Germany and Deutsche Bank both face economic problems

One of the supposed constants of the credit crunch era has been the economic performance of Germany. Earlier this week saw a type of confirmation of past trends as the European Central Bank or ECB updated its capital key, which is calculated on the basis show below.

The shares of the NCBs in the ECB’s capital are weighted according to the share of the respective Member States in the total population and gross domestic product of the European Union (EU), in equal measure.

Few will be surprised to read that in Euro area terms ( other European Union members are ECB shareholders with the Bank of England at 14.33%) the share of Germany has risen for 25.6% to 26.4%. That poses an issue for any future ECB QE especially as the Italian share has declined. But a little food for thought is provided by the fact that the Bank of England share went up proportionately more.

The economic outlook

As the latest monthly economic report from the Bundesbank points out the situation is not starting from its usual strength.

Economic output in Germany dipped slightly in
the third quarter of 2018. According to the
Federal Statistical Office’s flash estimate, real
gross domestic product (GDP) contracted by
0.2% in seasonal and calendar-adjusted terms
as compared to the previous quarter.

That has tended to be swept under the carpet by the media partly because of this sort of analysis.

This decline was mainly caused by a strong temporary
one-off effect in the automotive sector.

Central banks always tell you a decline is temporary until they are forced not too and in this instance we see two bits at this particular cherry as “temporary” finds “one-off” added to it. But the detail begs a question.

Major problems in connection with the introduction
of a new EU-wide standard for measuring exhaust emissions led to significant production
stoppages and a steep drop in motor vehicle
exports.

Fair enough in itself but we know from our past analysis that production boomed ahead of this so we are counting the down but omitting the up. Whereas next we got something I had been suggesting was on the cards.

At the same time, private consumption was temporarily absent as an important force driving the economy.

This reminds me of my analysis from October 12th.

 Regular readers will be aware of the way that money supply growth has been fading in the Euro area over the past year or so, and thus will not be surprised to see official forecasts of a boom if not fading to dust being more sanguine.

The official view blames the automotive sector but if we take the estimate of that below we are left with economic growth of a mere 0.1%.

 IHS Markit estimates that the autos drag on Germany was around -0.3 ppts on GDP in Q3

Apparently that is a boom according to the Bundesbank as its view is that the economy marches on.

Despite these temporary one-off effects, the economic
boom in Germany continues.

Indeed we might permit ourselves a wry smile as the usual consensus that good weather boosts an economy gets dropped like a hot potato.

as well as the exceptionally hot, dry
weather during the summer months.

No ice-creams or suntan oil apparently.

What about now?

The official view is of a powerful rebound this quarter but the Markit PMI survey seems to be struggling to find that.

 If anything, the underlying growth trajectory for the industry remains downward: German manufacturers reported a near stagnation of output in November, the sharpest reduction in total new orders for four years and a fall in exports not seen since mid-2013. Moreover, Czech goods producers, who are sensitive to developments in the autos sector, again commented on major disruption,

If we look wider we see this.

The Composite Output Index slipped to a near four-year low of 52.3 in November, down from 53.4 in October.

Moving to this morning’s official data we were told this.

In October 2018, production in industry was down by 0.5% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis).

It was 1.6% higher than a year ago on the other side of the coin but Bundesbank hopes of a surge in consumption do not seem to be shared by producers.

The production of consumer goods showed a decrease of 3.2%.

Yesterday’s manufacturing orders posed their own questions.

+0.3% on the previous month (price, seasonally and calendar adjusted)
-2.7% on the same month a year earlier (price and calendar adjusted)

Deutsche Bank

The vultures are circling again and here is how the Wall Street Journal summed it up yesterday.

Deutsche Bank shares were down about 4% in afternoon trading Thursday in Frankfurt, roughly in line with European banks amid broader market declines. Deutsche Bank shares have fallen 51% this year to all-time lows below €8 ($9.08).

As I type this it has failed to benefit much from today’s equity market bounce and is at 7.73 Euros. Perhaps because investors are worried that if it has not done well out of “the economic boom” then prospects during any slow down look decidedly dodgy. Also perhaps buyers are too busy laughing at the unintentional comedy here.

Deutsche Bank on Thursday and last week defended senior executives. Improving compliance and money-laundering controls “has been a real emphasis of current management,” and the bank has made “enormous investments” in fighting financial crime, said Mr. von Moltke, who joined the bank in 2017, in the CNBC interview.

Could it do any worse? The numbers are something of a riposte also to those like Kenneth Rogoff who blame cash and Bitcoin for financial crime.

Deutsche Bank processed an additional €31bn of questionable funds for Danske Bank than previously thought – that takes the total amount of money processed by the German lender for Danske’s tiny Estonian branch to €163bn ( Financial Times).

That compares to the present market value of 16 billion Euros for its shares. That poses more than a few questions for such a large bank and whilst banking sectors in general have been under pressure Deutsche Bank has been especially so. Personally I do not seem how merging it with Commerzbank would improve matters apart from putting a smoke screen over the figures for a year or two. One thing without doubt is that it would make the too big to fail issue even worse.

Comment

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area. The positive area is the labour market where employment is 1.2% higher than a year ago and wages have risen with some estimates around 3%. So the second half of 2018 seems set to be a relatively weak one.

One area which must be an issue is the role of the banks because as they, and Deutsche Bank especially, get weaker how can they support the economy via lending to businesses? At least with the fiscal position strong ( running a surplus) Germany has ammunition for further bailouts.

Moving back to the ECB I did say I would return to the capital key change. It means that under any future QE programme it would buy relatively more German bunds except with its bond yields so low with many negative it does not need it. Also should the slow down persist there is the issue of it being despite monetary policy being so easy.

 

 

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Greece GDP growth is accompanied by weakening trade and falling investment

Let us take the opportunity to be able to look at some better news from Greece which came from its statistics office yesterday.

The available seasonally adjusted data indicate that in the 3
rd quarter of 2018 the Gross Domestic Product (GDP) in volume terms increased by 1.0% in comparison with the 2
nd quarter of 2018, while in comparison with the 3 rd quarter of 2017, it increased by 2.2%.

So Greece has achieved the economic growth level promised for 2012 in the original “shock and awe” plan of the spring of 2010. Or to be more specific regained it as the 1.3% growth of the second quarter of 2017 saw the annual growth rate rise to 2.5% at the opening of this year before falling to 1.7%. So far in 2018 Greece has bucked the Euro trend but in a good way as quarterly economic growth has gone 0.5%,0.4% and now 1%.

If we continue with the upbeat view there was this on Monday from the Markit PMI business survey of the manufacturing sector.

Greek manufacturing firms signalled renewed growth
momentum in November, with the PMI rising to a six month high. The solid overall improvement in operating
conditions was driven by stronger expansions in output and
new orders. That said, foreign demand was not as robust,
with new export order growth easing to a 14-month low.
Manufacturers increased their staffing numbers further
in November, buoyed by stronger production growth and
domestic client demand.

So starting from a basic level there is growth and it is better than the average for the Euro area with a reading of 54 compared to 51.8. Also there is hopeful news for an especially troubled area.

In line with stronger client demand, manufacturing firms
expanded their workforce numbers at the fastest pace for
three months. Moreover, the rate of job creation was one of
the quickest since data collection began in 1999

Concerns

If we move to the detail of the national accounts we see that even this level of growth comes with concerns.

Exports of goods and services increased by 2.8% in comparison with the 2nd quarter of 2018. Exports of goods increased by 1.0% while exports of services increased by 3.8%.

This looks good at this point for what was called the “internal devaluation” method where the Greek economy would become more price competitive via lower real wages. But it got swamped by this.

Imports of goods and services increased by 7.5% in comparison with the 2nd quarter of 2018. Imports of goods increased by 8.3% while imports of services increased by 2.2%.

If we look deeper we see that the picture over the past year is the same. We start with a story of increasing export growth looking good but it then gets swamped by import growth.

Exports of goods and services increased by 7.6% in comparison with the 3rd quarter of 2017. Exports of goods increased by 7.9%, and exports of services increased by 8.0%…… Imports of goods and services increased by 15.0% in comparison with the 3 rd quarter of 2017. Imports of goods increased by 15.0%, and imports of services increased by 16.0%.

This is problematic on two counts and the first one is the simple fact that a fair bit of the Greek problem was a trade issue and now I fear that for all the rhetoric the same problem is back. Perhaps that is why we are hearing calls for reform again. Are those the same reforms we have been told have been happening. Also I note a lot of places saying Greek economic growth has been driven by exports which is misleading. This is because it is the trade figures which go in and they are a drag on GDP due to higher import growth. We can say that Greece has been both a good Euro area and world member as trade growth has been strong over the past year but it has weakened itself in so doing.

Investment

An economy that is turning around and striding forwards should have investment growth yet we see this.

Gross fixed capital formation (GFCF) decreased by 14.5% in comparison with the 2nd quarter of 2018.

Ouch! Time for the annual comparison.

Gross fixed capital formation (GFCF) decreased by 23.2% in comparison with the 3rd quarter of 2017.

Whilst those numbers are recessionary as a stand-alone they would be signals of a potential depression but for the fact Greece is still stuck in the middle of the current one. For comparison Bank of England Governor Mark Carney asserted that UK investment is 16% lower than it would have otherwise have been after the EU Leave vote so Greece is much worse than even that.

There are issues here around the level of public investment and the squeeze applied to it to hit the fiscal surplus targets. If this from National Bank of Greece in September is to turn out to be correct then it had better get a move on.

A back-loading of the public investment programme, along with positive confidence effects, should provide an additional boost to GDP growth in the H2:2018,

What did grow then?

Rather oddly the other sectoral breakdown we are provided with shows another fall.

Total final consumption expenditure decreased by 0.2% in comparison with the 2nd quarter of 2018.

But the gang banger in all of this is the inventories category which grew by 1321 million Euros or if you prefer accounts for 2.4% quarterly GDP growth on its own. This is not exactly auspicious looking forwards as you can imagine unless there is about to be a surge in demand. The only caveat is that we do not get a chain-linked seasonally adjusted number.

Comment

As you can see there is plenty of food for thought in the latest GDP numbers for Greece.On the surface they look good but the detail is weaker and in some cases looks simply dreadful. That is before we get to the impact of the wider Euro area slow down. The problem with all of this is that of we look back rather than the 2.1% economic growth promised for 2012 Greece saw economic growth plunge into minus territory peaking twice at an annual rate of 10.2%. Or the previous GDP peak of 60.4 billlion Euros of the spring of 2009 has been replaced by 48 billion in the autumn of 2018.

Meanwhile after the claimed triumphs and reform and of course extra cash the banks look woeful. So of course out comes the magic wand. From the Bank of Greece.

The proposed scheme envisages the transfer
of a significant part of non-performing exposures
(NPEs) along with part of the deferred
tax credits (DTCs), which are booked on bank
balance sheets, to a Special Purpose Vehicle
(SPV). value (net of loan loss provisions). The
amount of the deferred tax asset to be transferred
will match additional loss, so that the
valuations of these loans will approach market
prices. Subsequently, legislation will be
introduced enabling to transform the transferred
deferred tax credit into an irrevocable
claim of the SPV on the Greek State with a
predetermined repayment schedule (according
to the maturity of the transaction).

More socialisation of losses?

 

France does not like being told higher inflation is good for it

This weekend has seen a further escalation in the Gilet Jaune or yellow jacket protest in France. This has so unsettled Bloomberg that it is running a piece suggesting it could happen in the UK perhaps as a way of mollifying the bankers it has suggested should go to Paris. However, let us dodge the politics as far as we can as there is a much simpler economic focus and it is inflation. From the Financial Times.

Mr Macron introduced the increases in fuel taxes last year, as part of a package intended to attract investment and revitalise economic growth. They were also intended to support his ambition of setting France on course to ban sales of petrol and diesel cars by 2040. The tax is rising more sharply for diesel fuel, to bring it into line with the tax on petrol, as Mr Macron’s government argues that the advantage it has enjoyed is unjustified. Since the Volkswagen emissions scandal, it has become more widely accepted that diesel vehicles do not have the advantage in environmental impact over petrol engines, although manufacturers are still defending the technology.

Let us analyse what we have been told. How do you revitalise economic growth by raising costs via higher taxes? Perhaps if that was your intention via this move you would reduce taxes on petrol instead of at least reduce petrol taxes by the same amount you raise the diesel ones. As to the point about diesel engines I agree as I am the owner of what I was told was a clean diesel but has turned out to be something polluting both my and other Londoners lungs. Not President Macron’s fault of course as that was way before he came into power and of course he is the French President. But no doubt they encouraged purchases of diesel vehicles ( by the lower tax if nothing else) as we note that when the establishment is wrong it “corrects” matters by making the ordinary person pay. This especially hits people in rural France who rely on diesel based transport.

The details of the extra tax are show by Connexions France from October 2017.

Tax on diesel will rise 2.6 cents per litre every year for the next four years, after MPs voted in favour of the government’s draft budget for 2018.

As this from the BBC shows this is as well as higher taxes on petrol.

the Macron government raised its hydrocarbon tax this year by 7.6 cents per litre on diesel and 3.9 cents on petrol, as part of a campaign for cleaner cars and fuel.

The decision to impose a further increase of 6.5 cents on diesel and 2.9 cents on petrol on 1 January 2019 was seen as the final straw.

If we look at the November CPI data for France we see that it is at 1.9% but is being pulled higher by the energy sector which has annual inflation of 11.9%. In a piece of top trolling Insee tells us this.

After seven months of consecutive rise, energy prices should fall back, in the wake of petroleum product prices.

If we look at this via my inflation theme we see that as well as energy inflation being 11.3% that food inflation is 5%. So whilst central bankers may dismiss that as non-core and wonder what is going on? We can see perhaps why the ordinary person might think otherwise. Especially if they like carrots.

 Vegetable prices rose by 15.2% over one year with prices going up for salads (+15.6%), endives (+19.5%), carrots (+76.7%) and leeks (+54.2%). In contrast, tomato prices went down by 12.3% over one year.  ( Insee October agricultural prices)

Manufacturing

This morning saw the monthly series of Markit purchasing manager’s indices on manufacturing published.

November data pointed to the softest improvement in French manufacturing operating conditions for 26 months. The latest results reflected falling new orders and job shedding…….Manufacturing output was unchanged since October. That said, the latest reading represented stabilisation following a drop in production in the previous month.

It used to be the case that Markit was downbeat on France but these days it is very cheery. If we look at the last two months then production is lower as are jobs and new orders yet we are told this is an improvement! In reality the zone 49-51 represents unchanged and 50.8 is in that, although I do note that the 53.1 of the UK is apparently “lacklustre”. Anyway here is the view of the French situation.

However, any negativity towards unchanged output could be misplaced given it represented stabilisation after October’s decline.

Moving to prices they hinted that the protests might not be about to end any time soon.

On the price front, input costs continued to rise in
November. The rate of inflation was the strongest for nine
months, following two successive accelerations. Panellists
overwhelmingly blamed higher cost burdens on increased
raw material prices.
Survey respondents noted that part of the additional cost
burden was passed onto customers, with charges rising
solidly again in November.

Official data

On Friday we saw that September seems to have seen a slow down in the French economy.

In September 2018, the sales volume in overall trade fell back sharply (−2.1%) after an increase in August (+1.8%)…..In September 2018, the turnover turned down sharply in the manufacturing industry (−2.3%) after a strong increase in August (+2.8%). It also went down in industry as a whole (−1.9% after +2.8% in August)……In September 2018, output in services was stable after a strong increase in August (+2.9%).

As you can see all measures saw weakening in September and eyes will be on the services sector. This is because whilst the national accounts do not present it like this the 1% growth for the sector was what made it a better quarter. So let us also dig into the situation further.

According to business managers surveyed in November 2018, the business climate in services is stable. At 103, it remains above its long-term average (100).

Otherwise, the indicator of October 2018 has been revised downward by two points because of late businesses’ answers that have been taken into account.

Considering this revision, the turning point indicator stands henceforth in the area indicating an unfavourable short-term economic situation.

The Bank of France remains optimistic however.

According to the monthly index of business activity (MIBA),
GDP is expected to increase by 0.4% in the fourth
quarter of 2018 (first estimate).

Comment

We often discuss the similarities between France and the UK but the ECB has this morning given us another insight, as according to its capital key France is virtually unchanged in relative terms over the past five years if we look at GDP and population combined. I will leave readers to decide for themselves if the Euro area average is good or bad as you mull the official view.

 

Switching back to France it has not been a great year economy wise even if the Bank of France is correct about this quarter. But its establishment seems to be up to the games of those elsewhere whilst is to push its policies via punishment ( higher taxes ) rather than encouragement. These days though more have seen through this and hence the current troubles.

Weekly Podcast

The Italian crisis continues to deepen

Sometimes financial life comes at your quickly and at others it feels like it takes an age. The current Italian crisis has managed in typically Italian style to have covered nearly all bases as we note the main driver simply being lack of economic growth meaning on a per head basis economic output is lower than when the Euro began, But if we move to the current there was a development yesterday, and context can be provided by statements from the new government that economic growth of 3% per annum is possible. From Italian statistics.

In 2018, GDP is expected to increase by 1.1 percent in real terms.The domestic demand will provide a contribution of 1.3 percentage points while foreign demand will account for a negative 0.2 percentage point and inventories will provide a null contribution. In 2019, GDP is estimated to increase by 1.3 percent in real terms driven by the contribution of domestic demand (1.3 percentage points)
associated to a null contribution of the foreign demand and inventories.

The initial response was surprise that Istat had held the previous forecast at 1.4% for so long. After all the Italian economy had been slowing for a while in quarterly terms from the peak of 0.5% and as it had been following a Noah’s Ark two-by-two style policy might have been expected to be 0.2% this time around, Except of course it was 0% reducing the annual rate to 0.8% which is below the current forecast.

If we look at the detail we see that such as it is there seems to be a reliance on consumption.

In 2018, exports will increase by 1.6 percent and imports will grow by 2.6 percent, both are expected
to accelerate in 2019 (3.2% and 3.5% respectively). Residential households consumption expenditure
is expected to grow by 0.9 percent in 2018 accelerating in 2019 (1.2%). The stabilisation in employment and the wages increase will support households purchasing power. Investment are expected to progressively decelerate both in 2018 (+3.9) and in 2019 (+3.2%).

In itself the trade decline is not a big deal as Italy has a strong trade position but it does subtract from GDP. It also poses a question for the Euro area “internal devaluation” model. Also it is hard not to question where that investment is going? After all in collective terms the economy is not growing. So we are left with domestic consumption relying on this.

Labour market conditions will improve over the forecasting period. Employment growth is expected to stabilise at 0,9 percent in 2018 and in 2019. At the same time, the rate of unemployment will decrease at 10.5 percent in the current year and at 10.2 percent in 2019.

Will the labour market continue to improve with economic growth slowing and maybe stopping completely? Frankly the only reason to forecast a better 2019 is the planned fiscal stimulus which of course is where the whole issue comes in.

Along the way we can get a new perspective from the fact that if we put 2010 at 100 the Italian economy peaked above 102 in early 2008 and has now recovered to just above 97.

Excessive Deficit Procedure

In essence the Euro area is stalling on the application of the EDP as it is hoping there might be a change of tack. Also I would imagine that it does not want to prod the Italian crisis with Brexit also up in the air. But there is something quite revealing in yesterday’s documentation from the European Commission.

Italy made a sizeable fiscal effort between 2010 and 2013, raising the primary surplus to over 2% of GDP and exiting the excessive deficit procedure in 2013 by keeping its headline deficit at a level not above 3% of GDP as of 2012 (down from more than 5% in 2009).

The reality if we look at the pattern of GDP was that returning to 2010 as our benchmark Italian GDP which was recovering from the initial credit crunch shock and rallying from ~94 to ~97 turned south from early 2011 and fell to below 93. Back then the EC and its acolytes were claiming that this was an expansionary fiscal contraction whereas if we allow for the lags it hit the Italian economy hard. There have been various mea culpas ( IMF mostly) and redactions of history since. But not only did Italy struggle to recover as even now we are only back to the 97 level where in GDP terms it started from of course it was then benefiting from both fiscal and monetary policy. Or as Mario Draghi likes to put it.

an ongoing broad-based economic expansion

If we look back to my article from the 26th of October Italy is now being told that fiscal policy cannot help and may make things worse too. So Italians may reasonably be annoyed and sing along with All Time Low.

‘Cause I’m damned if I do ya, damned if I don’t

Things that will not improve their humour is that it is the same Olivier Blanchard pushing this who was in the van of arguing that a fiscal contraction would boost the economy. Also that Euro area rhetoric is making the situation of their bond market worse.

Bond Market

Back on the 2nd of October I noted that the benchmark ten-year yield for Italy had risen to 3.4% but that such things took time to have an impact on the real as opposed to financial economy. Well it is 3.47% as I type this and I note that @liukzilla calculated that this phase of higher yields will cost Italy around 6.6 billion Euros in higher debt costs. Care is needed as it is not something to pay now but say over the next ten years as interest is paid. But a rising problem.

The new government suggested that retail investors might surge into the market but they have bought less than one billion Euro’s of this week’s offer which is at best a damp squib. Of course there are the banks…

Italian banks

Did somebody mention the banks? They are of course stuffed full of Italian government bonds and you can see the state of play courtesy of @LiveSquawk.

Italy’s 5 Star Movement Has Proposed Measures To Allow Unlisted Banks And Insurers Not To Mark To Market Gvt Bonds – RTRS Sources.

Yes that bad. But the circus for banks carries on regardless it would appear as we move to Reuters.

Carige said Italian banks had guaranteed they would buy bonds worth 320 million euros, with a further 80 million euros earmarked for private investors, possibly including existing shareholders.

So the tin can gets another kick as we note that this weakens the other banks which participate.

Comment

Let me add another dimension provided courtesy of the Financial Times Magazine and let us first set the scene.

Mafia syndicates in Italy have an estimated annual turnover of €150bn, according to a report by the anti-Mafia parliamentary committee in 2017.

They have moved into agriculture as it seems like easy money and the economic crisis gave them an opportunity as whilst conventional business struggled they had cash.

With margins as high as 700 per cent, profits from olive oil, for example, can be higher than those from cocaine — and with far less risk.

Also it gives you clean money to which Michael Corleone would nod approvingly. Here is one route.

A Mafia family could claim about €1m a year in EU subsidies on 1,000 hectares, while leasing it for as little as €37,000. “With profit margins as high as 2,000 per cent, with no risk, why sell drugs or carry out robberies when you can just wait for the cheque to arrive in the post?” he says by telephone from his home.

Here is an even more unpleasant one.

In February last year, 42 members of the Piromalli clan in Calabria were arrested and 40 farms seized in connection with the export of counterfeit oil to the US, sold as extra virgin, which retails for at least €7 a litre. A number of those arrested are now in prison awaiting trial. According to police, about 50 per cent of all extra-virgin olive oil sold in Italy is adulterated with cheap, poor-quality oil. Globally the proportion is even higher.

Makes me wonder about the bottle of olive oil in my kitchen and the “made in Italy” spaghetti. It is all nearly as bad as the video of Patrice Evra and the chicken or perhaps we should say salmonella.

 

 

 

 

Can the Portuguese economic and house price boom continue?

It has been a little while since we looked at the western outpost of the Euro area which is Portugal. The good news is that it has now completed some five years of economic growth which in historical terms is a lengthy period for it. Albeit that rather ominously that length of growth ran straight into the credit crunch last time around. According to Portugal Statistics here is the current state of play.

In comparison with the second quarter of 2018, GDP increased 0.3% in real terms (0.6% in the previous quarter). The contribution of net external demand to the GDP quarter-on-quarter change rate became negative, after being null in the previous quarter, reflecting a decrease of Exports of Goods and Services more intense than that of Imports of Goods and Services. The positive domestic demand contribution increased in the third quarter, reflecting the higher growth of private consumption and Investment.

Firstly it has been nice to see Portugal have a better run as it badly needed it. For the last two quarters it has managed to grow faster than the Euro area average which it does not do often. However we do note that whilst it has done better than average it too was affected by the third quarter slow down too as the quarterly growth rate halved. This impacted on the annual rate.

The Portuguese Gross Domestic Product (GDP) increased by 2.1% in volume in the third quarter 2018, compared with
the same period of 2017 (2.4% in the previous quarter). Domestic demand registered a less intense positive
contribution to GDP year-on-year change rate, due to the deceleration of private consumption, as Investment presented a slightly more intense growth. Net external demand presented a negative contribution similar to that observed in the two previous quarters.

So still good in Portuguese terms as we note that a familiar issue which is trade being picked up on our radar screens. This matters on two counts firstly because the Euro area “internal competitiveness” austerity model was something which should be picked up in the trade balance. Secondly it is an old problem area for Portugal that has regularly led it into the arms of the International Monetary Fund or IMF.

Trade

As you can see the growth rates are very good but 2018 has seen export growth overtaken by import growth.

In the 3rd quarter 2018, exports and imports of goods increased by 6.1% and by 7.3% respectively, vis-à-vis the
same period of the previous year. In the 2nd quarter exports and imports recorded variations of +10.8% and +9.5% respectively. In accumulated terms, from January to September 2018, exports increased by 6.7% and imports grew by 7.8%.

Cars

The automotive sector is an important one for Portugal.

The auto sector – including car and component production – is a core sector of the Portuguese economy. It represents 4% of total GDP, is represented in 29 000 companies, is responsible for 124 000 direct jobs and a business volume of 23, 7 thousand millions of euros and 21,6 % of the total fiscal revenues in Portugal. ( Portugal IN)

A fair bit of this is Volkswagen and this from The Portugal News on the 30th of August was very upbeat.

AutoEuropa has produced over 139,000 vehicles this year, surpassing its previous record of 138,890 in 1998, the company announced on an internal communication………According to the company’s data, in 2017” AutoEuropa’s sales weight on Portugal’s goods export was 3.4%……..AutoEuropa expects to double its sales in 2018 compared to 2017, meaning that Portugal’s goods export would grow 3.4%, and the weight on the exports would increase to 6.6%.

As you can see it has been driving both export and GDP growth and has been a success story for Portugal. Switching back to the trade figures we see that transport sector exports grew by 15.3% in the third quarter. This means that the overall picture conforms to this from FT Alphaville in April.

Portuguese earnings from selling goods to the rest of the world — particularly manufactures related to the Iberian motor vehicle supply chain — grew by more than 40 per cent from 2008 through 2017:

Thus we have an actual success for the internal devaluation model so well done to Portugal. Of course the car market even with all the help is only a certain size and it is not all gravy as some of this has been from other Euro area countries. Also we await the news from the last part of 2018 as we have seen car production slowing and temporary factory shut downs due to a reduction in demand from Asia and the Trump Tariffs.An example of this has just flashed across the newswires.

*VW GROUP OCT. DELIVERIES FALL 10% Y/Y; 846,300 VEHICLES…… *VW GROUP OCT. CHINA SALES FALL 8.3% Y/Y; 365,100 VEHICLES ( @mhewson_CMC )

Looking further ahead there is the issue that car production may move even further south as more and more producers look at places like Morocco.

Unemployment

This has been a success too no doubt driven by the developments above and helped by the tourism boom.

The unemployment rate for the 3 rd quarter of 2018 stood at 6.7%, corresponding to the lowest value of the data series
started in the 1st quarter of 2011. This value is equal to the one from the previous quarter and lower in 1.8 percentage
points (p.p.) from the same quarter of 2017.

The full picture is given here.

These reductions were also observed in the
correspondent rates, having the unemployment rate
dropped from 17.5% to 6.7% and the labour
underutilisation rate from 26.4% to 13.1%

The attempt to measure underemployment is welcome as is its drop although it is still high which is true of the number below.

The youth (15 to 24 years old) unemployment rate increased to 20.0%, the second lowest value of the data series started in the 1st quarter of 2011.

Comment

So far today we have charted some welcome progress but there are still issues of which number one was highlighted by the official data on Thursday.

In 2017, the resident population in Portugal was estimated at 10,291,027 people, which accounted for a 18,546 decline
from the previous year………. Despite the positive net
migration in 2017, the population’s downward trend observed since 2010 continued in 2017, although in the last four years at a slower pace.

There are simply fewer births than deaths and for a while many left. This mattered more than it may seem because the emigrants were often those with skills who could leave. Some have returned but many have not and for example I passed some of Little Portugal in Stockwell a couple of weekends ago with its Portuguese restaurants and delicatessens.

The five better years have coincided with the post “Whatever it takes to save the Euro” period and as we looked at on Friday there are now issues for what the ECB does next? Portugal has benefited in terms of a government bond yield of less than 2% for the tern-year benchmark as opposed to the 17/18% at the peak of the crisis. No doubt it has also helped some businesses borrow more cheaply although of course there is also this.

In the 2nd quarter of 2018 (last 12 months), the median house price of dwellings sales in Portugal was 969 €/m2
, an increase of +2% compared to the previous quarter and of +8.15% compared to the same period in the previous year.

Also the Golden Visa programme which has brought in Madonna for more than a holiday and Michael Fassbender for example is no doubt at play here.

The city of Porto (+24.7%), Lisboa (+23.4%), Amadora (+15.8%), Braga (+12.3%), Funchal (+10.4%) and Vila Nova de Gaia (+10.3%) scored the most significant growth rates, compared to the same period in the previous year.

Or as @WEAYL points out.

Housing in Lisbon (€3,381/m2) now more expensive than Madrid (€3,317/m2)

Actually if we look for the source which is JornalEconomico it points towards a familiar problem.

Buying a home as the first option is a wish of the Iberian families. It is not only in Portugal that acquiring housing is the dream of most people, also in Spain this is the first choice of families.

Although they should not be worried as apparently there is no inflation.

In October, the Portuguese HICP annual rate was 0.8% (1.8% in the previous month) while the monthly rate was
-0.5% (1.5% in September and 0.5% in October 2017).

So it is much more expensive but wages are under the influence of the “internal devaluation” model. As to a full perspective the previous peak of 45.76 billion Euros for GDP was finally passed in the second quarter with its 45.88 billion.

 

 

 

 

Mario Draghi and the ECB prepare for a change of course next month

After a week where the UK has dominated the headlines it is time to switch to the Euro area.  This is for two reasons.  We receive the latest inflation data but also because a speech from European Central Bank President Mario Draghi has addressed an issue we have been watching as 2018 has developed. We have been waiting to see how he and it will respond to the economic slow down that is apparent. This is especially important as during the credit crunch era the ECB has not only been the first responder to any economic downturns it has also regularly found itself to be the only one. Thus it finds itself in a position whereby in terms of negative interest-rates ( deposit rate of -0.4%) and balance sheet ( still expanding at 15 billion Euros per month ) and credit easing still heavily deployed. Accordingly this sentence from Mario echoes what we have been discussing for quite a while.

The key issue at stake is as follows: are we witnessing a temporary “soft patch” or a more lasting deterioration in the growth outlook?

The latter would be somewhat devastating for the man who was ready to do “whatever it takes” to save the Euro as it would return us to discussions about its problems a major one of has been slow economic growth.

Some rhetoric

It seems to be a feature these days of official speeches that they open with what in basketball terms would be called a head fake. Prime Minister Theresa May did it yesterday with an opening sentence which could have been followed by a resignation and Mario opened with what could have been about “broad based” economic growth.

The euro area economy has now been growing for five years, and we expect the expansion to continue in the coming years.

Of course central bankers always expect the latter until there is no other choice. Indeed he confirms that line of thought later.

There is certainly no reason why the expansion in the euro area should abruptly come to an end.

As we move on we get an interesting perspective on the past as well as a comparison with the United States.

Since 1975 there have been five periods of rising GDP in the euro area. The average duration from trough to peak is 31 quarters, with GDP increasing by 21% over that period. The current expansion in the euro area, however, has lasted just 22 quarters and GDP is only around 10% above the trough. In contrast, the expansion in the United States has lasted 37 quarters, and GDP has risen by 21%.

The obvious point is whether you can use the Euro area as a concept before it even existed?! Added to that via the “convergence” promised by the Euro area founders economic growth should be better now than then, except of course we have seen plenty of divergence too. Also you might find it odd to be pointing out that the US has done better especially as the way it is put which reminds us that for all the extraordinary monetary action the Euro area has only grown by 10%. Even that relies on something of a swinging ball as of course he is comparing with the bottom of the dip rather than the past peak as otherwise the number would be a fair bit weaker. Mario is leaving a bit of a trap here, however, or to be more precise he thinks he is.

How have we got here?

First we open with two standard replies the first is that whilst any growth is permanent setbacks are temporary and the other fallback is to blame the weather.

The first is one-off factors, which have clearly played an important role in the underperformance of growth since the start of the year. In the first half of 2018, weather, sickness and industrial action affected output in a number of countries.

Actually that makes the third quarter look even worse as they had gone by then yet growth slowed. He is on safer ground here though.

Production slowed as carmakers tried to avoid building up inventory of untested models, which weighed heavily on economies with large automobile sectors, such as Germany. Indeed, the German economy actually contracted in the third quarter, removing at least 0.1 percentage points from quarterly euro area growth.

This is another marker being put down because it you are thinking that you might need to further expand monetary policy it is best to try to get the Germans onside and reminding them that they too have issues will help. Indeed for those who believe that ECB policy is essentially set for Germany it may be not far off a clincher.

There is something that may worry German car producers if they are followers of ECB euphemisms.

The latest data already show production normalising.

After all the ECB itself may not achieve that.

Trade

This paragraph is interesting on quite a few levels.

The second source of the slowdown has been weaker trade growth, which is broader-based. Net exports contributed 1.4 percentage points to euro area growth in 2017, while so far this year they have removed 0.2 percentage points. World trade growth decelerated from 5.2% in 2017 to 4.6% in the first half of this year.

Oddly Mario then converts a slow down in growth to this.

We are witnessing a long-term slowdown in world trade.

As we note the change in the impact of trade on the Euro area there are several factors in play. You could argue that 2017 was a victory for the “internal competitiveness” austerity model applied although when we get to the collective that is awkward as the Euro area runs a large surplus driven by Germany. From the point of view of the rest of the world they would like it to reduce although the preferable route would be for the Euro area ( Germany ) to import more.

Employment

Mario cheers rightly for this.

Over the past five years, employment has increased by 9.5 million people, rising by 2.6 million in Germany, 2.1 million in Spain, 1 million in France and 1 million in Italy.

I bet he enjoyed the last bit especially! But later there is a catch which provides food for thought.

 But since 2013 more than 70% of employment growth has come from those aged 55-74. This partly reflects the impact of past structural reforms, such as to pension systems.

Probably not the ECB pension though as we are reminded of “Us and Them” by Pink Floyd.

Forward he cried from the rear
And the front rank died
And the general sat
And the lines on the map
Moved from side to side.

Also whilst no doubt some of these women wanted to work there will be others who had no choice.

The share of women in work has also risen by more than 10 percentage points since the start of EMU to almost 60% – its highest level ever

Put another way this sentence below could fit into a section concerning the productivity crisis.

 In addition, countries that have implemented structural reforms have in general seen a rise in labour demand in recent years compared with the pre-crisis period. Germany, Portugal and Spain are all good examples.

There is a section on wages but Mario end up taking something of an each-way bet on this.

But in the light of the lags between wages and prices after a period of low inflation, patience and persistence in our monetary policy is still needed.

Money Supply and Credit

This is how central bankers report a sustained and considerable slow down in the money supply.

The cost of bank borrowing for firms fell to record lows in the first half of this year across all large euro area economies, while the growth of loans to firms stood at its highest rate since 2012. The growth rate of loans to households is also the strongest since 2012, with consumer credit now acting as the most dynamic component, reflecting the ongoing strength of consumption.

Also the emphasis below is mine and regular readers are permitted a wry smile.

Household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth.

Comment

We are being warmed up for something of a change of course in case it is necessary.

When the Governing Council met in October, we confirmed our confidence in the economic outlook………….When the latest round of projections is available at our next meeting in December, we will be better placed to make a full assessment of the risks to growth and inflation.

As if they are not already thinking along those lines! The next bit is duo fold. It reminds us that the Euro area has abandoned fiscal policy but does have a kicker for the future.

To protect their households and firms from rising interest rates, high-debt countries should not increase their debt even further and all countries should respect the rules of the Union.

The kicker is perhaps a hint that there is a solution to that as well.

In conclusion, I want to emphasise how completing Economic and Monetary Union has become more urgent over time not less urgent – and not only for the economic reasoning that has always underpinned my remarks, but also to preserve our European construction………….more Europe is the answer.

There Mario leaps out of his apparent trap singing along to Luther Vandross.

I just don’t wanna stop
Oh my love, a million days in your arms
Is never too much (never too much, never too much, never too much)

Podcast

 

What are the economic implications of Brexit?

Today there can only be one subject although as ever I will avoid the politics as much as is possible. Anyway at the current rate of progress anything on that subject would be out of date before I finished typing! At least in a world where the Brexit Secretary resigns over the Brexit deal. What exactly has he been doing these last few months? Let us move onto what is the debate over the economics and look at the outlook published by the International Monetary Fund or IMF yesterday.

IMF

The background is something that we are hearing from many establishments and central banks these days.

Moderate growth of just above 1½ percent is projected for the coming years, conditional on reaching a broad free trade agreement (FTA) with the EU and a smooth Brexit process.

Obviously the second part of the sentence is specific to the UK but both the Bank of England with its “speed limit” and the European Central Bank or ECB have been hammering out this bear. As ever the problem is how we got here? After all both central banks have indulged in monetary easing on a grand scale involving large interest-rate cuts, QE and credit easing. Yet the future is apparently not as bright as they promised. In essence we in Europe have a future that is a bit better than the past trajectory of Italy as we note that such views only cover what Chic called “Good Times” and mostly ignores recessions and setbacks.

The view from Tokyo is even worse where expanding the balance sheet of the Bank of Japan to more than 100% of GDP has led to the speed limit being between 0.5% and 1%. Is that the next step? Because if so a lot harder questions need to be asked about the way that central banks have been allowed to operate as borrowing from Peter to pay Paul has not gone anything like as well as they have claimed.

IMF View

Here is their base view on a no-deal Brexit.

On the downside, reverting to WTO trade rules, even in an orderly manner, would lead to long-run output losses for the UK of around 5 to 8 percent of GDP compared to a no-Brexit scenario. This is because of higher tariff and non-tariff trade barriers, lower migration, and reduced foreign direct investment.

The issue with that style of analysis is that in the long-run many things will change and we simply do not know what they will be. For example the UK would likely end up with higher trade tariffs with the European Union but might cut them elsewhere. Initially one would expect foreign investment to be lower due to the uncertainty but as time passes the UK may make moves – for example a mooted reduction in Corporation Tax – to offset that. Lower migration is the most likely to continue although as we have until now had little control over our borders it seems set to be driven by demand with fewer people wanting to come.

The IMF has a worse scenario for a disorderly situation.

A worst-case scenario would be a disorderly exit from the EU without an implementation period. In such a scenario, a sudden shift in investors’ preference for UK assets could lead to a sharp fall in asset prices and a hit to consumer and business confidence, which in turn would have adverse
impact on the balance sheets of households, firms and financial intermediaries. Sterling would depreciate further, raising domestic prices and affecting households’ real income and consumption. A disorderly exit is likely to lead to widespread disruptions in production and
services.

If we pick our way through this we open with what is mostly a euphemism for house prices which are of course supposed to be already falling. In fact I though and indeed hoped we would see a fall as they are too high but if we take yesterday’s official data we see that they were rising at an annual rate of 3.5% in September. One asset price that is surging today is the UK Gilt market where the long gilt future has risen over one point and the ten-year yield has fallen from 1.5% to 1.38%. As we have political turmoil right now and a disorderly departure is thus more likely this is awkward for the IMF. Of course the driving force in my opinion is investors seeing through the rather transparent “Forward Guidance” of Bank of England Governor Mark Carney and expectations of him pressing on his control P button. Last time around his “Sledgehammer QE” drove the ten-year Gilt yield as low as 0.5% so you can see what punters, excuse me investors may be thinking of.

If we move onto business investment then the IMF finds much firmer ground under its feet basically because of this. From last Friday’s GDP release by the Office for National Statistics.

being partially offset by a fall of 1.2% in early estimates of business investment.

The issue around consumer confidence is more complicated as some issues remain here as the IMF hints at.

At 8.1 percent yoy in August, consumer credit growth remains high relative to income growth.

What would happen to sterling? Well this morning;s circa two cent fall versus the US Dollar gives backing to the IMF view but of course we are already considerably lower than we were. So I do not expect a similar move unless there is a complete calamity. That brings in the trade issue where a calamity would mean trade at the ports and airports grinding to a halt. In the political shambles we are living through that is of course possible but you would think both sides would move heaven and earth to avoid it.

Comment

As you can see there is some solid backing for the IMF view but also more than a few areas which are debatable. To be fair it does hint at one of these itself.

New trade arrangements with countries outside the EU could offset some of losses on trade with the EU over the long run.

The exact balance is simply unknowable. For example in the short-term one would expect trade in goods and services to be affected but over time new products and methods will apply. Philosophically this type of steady-state analysis will always look bad because any change on this scale will have dislocations but any possible benefits are for the future and are therefore unpredictable. Indeed there is always a lot of doubt about such matters. Let me illustrate this with something from the IMF as recently as July 4th on the subject of Germany.

In the first quarter of 2018, growth slowed to 0.3 percent (qoq), reflecting a normal correction following unusually strong growth in late 2017 and temporary factors (strikes, a particularly nasty flu outbreak, and early Easter holidays).

Is the flu outbreak ongoing as we mull this from the German statistics office yesterday?

The Federal Statistical Office (Destatis) reports that, in the third quarter of 2018, the gross domestic product (GDP) shrank by 0.2% on the second quarter of 2018 after adjustment for price, seasonal and calendar variations. This was the first decline recorded in a quarter-on-quarter comparison since the first quarter of 2015.

That reduced the annual rate of GDP growth to 1.1% or half of what the IMF forecast for this year (2.2%) and pretty much half of what was forecast for next year (2.1%).

Next let me move to the UK consumer which I have dodged so far and maybe the most unpredictable of all. The reason for this is it is entwined with Bank of England policy and the IMF did its best to rewrite history tucked away in its report.

Mortgage rates are at record low levels in part due to intense bank competition.

After all the Bank of England moves to reduce mortgage rates ( remember its own research suggested a nearly 2% fall in them due to the Funding for Lending Scheme on its own) that is breathtaking! Any “intense bank competition” has been driven by the policy of “the spice must flow” to the banks.

Which brings me to my next suggestion which is the surge in the UK Gilt market is in my opinion due to it rejecting the Forward Guidance of “limited but gradual interest-rate rises” of Mark Carney and the Bank of England. Instead expectations of Sledgehammer QE 2.0 which if you recall in its madness drove the ten-year Gilt yield to 0.5% seem to be at play. Perhaps a Bank Rate cut to what after all is the “emergency” rate of 0.5% too.

So how do you think the UK consumer would respond now?

Number Crunching 

Is everything 1.5% these days? From the IMF about UK Bank Rate.

The nominal policy rate is still below the Fund staff’s estimated neutral rate of about 1½ percent