail Sales have continued to be strong. But as time passed we began to see more and more Covid-19 restrictions applied, first regionally and now including as of midnight all of England.

This morning’s Markit PMI business survey tells us this.

October data indicates that the UK service sector was close
to stalling even before the announcement of lockdown 2
in England, with tighter restrictions on hospitality, travel
and leisure leading to a slump in demand for consumer facing businesses. This was only partly offset by sustained expansion in areas related to digital services, business-to business sales and housing market transactions.

So the existing restrictions had clipped the tails of the service sector. So we are left with a pattern of a manufacturing recovery and very slow services growth followed by an expectation of this.

November’s lockdown in England and a worsening
COVID-19 situation across the rest of Europe means that the UK economy seems on course for a double-dip recession this winter and a far more challenging path to recovery in 2021.

There are issues with the credibility of the PMIs after some misfires but they are relevant because the Bank of England follows them. Some of you may recall Deputy Governor Ben Broadbent guiding us towards sentiment indices like them in the autumn of 2016. The absent-minded professor seems untroubled by the fact that led him up the garden path. Also I am intrigued by them discussing the risk of a double-dip recession when this is in fact a depression with the only issue being how long it will last?

Impact of Lockdown 2

The National Institute for Economic and Social Research or NIESR thinks this.

The second wave of the virus, and newly announced November lockdown, are likely to further increase the fall in 2020 GDP to around 11-12 per cent. This includes a fall of
around 3 per cent in the fourth quarter of 2020, with additional public borrowing but a slower rise in unemployment due to the extension of the furlough scheme.

Later they refine some of this although we are in the territory of spurious accuracy.

Saturday’s announcement of a further he November lockdown in response to resurgent Covid-19 will push
growth in the fourth quarter negative, to an estimated -3.3 per cent.

So we have a change to what we were expecting because we had our concerns about the end of the furlough scheme and its impact on employment and wages which would have knock-on effects elsewhere in the economy. That now will come in early December (probably as we are not sure when the lockdown will end) but in the meantime the lockdown will push economic output around 3% lower.

Another consideration for the Bank of England will be the labour market explicitly.

Our main case scenario was for unemployment to rise to above 7 per cent in the final quarter of 2020 and 8 per cent in the first half of 2021 as the Coronavirus Job Retention Scheme (CJRS) ends: the extension in November will have reduced this at the end of 2020 but may just have
postponed it. Unemployment is expected to rise above 5 per cent until 2024, with long-term persistent unemployment exacerbated by the prospect of a long and uncertain recovery.

Of course it has been a troubled area for them as back in the early days of Forward Guidance they established an unemployment rate of 6.5% as being significant for interest-rate rises and then ignored it.

Looking ahead which is what the Bank of England should be doing today, this looks rather tenuous on the vaccine front. We do not know when or indeed if one will be ready? Also individuals may be less than keen on being injected with something about which the long-term implications cannot be known.

Comment

The analysis suggests more easing is on its way and the first part is easy. These days the role of monetary policy is primarily to encourage fiscal policy by making it as cheap as possible. Today will see another £1.473 billion spent by the Bank of England buying UK government bonds aiming at that objective. But it is running out of road on its present plan because as of the end of today it will have spent some £697 billion out of the £725 billion it has authourised. That is only about another 6 weeks worth at the current rate. Just for the avoidance of doubt the £745 billion figure often quoted includes  £20 billion of corporate bonds which is now all over bar the shouting.

So the easy bit is a vote in favour of another £100 billion of QE which kicks the can comfortably into 2021. They could do more but that takes away some of the opportunity to act or rather looking like they are acting in the future. Regular readers will know I have been expecting an extra £100 billion for a while now as this is simply implicit funding of the government.

The path for Bank Rate is more complex. I still think a move is unlikely but cannot rule out they might be silly enough to cut Bank Rate to 0%. After all with all the rate cuts we have seen another 0.1% would be pretty much laughable. As to a cut into negative interest-rates that would look rather silly when their enquiry into them is not yet complete. However some of the MPC would vote for them and the way things are looking they could easily panic and give us a negative Bank Rate in 2021. Just as a reminder we already have negative bond yields in the UK out to the 6 year maturity. Due to the way that fixed-rate mortgages have become much more popular they are as significant as Bank Rate these days.

 

 

 

Can the ECB save the Euro area economy?

The last day or so has brought economic activity in the Euro area into focus. Last night brought a reminder that November was going to be difficult in France via all the reports of the traffic logjam in Paris as Parisians tried to find somewhere else to spend the new lockdown. We also had the ECB policy meeting of which more later as first we get to see what happened in the third quarter for the 2 biggest economies. France was first to release its numbers.

In Q3 2020, GDP in volume terms bounced back: +18.2% after –13.7% in Q2 2020. Nevertheless, GDP remained well below the level it had before the health crisis: measured in volume, compared to its level in Q3 2019 (year-on-year), GDP of Q3 2020 was 4.3% lower.

Yet again the expectations of analysts were wrong ( much too low) in spite of the fact that the theme was effective leaked by ECB President Lagarde in the press conference yesterday. After all she would have known the numbers.

Lagarde: As you know, the number for the third quarter will be coming out I believe tomorrow, and might surprise on the upside.

The bit that was a surprise to me was this at a time of large government intervention.

while general government expenditure slightly exceeded it (+0.4% year-on-year).

Moving on we saw Germany next to release its numbers.

WIESBADEN – The gross domestic product (GDP) rose by 8.2% in the third quarter of 2020 on the second quarter of 2020 after adjustment for price, seasonal and calendar variations……GDP in the third quarter of 2020 was down a price-ajusted 4.1% on the third quarter of 2019 (price- and calendar-adjusted: -4.3%).

So at this point we have a similar pattern with a fall of around 4% which means we are Looking at numbers around 1% worse that the USA. I note that Italy has fallen into the same pattern.

In the third quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 16.1 per cent with respect to the previous quarter, whereas it decreased by 4.7 per cent over the same quarter of 2019.

Both typically and sadly our Girlfriend in a coma has down slightly worse, but there is a need to take care as the numbers will be less accurate than usual due to collection difficulties. Also if there is ever a tear where seasonal adjustment will be inaccurate this is it and that is before we get to the impact of issues like this.

The third quarter of 2020 has had four working days more than the previous quarter and one working day
more than the same quarter of previous year.

More Trouble?

We got a hint of things turning for the worse from the German retail sales release.

WIESBADEN – According to provisional data, turnover in retail trade in September 2020 was in real terms 2.2% and in nominal terms 2.6% (both adjusted for calendar and seasonal influences) lower than in August 2020.

As you can see one of the factors driving the German economy forwards looks to have weakened at the end of the quarter. The annual comparison still looks strong but we need to take around 3% away from it to allow for the extra day.

In September 2020, the turnover in retail rose by 6.5% (real) and 7.7% (nominal) compared to the same month of the previous year, where the September 2020 had one day of sale more. In comparison to February 2020, the month before the outbreak of Covid 19 in Germany, the turnover in September 2020 was 2.8% higher.

What next for the ECB?

As I pointed out earlier the ECB will have been aware that the third quarter in isolation had outperformed. But it was also aware that the passage to the end of the year and maybe beyond was not. That has been confirmed by its survey of professional forecasters this morning.

However, due to the emergence of new COVID-19 cases in the recent weeks, many forecasters now assumed a weaker fourth quarter 2020 and that the economy would remain affected by restrictions (albeit not complete lockdowns) well into 2021.

That in essence is the shift we are seeing and let me add that it puts 2021 on a weak opening and also what if the lockdown cycle repeats again?

The ECB response was as we expected to kick the can to its next meeting.

The full Governing Council was in total agreement to analyse the current economic situation and to recognise and acknowledge the fact that risks are clearly, clearly tilted to the downside. We all acknowledge the role and the importance as a driving force of the pandemic and the increase of contagion, as well as the impact that containment measures will have on the economy. So it is with that recognition and that acknowledgement that we agreed, all of us, that it was necessary to take action, and therefore to recalibrate our instruments at our next Governing Council meeting. ( President Lagarde )

Perhaps the most revealing bit here was the shift of language as “tools” have morphed into “instruments”. That may turn out to be like the way “The Troika” became “The Institutions” as things went from bad to worse in Greece.

Then we got more from Christine Lagarde.

So the teams, the committees, staff members are already at work in order to do this recalibration exercise, and this recalibration exercise will touch on all our instruments. It is not going to be one or the other. It is not going to be looking at one single instrument. It will be looking at all our instruments, how they interact together, what will be the optimal outcome, and what will be the mix that will best address the situation.

I do love the way this is presented as a scientific enterprise! But suddenly quite a few extra things are in play via the mention of “all our instruments”. For example another interest-rate now looks to be in play. Maybe the ECB might buy more private-sector instruments such as equities too. Up to now it has only bought bonds,but should the equity market falls continue maybe it will spread its wings. I suggested back on March the 2nd that it could be the next central bank to but equities and it seems such thoughts have arrived at the Financial Times.

“New Instruments” If BOJ is the blueprint, ECB already buy government, corporates bonds and commercial paper. One thing missing… stock ETFs? ( Stephen Spratt)

Comment

We see that the ECB is strongly hinting that it is preparing what has become called a Bazooka although I suppose in the circumstances Panzerfaust may be better. But if we look at what is its main policy tool right now it is already pretty much flat out.

But, according to calculations by Citigroup, ECB purchases will more than cover the extra cash that governments need in 2021 — even if the central bank does not scale up its €1.35tn emergency bond-buying programme by another €500bn in December as is widely expected. Christine Lagarde, the ECB’s president, hinted at a policy-setting meeting on Thursday that further stimulus is on the way. (Financial Times)

Actually to my mind the precise figures do not matter because if there is a miss match and bond yields start to rise I expect the ECB to raise its rate of purchases. The numbers above omit the 20 billion Euros a month of the pre-exisiting QE scheme but as I just said the principle here is that they will implicitly ( they do not buy in the primary market) finance the deficits.

The ongoing problem remains that there is never any exit strategy as highlighted from Japan earlier this week.

BOJ’S GOV. KURODA: THE ETF PURCHASES WILL CONTINUE TO BE A NECESSARY POLICY TOOL. ( @FinancialJuice )

 

 

 

 

 

 

Hard times for the economy and banks of Spain

We have an opportunity to peer under the economic bonnet of one of the swing states in the Euro area. We have seen Spain lauded as an economic success followed by the bust of the Euro area crisis and then it move forwards again. But 2020 has proven to be another year of economic trouble and that theme has been added to by this morning’s data release.

The monthly variation of the seasonally and calendar adjusted general Retail Trade Index (RTI)
at constant prices between the months of September and August, stood at −0.3%. This rate was 1.7 points lower than the previous month. ( INE)

So we have a fall when if we follow the official view of recoveries from the pandemic we should be seeing the opposite. Then we note that relative to August there has been a much larger decline. The breakdown is below.

By products, Food remained the same (0.0%) and Non-food products declined by 0.6%. If the latter is broken down by type of product, Household equipment decreased the most (−3.7%).

The one category which rose was personal equipment which was up 2.3%.

If we switch to the annual picture we see this.

In September, the General Retail Trade Index, once adjusted for seasonal and calendar effects, registered a variation of −3.3% as compared with the same month of the previous year. This rate was four tenths lower than the one registered in August.

In a by now familiar pattern car fuel sales are down by 9.2% and after them the breakdown is as follows.

If these sales are broken down by type of product, Food
decreased by 2.7%, and Non-food products by 3.1%.

So unlike in the UK the Spanish are not eating more. After the news we have looked it sadly it is no surprise that jobs are declining.

In September, the employment index in the retail trade sector registered a variation of −3.0%
as compared to the same month of 2019. This rate was three tenths above that recorded in August. Employment decreased by −4.9% in Service stations.

If we look at the structure of the sales we see that small chain stores have been hit hard with sales down 14.3% on a year ago meaning they are only 88.3% of what they were in 2015. There has been a switch towards large chain stores who are 2.4% up in September on a year ago and some 17% up on 2015.

Looking at the overall picture the “Euro Boom” has pretty much been erased as we note that retail sales in September are only 2.2% above 2015. These numbers are not seasonally adjusted and may give the best guide because if there has been a year not fitting regular patterns this is it. We get another clue from the numbers from the Canary Islands where volumes are 13.5% below a year ago and the overall index is at 87,5. I am noting that because it gives us a proxy for the tourism effect, or in this instance the lack of tourism effect. Regular readers will recall we feared that this would be in play when the Covid-19 pandemic started and we can see that it has.

Housing Market

The Bank of Spain and the ECB would of course have turned to these figures first.

The number of mortgages constituted on dwellings is 19,825, 3.4% less than in August 2019. The average amount is 134,678 euros, an increase of 4.0%.

They will have been disappointed to see the number of mortgages lower but pleased to see an increase in mortgage size which offers the hope of more business for their main priority which is the banks and may even offer a hint of house price rises.

One factor of note is that if we look at the remortgage figures we see a different pattern in terms of fixed to floating mortgage rates than we have become used to.

After the change of conditions, the percentage of mortgages
fixed interest increases from 19.0% to 31.2%, while that of variable rate mortgages decreases from 80.4% to 59.7%.

As to house prices these are the most recent numbers.

The annual rate of the Housing Price Index (HPI) decreased one percentage point in the
second quarter of 2020, standing at 2.1%.
By housing type, the rate of new housing reached 4.2%, almost two points below that
registered in the previous quarter

So we still have growth and the central bankers will be happy with an index that is at 126.8 when compared with 2015. Their researchers will be busy enhancing their career prospects by finding Wealth Effects from this whilst nobody asks why all the emails from first-time buyers saying they cannot afford anything keep ending up in the spam folder.

Looking Ahead

Last month the Bank of Spain told us this.

Under these considerations, the economy’s output would fall by 10.5% on average in 2020 in scenario 1, and by up to 12.6% in the event that the less favourable epidemiological situation underlying the construction of scenario 2 were to
materialise. That said, the pickup in activity projected for the second half of this year, following the historic collapse recorded in the first half, would have a positive carry-over
effect on the average GDP growth rate in 2021, which would reach 7.3% in scenario 1, while remaining at 4.1% in scenario 2,

With the pandemic storm clouds gathering around Europe we look set for scenario 2 of a larger decline in GDP followed by a weaker recovery. Also if you are in an economic depression then how long it lasts matters as much as how deep the fall is.

In any event, at the end of 2022, GDP would stand some 2 percentage points (pp) below its pre-crisis level in
scenario 1, a gap that would widen to somewhat more than 6 pp in scenario 2.

It is a bit like wars which are always supposed to be over like Christmas and like a banking collapse where we are drip fed bad news. Speaking of the banks there is plenty of bad news around. We can start with the Turkish situation.

Turkish debt held by European banks via BIS – $64 billion in Spanish banks. – $24 billion, in French banks. – $21 billion, in Italian banks. – $9 billion, in German banks. ( DailyFX )

Then there was also this earlier this week. The Spanish consumer association took th banks to court over past mortgage fees.

Those affected do not need to initiate an individual lawsuit, with the costs and time that this entails, but can directly benefit from the success of the Asufin class action lawsuit.

So, as previously indicated, those 15 million mortgages may recover up to an average of 1,500 euros without the need to litigate. ( El Economista)

I doubt that is the end of the story but it is where we presently stand.

Comment

The situation looks somewhat grim right now and it has consequences.If we look at the labour market we have learned that unemployment as a measure is meaningless so here is a better guide.

Total hours worked would fall very sharply on average in 2020: by 11.9% in scenario 1 and 14.1% in scenario 2. Although the rise in this variable, which began
with the easing of lockdown, would continue over the rest of the projection horizon, the total number of hours worked at the end of 2022 would still be 4.5% and 8.3% lower than before the COVID-19 crisis under scenarios 1 and 2, respectively. ( Bank of Spain)

Also the public finances will be doing some heavy lifting.

.As regards public finances, it is estimated that the general government deficit will increase sharply in 2020, to stand at 10.8% and 12.1% of GDP in each of the two scenarios considered…….Public debt, meanwhile, would increase in 2020 by more than 20 pp in scenario 1 and by
some 25 pp in scenario 2, to stand at 116.8% and 120.6% of GDP, respectively.

Of course debt affordability fears are much reduced when some of your bonds can be issued at negative yields and even the ten-year is a mere 0.17%.

As to the banks the eyes of BBVA and Banco Santander will be on developments in Turkey right now.

Me on The Investing Channel

Greece rearms but what about the economy?

These times does have historical echoes but in the main we can at least reassure ourselves that one at least is not in play. However Greece is finding itself in a situation where in an echo of the past it is now boosting its military. From Neoskosmos last month.

Greece’s new arms procurement program features:

  • A squadron 18 Rafale fighter jets to replace the older Mirage 2000 warplanes
  • Four Multi-Role frigates, along with the refurbishment of four existing ones
  • Four Romeo navy helicopters
  • New anti-tank weapons for the Army
  • New torpedoes for the Navy
  • New guided missiles for its Air Force

The Greek PM also announced the recruitment of a total of 15,000 soldier personnel over the next five years, while the Defence industry and the country’s Armed Forces are set for an overhaul, with modernisation initiatives and strengthening of cyberattack protection systems respectively.

Some of this will provide a domestic economic boost with the extra 15,000 soldiers and some of the frigate work. Much will go abroad with President Macron no doubt pleased with the orders for French aircraft as he was calling for more of this not so long ago. As a major defence producer France often benefits from higher defence spending. That scenario has echoes in the beginnings of the Greek crisis as the economy collapsed and people noted the relatively strong Greek military which had bought French equipment. Actually a different purchase became quite a scandal as bribery and corruption allegations came to light. The German Type 214 submarines had a host of problems too as the contract became a disaster in pretty much every respect.

The driving force behind this is highlighted by Kathimerini below.

Turkey’s seismic survey vessel, Oruc Reis, was sailing 18 nautical miles off the Greek island of Kastellorizo on Tuesday morning. The vessel, which had its transmitter off, was heading northeast and, assuming it continues its course at its current speed, it was expected to reach a point 12 nautical miles off Kastellorizo by around noon.

The catch is that many of the defence plans above take many years to come to fruition and Greece is under pressure from Turkey in the present.

The Economy

At the end of June the Bank of Greece told us this.

According to the Bank of Greece baseline scenario, economic activity in 2020 is expected to contract substantially, by 5.8%, and to recover in 2021, posting a growth rate of 5.6%, while in 2022 growth will be 3.7%. According to the mild scenario, which assumes a shorter period of transition to normality, GDP is projected to decline by 4.4% in 2020 and to increase by 5.8% and 3.8%, respectively, in 2021 and 2022. The adverse scenario, associated with a possible second wave of COVID-19, assumes a more severe and protracted impact of the pandemic and a slower recovery, with GDP falling by 9.4% in 2020, before rebounding to 5.7% in 2021 and 4.5% in 2022.

As it turns out it is the latter more pessimistic scenario which is in people’s minds this week. As I regularly point out the forecasts of rebounds in 2021 and 22 are pretty much for PR purposes as we do not even know how 2020 will end. This is even more exacerbated in Greece which has been forecast to grow by around 2% a year for the last decade whereas the reality has been of a severe economic depression.

The projection of a 9.4% decline would mean that we would then be looking at a decline of around 30% from the peak back in 2009. I am keeping this as a broad brush as so much is uncertain right now. But one thing we can be sure of is that historians will report this episode as a Great Depression.

What about the public finances?

There is a multitude of issues here so let us start with the latest numbers.

In January-September 2020, the central government cash balance recorded a deficit of €12,860 million, compared to a deficit of €1,243 million in the same period of 2019. During this period, ordinary budget revenue amounted to €30,312 million, compared to €35,279 million in the corresponding period of last year. Ordinary budget expenditure amounted to €41,332 million, from €37,879 million in January-September 2019.

Looking at the detail for September there was quite a plunge in revenue from 5.2 billion Euros last year to 3.8 billion this. Monthly figures can be erratic and there have been tax deferrals but that poses a question about further economic weakness?

If we try to look at how 2020 will pan out then last week the International Monetary Fund suggested this.

The Fund further anticipates the budget deficit this year to come to 9% of GDP, matching the global average rate, while the draft budget provides for 8.6% of GDP. In 2021 the deficit is expected to return to 3% of GDP rate, as allowed for by the general Stability Pact rules of the European Union, the IMF says, bettering the government’s forecast for 3.7% of GDP. ( Kathimerini)

As an aside I do like the idea that the Growth and Stability Pact still exists! That is a bit like the line from Hotel California.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

Actually it has only ever applied when it suited and I doubt it is going to suit for years. Anyway we can now shift our perspective to the national debt.

However, on the matter of the national debt, the government appears far more optimistic than the IMF. The Fund sees Greek debt soaring to 205.2% of GDP this year, from 180.9% in 2019, just as the Finance Ministry sees it contained at 197.4%. ( Kathimerini)

I do like the idea of it being “contained” at 197.4% don’t you? George Orwell would be very proud. So we can expect of the order of 200%. Looking ahead we see a familiar refrain.

For 2021 the government anticipates a reduction of the debt to 184.7% of GDP, compared to 200.5% that the IMF projects before easing to 187.3% in 2022 and to 177% in 2023. ( Kathimerini)

This is a by now familiar feature of official forecasts in this area which have sung along with the Beatles.

It’s getting better all the time

Meanwhile each time we look again the numbers are larger.

Debt Costs

This has been a rocky road from the initial days of punishing Greece to the ESM ( European Stability Mechanism) telling us how much it has saved Greece via Euro area “solidarity”

Conditions on the loans from the EFSF and ESM are much more favourable than those in the market. This saves Greeces around €12 billion every year, or 6.7 percent of its economy: a substantial form of solidarity.

These days the European Central Bank is also in the game with Greece now part of its QE bond buying programme. So its ten-year yield is a mere 0.83% and costs of new debt are low.

Comment

I have several issues with all of this. Let me start with the basic one which is that the shambles of a “rescue” that collapsed the economy was always vulnerable to the next downturn.I do not just mean the size of the economic depression which is frankly bad enough but how long it is lasted. I still recall the official claims that alternative views such as mine ( default and devalue) would collapse the economy. The reality is that the “rescue” has collapsed it and people may live their lives without Greece getting back to where it was.

Next comes the associated swerve in fiscal policy where Greece was supposed to be running a primary surplus for years. This ran the same risk of being vulnerable to the economic cycle who has now hit. We are now told to “Spend! Spend! Spend!” in a breathtaking U-Turn. Looking back some of this was real fantasy stuff.

 In 2032, they will review whether additional debt measures are needed to keep Greece’s gross financing needs below the agreed thresholds ( ESM)

Mind you the ESM still has this on its webpage.

Now, these programmes have started to bear fruit. The economy is growing again, and unemployment is falling. After many years of painful reforms, Greece’s citizens are seeing more jobs opening up, and standards of living are expected to rise.

Shifting back to defence we see that another burden is being placed on the Greek people in what seems a Merry Go Round. Reality seldom seems to intervene much here but let me leave you with a last thought. What sort of state must the Greek banks be in?

 

 

China reports year on year economic growth

This has been a year where China has been especially in focus. Even before it began there were plenty of eyes on its economic performance but the Coronavirus pandemic that looks to have emerged from the Huhan Province upped the ante. Today gives us the opportunity to note the official view on economic developments since then.

The economic growth of the first three quarters shifted from negative to positive, the relations between supply and demand gradually improved, the vitality and dynamic of market were enhanced, and the employment and people’s livelihood were well guaranteed. The national economy continued the steady recovery and the overall social stability was maintained.

So quite an apparent triumph with the pattern for the year show below.

Specifically, the GDP for the first quarter declined by 6.8 percent year on year, increased by 3.2 percent for the second quarter, and up by by 4.9 percent for the third quarter.

They use numbers that are compared to the previous year for that quarter so let us now switch to looking at quarterly and annual growth.

The GDP for the third quarter grew by 2.7 percent quarter on quarter……..According to the preliminary estimates, the gross domestic product (GDP) of China was 72,278.6 billion yuan in the first three quarters, a year-on-year growth of 0.7 percent at comparable prices.

So the overall picture we are left with her is of an economy which has weathered the pandemic and in fact grown albeit very slightly. If you want the pattern which has brought us here it is shown below.

The quarter-on-quarter growth of quarterly GDP since 2019 were 1.9 percent, 1.3 percent, 1.0 percent, 1.6 percent, -10.0 percent, 11.7 percent and 2.7 percent respectively.

The Breakdown

In terms of industry China is emphasising that there has been plenty of high-tech growth.

 In the first three quarters, the value added of high-tech manufacturing and equipment manufacturing grew by 5.9 percent and 4.7 percent year on year. In terms of the output of products, in the first three quarters, the production of trucks, excavators and shoveling machinery, industrial robots, and integrated circuits grew by 23.4 percent, 20.2 percent, 18.2 percent and 14.7 percent year on year respectively.

I am not quite sure why they needed so many extra trucks, excavators and shovelling machinery. Unless of course they were dealing with the swine flu problems of pork production.

Specifically, the output of poultry grew by 6.5 percent, and output of beef, mutton and pork dropped by 1.7 percent, 1.8 percent and 10.8 percent respectively, a decline narrowed by 1.7 percentage points, 0.7 percentage points and 8.3 percentage points compared with that of the first half of this year. The pig production capacity gradually recovered. By the end of the third quarter, 370.39 million pigs were registered in stock, up by 20.7 percent year on year, among which, 38.22 million were breeding sows, up by 28.0 percent.

Overall industry was an outperformer.

Specifically, that of the third quarter grew by 5.8 percent year on year, 1.4 percentage points faster than that of the second quarter.

Services

Again the picture here is of a modern thriving economy.

In the first three quarters, of modern service industries, the value added of the information transmission, software and information technology services, and financial services grew by 15.9 percent and 7.0 percent respectively, or 1.4 percentage points and 0.4 percentage points higher than that of the first half of this year.

However the overall position like elsewhere is of a services sector in decline.

The Index of Services Production dropped by 2.6 percent year on year, a decline narrowed by 3.5 percentage point compared with that of the first half of the year; specifically, that of September grew by 5.4 percent, 1.4 percentage points faster than that of August.

We see that retail sales have had their struggles by the way we are guided towards September rather than the whole third quarter.

In September, the total retail sales of consumer goods reached 3,529.5 billion yuan, up by 3.3 percent year on year, 2.8 percentage points faster than that of August, maintaining the growth for two consecutive months.

Investment

This has managed to just become positive.

In the first three quarters, the investment in fixed assets (excluding rural households) reached 43,653.0 billion yuan, up by 0.8 percent year on year, shifting from negative to positive for the first time in 2020, while that of the first half of this year was down by 3.1 percent.

Looking into the detail we see that one definition of investment ( manufacturing) fell but construction carried on growing.

the investment in manufacturing dropped by 6.5 percent, a decline narrowed by 5.2 percentage points compared with that of the first half of 2020; the investment in real estate development grew by 5.6 percent, 3.7 percentage points faster than that of the first half of 2020.

The latter is very different to what we have seen elsewhere.

Trade

This of course was a contributor to the imbalances that led to the credit crunch. As you can see it has got worse rather than better this year.

In the first three quarters…….The value of exports was 12,710.3 billion yuan, up by 1.8 percent, and the value of imports was 10,404.8 billion yuan, down by 0.6 percent.

I note that they use value rather than volume but suspect this may just be a translation issue. The imbalance situation did improve in September but as ever we need to be cautious about trade figures for a single month.

The Exchange-Rate

This merits a mention as it has not behaved as people continue to expect.There have been plenty of reports published about a weaker Renminbi but in fact in the second half of this year it has been strengthening. The nadir was on the 28th of May at 7.17 versus the US Dollar compared to 6.7 this morning.

What this means beyond the obvious is complex because the Renminbi is neither fixed nor floating and is a managed currency.

Comment

There are several layers in an analysis of this. So let me start from the beginning which is that GDP is calculated differently in China to elsewhere.

While GDP growth in most countries is a measured output that depends on volatile real economic activity, Chinese GDP is an input into the economic process in which local governments are required to add whatever additional economic activity is needed to achieve the targeted GDP growth rate, whether or not this activity adds to welfare or productive capacity ( Michael Pettis )

So a version of “tractor production is always rising” if you like. The debate has gone on for years and a new view on it is around inflation measurement which if you look at the thrust of my work raises a wry smile. Essentially it is not the basic numbers used but it is the inflation measure or deflator that has “smoothed” things since 2012. Taking that view Capital Economics in China suggest GDP has been overstated by around 12%. They back up their view in this way.

For example, the formerly tight link between construction activity and cement output stops working. (See the chart.) Industrial value-added (and monthly IP) become eerily stable, but direct measures of output from industry don’t.

It’s harder to find proxies for services (partly because much of it is lumped together as “other” services, which have apparently been growing very fast). But we see the same abrupt drop in volatility as in industry.

This fits with what we have noted in the past as for example the phase whereby electricity production did not fit what we were told. However, this is a movable feat as once the Chinese noticed this they became “smoothed” too.

So China looks as though it is doing better than us western capitalist imperialists in 2020 which I guess is no great surprise.After all they have much more experience of running a centrally planned economy.We keep stopping ours. However they have been to coin a phrase “somewhat economical with the figures” since around 2012.

There is a subplot to that too as back on the 12th of August I pointed out a really odd move in the UK Deflator.

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.

We failed to follow what Level 42 would call The Chinese Way however as we reduced our GDP by around 5%.

Podcast

 

UK GDP shows that we are experiencing a depression rather than a recession

Today gives us an opportunity to find out what the UK economy was up to in August so let me start with the good news which is that it grew. Indeed in ordinary times this would be considered stellar growth. Although of course these times are quite some distance from ordinary.

Monthly gross domestic product (GDP) grew by 2.1% in August 2020 following growth of 6.4% in July, 9.1% in June and 2.7% in May.

As you can see we have had four months of very strong growth but the pattern has been very erratic. Although as I will come to later there is a worrying trend if you just look at the last three months.

The Services Sector

As we are looking at August I doubt many will be surprised where much of the growth came from.

In August 2020, the services sector grew by 2.4%, following growth of 5.9% in July. The accommodation and food services sub-sector was the largest contributor to the increase in August, in particular, the food and beverage service activities industry, which grew 69.7% as the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants.

So the Eat Out to Help Out Scheme was successful in its initial aim although with local lockdowns spreading it seems likely that the boost will fade. In fact the whole sector was on a bit of a tear in August.

The accommodation industry also grew by 76% as international travel restrictions boosted domestic “staycations”. These industries contributed 1.25 percentage points to the 2.1% growth in GDP for August 2020.

Even with this growth we have a fair distance still to travel.

In August 2020, the Index of Services was 9.6% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic.

Some sectors have further to go than others.

There were four industries that failed to reach 50% of their pre-February 2020 level; these were travel agencies, air transport, rail transport, and creative, arts and entertainment.

Also I note significant growth being recorded for education ( worth 0.35% of GDP) and health ( 0.13%) of GDP as we begin to correct the extraordinary inflation recorded by out statisticians in these areas in the second quarter.

Production

This also played its part in August.

Production output rose by 0.3% between July 2020 and August 2020, with manufacturing providing the largest upward contribution, rising by 0.7%; electricity and gas also rose (1.6%), partially offset by a fall in mining and quarrying (4.1%).

But as you can see on a much smaller scale especially as mining and quarrying was a brake. However over the pandemic period as a whole it has done better than services.

production output is 6.0% lower than the level in February 2020, with manufacturing 8.5% lower.

Construction

Regular readers will know that even in much calmer times these numbers had what Taylor Swift would call “trouble,trouble,trouble” which will be even worse now. But with that caveat here they are.

Monthly construction output growth slowed to 3.0% in August 2020, following record monthly growth of 21.8% in June 2020 and growth of 17.2% in July 2020.

So the surge has slowed substantially and even so this is where we think we are.

The level of construction output in August 2020 remains 10.8% below the February 2020 level.

More Perspective

We find out a little more from this.

Gross domestic product (GDP) grew by 8.0% in the three months to August 2020 as restrictions on movement eased across June, July and August.

An extraordinary burst of growth but it is much smaller than the fall. The pattern is rather different from what we have become used to.

All the headline sectors provided a positive contribution to GDP growth in the three months to August 2020. The services sector grew by 7.1%, production by 9.3% and construction by 18.5%.

So the usual leader of the pack which is services have been an under performer. This is in spite of the fact that we have surge a surge in accommodation and hospitality of 85.5% and 16.4% in education.

So a very different structure from normal as we see that this is a services driven depression.

Back to Normal?

Er no.

August 2020 GDP is now 21.7% higher than its April 2020 low. However, it remains 9.2% below the levels seen in February 2020, before the full impact of the coronavirus (COVID-19) pandemic.

In terms of structure we have this.

The production sector remains 6.0% lower than the level in February 2020, before the main impacts of the coronavirus were seen…….The services sector remains 9.6% lower than the level in February 2020……The construction sector remains 10.8% lower than the level in February 2020.

Seasonal Adjustment

GDP numbers rely quite a bit on this and as you will see tucked away in it is some hope for September.

In normal times this works well: education outputis smoothed through the year, effectively ‘looking through’ the school holidays as they come and go.

We are back to education so let’s have some Alice Cooper who was on the ball this year.

School’s out for summer
School’s out forever
School’s been blown to pieces

How have our statisticians dealt with this?

Observing a steady increase in school attendance in June and July, and with early evidence that classroom numbers were much closer to normal in September, we will instead smooth the path of education output over the holidays. That means education output will be higher in August than July, but lower than our September estimate……As schools have returned, attendance levels have been much higher than before the school holidays. Everything else being equal, this points to a much stronger September estimate.

The whole issue of seasonal adjustment this year is quite a minefield.

A Trade Surplus

I have been pointing out that we now have a trade surplus for several months now and we have another one.

The UK total trade surplus, excluding non-monetary gold and other precious metals, increased £3.8 billion to £7.7 billion in the three months to August 2020, as exports grew by £21.4 billion and imports grew by a lesser £17.5 billion.

Unlike in the GDP arena this seems to be a services thing.

The widening of the total trade surplus in the three months to August 2020, excluding non-monetary gold and other precious metals, was driven by an £11.9 billion increase in services exports, compared with a lesser £8.9 billion increase in services imports.

Even on an annual basis we now have a surplus.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £33.9 billion to a £4.9 billion surplus in the 12 months to August 2020,

Whilst a surplus for the UK is welcome after decades of deficits the smile changes Cheshire Cat style as we note this.

 Imports of goods decreased by £76.9 billion, while exports decreased by a lesser £39.4 billion.

Comment

This morning’s release is both welcome and sobering. The welcome bit is that we have growth but the sobering bit is that we have a long way to go still. It has been a very poor day for those claiming we are in the middle of a “V-Shaped” recovery. Let me illustrate with this from Bank of England chief economist Andy Haldane.

Four months on, we now expect GDP to be around 3-4% below its pre-Covid level by the end of the third
quarter. In other words, the economy has already recovered just under 90% of its earlier losses. Having
fallen precipitously by 20% in the second quarter, we expect UK GDP to have risen by a vertiginous 20% in
the third quarter – by some margin its largest-ever rise. Put differently, since May UK GDP has been rising,
on average, by around 1.5% per week.

The man I have described as a “loose cannon on the decks” has been free wheeling again. Of course we might grow by 5-6% in September but in August we grew in a month by what he thought would take not much more than a week. Still I am pleased he has been doing some reading albeit of a book I read as a child.

Now is not the time for the economics of Chicken Licken.

For those of you who have never read this Chicken Licken was worried about the sky falling down. Well it looks like it has on Andy’s forecasts and on Andy himself who is now a figure of fun even amongst those that previously cheered him.

Central bankers aren’t known as innovators or thought leaders, but Andrew Haldane, a senior official at the Bank of England, is an exception. ( Time 100)

Oh how Time magazine must wish they could redact that! But the more important point is something I have been making all along. This is a depression much more than a recession and it looks as though it is going to last much longer than some claimed. Yes we have seem bounce backs in some areas but others are plainly in a mess.

As it would have been John Lennon’s 80th birthday let me finish with this.

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