Can we Test and Trace for UK GDP?

Due to the economic impact of the Covid-19 pandemic we are even more keen than usual to peer under the bonnet of the economy. There is an irony in that in normal times I advise care with the monthly economic output or GDP data and there are obvious reasons to think that is exacerbated now. But we are where we are and here it is.

Monthly real gross domestic product (GDP) is estimated to have increased by 0.8% in May 2021 as coronavirus (COVID-19) restrictions continued to ease to varying degrees in EnglandScotland and Wales. This is the fourth consecutive month of growth, albeit slower compared with March (2.4%) and April (2.0%).

In ordinary times monthly growth of 0.8% would be at party levels but the main point here is that things look to have slowed from what we had in March and April. However we now have four months in a row of growth and some factors are shifting towards a more normal setting.

The service sector grew by 0.9% in May 2021 – accommodation and food service activities grew by 37.1% as restaurants and pubs welcomed customers back indoors following the easing of coronavirus restrictions.

The default setting for the UK is for growth in the services sector to lead the economy and it looks to be back. On a personal level I saw quite a bit of filming going on by the lake in Battersea Park earlier this week suggesting that industry is getting back into its groove although that is a couple of months ahead of the numbers today. For them we were told this.

Consumer-facing services grew by 3.2% as coronavirus restrictions continued to ease throughout May, with output levels now at the closest to their pre-pandemic level, at just 7.8% below. Despite growth in consumer-facing services, it is travel, transport and other personal services that continue to contribute to output remaining below pre-pandemic levels.

That can be broken down to this and at the end we see that the film industry looks to have been picking up in May as well.

Food and beverage services activities was the main contributor to the growth in consumer-facing services, growing by 34.0% in May 2021 as restaurants and pubs could serve the public indoors for part of the month. Strong growth means that the industry is now 9.4% below its pre-pandemic level (February 2020), but 0.3% above its August 2020 peak when the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants. Arts, entertainment and recreation also contributed positively to consumer-facing services growth, growing by 7.3%.

Education and Health

Two of the sectors most affected by the pandemic and it has led to quite a lot of issues as to how this is measured in economic terms and in particular for GDP.

education output contributed negatively to gross domestic product (GDP) in May 2021, as it fell by 0.5% compared with the previous month. Weighted attendance (taking into account the impact of remote learners) for May 2021 was approximately 91.6%, compared with 93.0% in April 2021.

Whilst in many ways this is worthy stuff there does anybody really believe that weighted attendance is accurate to a decimal point? Next up is health and for foreign readers there have been a lot of questions in the UK about the Test and Trace scheme and how effective it has been which provides a background to this.

Human health activities returned to growth, growing by 0.3% in May 2021. Output levels also remain high, driven by NHS Test and Trace services, and vaccine schemes across the UK.

The vaccine is rather different as it has been a success. The measurement is an issue because I have my doubts about how they get to this.

These adjustments are applied to both the government expenditure data as well as output data, and are applied only to volume data .

Reinforced by this bit.

we have used the latest available quarterly government data

Hang on this is a monthly series. I am not sure the detail improves things much as how accurate can it be?

the estimated cost to secure and manufacture vaccines for the UK and deploy vaccines in England, and testing and vaccination data, and estimated imports – and applied indicative volume adjustments to preserve the growth within the health sector and its impact on the economy, rather than applying an adjustment to preserve the level that could give an incoherent growth.

If we take it out of the figures we get quite a different pattern because March was then 1.3%, April was 2.4% and May 0.9%. So whilst growth is lower the pattern changes quite a bit because essentially GDP was assumed to surge in March via the above and we have taken just under half of it away since.

Another Disaster For the Markit PMI Survey

These matter not only in themselves but because central bankers rely on them. Regular readers may recall the Bank of England’s absent minded professor Ben Broadbent revealing this in the autumn of 2016 as he tried to explain how he had got things so wrong. That theme continues here as we note this.

LONDON, June 1 (Reuters) – A deluge of new orders helped to drive a record increase in British manufacturing activity last month as the economy began to recover from the COVID-19 pandemic, a survey showed on Tuesday.

The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose to 65.6 in May from 60.9 in April.

Okay so this morning’s data showed quite a surge then?

The manufacturing sector remained broadly flat, contracting slightly for a second consecutive month, by 0.1%. Production in 6 out of the 13 manufacturing sub-sectors fell in May 2021.

So for the second month in a row they have predicted growth like a rocket and have seen a fall. Those who followed my analysis of how this went so badly wrong in Ireland will have a clue as in the case of the “pharmaceutical cliff” one large producer of a anti-cholesterol drug went off patent but was only one down tick in one hundred up-ticks, well here is the UK version.

 The largest contribution to the fall came from the manufacture of transport equipment, falling by 16.5%, as microchip shortages disrupted car production.

Didn’t pretty much everyone know that? The same happened in France and from this mornings release probably in Italy as well so as Britney would say it is a case of.

Hit me, baby, one more time


Returning to more like normal as lockdown eases seems to have had a negative effect here.

Construction output fell for a second consecutive month in May 2021, by 0.8%, following exceptionally strong growth in February and March, and an upwardly revised 0.7% decline in April 2021. Despite the fall, construction remains the only sector to have output levels at above its pre-coronavirus (COVID-19) pandemic level (February 2020).

I have long had my doubts about the measurement here and there was an official confession about problems a few years ago.


We can take a further perspective from this.

Overall, GDP grew by 3.6% in the three months to May 2021, mainly because of strong retail sales over the three months, increased levels of attendance as schools reopened from March, and the reopening of food and beverage service activities

Overall that is a solid performance but there is both a ying and a yang in the number below.

remains 3.1% below the pre-coronavirus (COVID-19) pandemic levels seen in February 2020.

So we are still well behind where we were in spite of the further progress we have made. So still a little sobering as we hope to get right back where we started from in say the winter of this year.

Mind you there is one area which has seen quite a surge.

Persimmon sales rose above pre-pandemic levels in the first half of 2021, as tax cuts and booming British house prices continued to benefit housebuilders.

The UK’s largest housebuilder said on Thursday that revenues reached £1.84bn in the first six months of 2021, outstripping the £1.75bn recorded in the same period of 2019. Persimmon’s sales had dropped to £1.2bn during the first half of 2020. ( The Guardian )

Rethinking The Dollar

I did an interview yesterday which from the comments placed already seems to have gone well.

Retail Sales in Italy are struggling again

Last night it was a case of Forza Italia after the success in reaching the Euro 2020 ( yes we all know it is 2021) football final. It was an especially ice cold final penalty from Jorginho who is having quite a summer. Sadly the economic news is not hitting such heights.

In May 2021 estimates for seasonally adjusted index of retail trade slightly increased by 0.2% in value terms, likewise volume rose by 0.4% in the month on month series.( Istat)

As you can see retail sales have improved but not by much although if we take a bit more perspective things look a bit better.

In the three months to May 2021 value of sales increased by 3.3% when compared with the previous three month period, while volume was up 3.5%.

Although that more positive view comes with the kicker of an apparent slowing which is rather familiar to followers of the Italian economy. The annual comparison has slowed from the 30% growth of the previous month but of course such figures are very distorted a bit like being in a hall of mirrors at a fun fair.

Year on year, value of retail trade continued its growth, increasing by 13.3% and volume sales grew by
14.1% comparing to May 2020, when non-essential retail stores were partially closed due to pandemic

But we can learn something from this.

Despite the growth, in May 2021 total retail
sales levels for both value and volume were still lower than pre-pandemic levels of February 2020.

The May volume index was at 99 where 2015 was 100. So volumes are below where they were when the index was set and if we look at May 2019 at 99.4 slightly below it. This is rather different to the chart presented because it is for values and not volumes. Italy has had some sales growth since 2015 but in essence the inflation seen takes it away as we convert to volumes. So we are back in “Girlfriend in a coma” territory.

The pattern of changes is similar to elsewhere it is just there is less of it in total.

Looking at the value of sales for non-food products, all sectors witnessed growth apart from Computers and
telecommunications equipment (-4.0%). The largest increase were reported for Clothing (+82.3%) and
Shoes, leather goods and travel items (+59.7%).

National Accounts

At the beginning of the month we learnt that the numbers suggested the situation would be better now.

Gross disposable income of consumer households increased by 1.5% with respect to the previous quarter, while final consumption expenditure decreased by 0.6%. As a consequence, the saving rate was 17.1%, 1.8 percentage points higher than in the last quarter of 2020. In real terms, gross disposalble income of consumer households increased by 0.9%.

So there is money available to be spent.

Whilst we are here we can note that the state has been supporting the economy too.

In the first quarter of 2021 the GG net borrowing to Gdp ratio was 13.1% (10.6% in the same quarter of 2020).

Taxes were 41.6% of GDP but expenditure was 54.8%. This leads us to the national debt which was 155.8% of GDP at the end of 2020 and as of April was 2.68 trillion Euros.


This is something that at first sight looks a positive highlighted by the most recent data.

In May 2021 the trade balance with non-EU27 countries registered a surplus of 4,767 million euro compared
to the surplus of 4.114 million euro in May 2020; excluding energy, the surplus was equal to 7,681 million
euro, up compared with a 5,201 million euro surplus in May 2020.

The annual comparisons are of course distorted but my initial point is that Italy has run a consistent surplus. We have to go back to April for the full figures including the EU but we remain at this point with what looks like a success economy via its trade surplus.

As ever care is needed because exports have risen since the Euro area crisis but there is a familiar point about under performance here. That is in this instance relative to its peers. But we do see weak internal demand from the pattern of retail sales we looked at earlier and that would feed into imports.

This brings us to one of the debates which is between whether it is good to have a trade surplus or a deficit? The answer mostly comes from the Talking Heads lyric “How did I get here”. A surplus can indicate a competitive economy and there are parts of the Italian economy that deserve that moniker. But in a 2018 paper from the LSE it was suggested that things may have hit trouble there. The emphasis is mine

Importantly, we find evidence that misallocation has increased more in sectors where the world technological frontier has expanded faster when, in the wake of Griffith et al, we measure the speed of technological change in a sector by the average change of R&D intensity in advanced countries. Relative specialisation in those sectors explains why, perhaps surprisingly, misallocation has increased particularly in the regions of Northern Italy, which traditionally are the driving forces of the Italian economy.

In terms of scale the issue was/is very significant.

With these definitions in mind, we study the universe of Italian incorporated companies over the period from 1993 to 2013. We find strong evidence of increased misallocation since 1995 (see Figure 3). If misallocation had remained at its 1995 level, aggregate TFP in 2013 would have been 18% higher than its current level. This would have translated into 1% higher GDP growth per year, which would have helped to close the growth gap with France and Germany.

TFP is their productivity measure or Total Factor Productivity.

Maybe it is linked to this issue.


The European Commission has just released an upbeat forecast starting with something not often written about Italy’s economy.

Economic activity proved more resilient than expected and increased slightly in the first quarter of this year,
despite stringent containment measures.

They now think this.

Performance data from the manufacturing sector and business and consumer surveys suggest that real GDP growth gained further momentum in the second quarter and should strengthen markedly in the second half of the year. On an annual basis, real GDP growth is expected to reach 5.0% in 2021 and 4.2% in 2022. The forecast for 2021 is significantly higher than in spring.

However one hope seems to be struggling if the retail sales numbers are a guide.

Private consumption is expected to rebound sizeably, helped by improving labour market prospects and the gradual unwinding of accumulated savings.

The overall picture looks very Japanese doesn’t it as we note the national debt, trade surplus and weak domestic demand? That brings us back to the Turning Japanese theme.

The Financial Times is bullish, however.

By April, goods exports were 6 per cent above January 2020 levels — the strongest growth rate of any major eurozone economy, compared with rates of less than 1 per cent in France and Germany. As a result, Italy’s goods trade surplus has surged since the start of the pandemic.

Although it is nice to see Italy outperform for once.

This is helping to ease the economic impact of the pandemic. Italy was the only major eurozone economy to grow in the first quarter of this year. Its output expanded by 0.1 per cent from the previous three months; by contrast, the eurozone as a whole logged a contraction of 0.3 per cent.

The problem for Italy remains that it does not grow much more than that in the good times.

The Reserve Bank of Australia decides to look away from surging house prices

We have an opportunity to take a look at a land which is both down under and a place where beds are burning, at least according to Midnight Oil. This is because the latest central bank to emerge blinking into the spotlight is the Reserve Bank of Australia or RBA. Here is its announcement.

  • retain the April 2024 bond as the bond for the yield target and retain the target of 10 basis points
  • continue purchasing government bonds after the completion of the current bond purchase program in early September. These purchases will be at the rate of $4 billion a week until at least mid November
  • maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent.

Perhaps they thought that announcing the interest-rate decision last would take the focus off it. A curious development in that who expects a change anyway? A sort of equivalent of an itchy collar or guilty conscience I think. Along the way they have reminded us that they also have a 0% interest-rate and I guess most of you have already figured that it of course applies to The Precious.

Exchange Settlement Accounts (ESAs) are the means by which providers of payments services settle obligations that have accrued in the clearing process.

As someone who has spent much of his career in bond markets I rather approve of starting with a bond maturity but what is taking place here is a little odd. This is because as time passes their benchmark of April 2024 is shortening as for example it is now 2 years and 9 months. For example that is below the minimum term that the Bank of England will buy ( 3 years) and also central banks have in general been lengthening the terms of their QE buying arguing that such a move increases the impact.

If you think the above is an implicit way of cutting QE there is then the issue that it has been extended until November although with around a 20% reduction in the rate of purchases. That is similar to the Bank of England.

As ever they think they can get away with contradicting themselves because the economy needs help apparently.

These measures will provide the continuing monetary support that the economy needs as it transitions from the recovery phase to the expansion phase.

But only a couple of sentences later it is apparently going great guns.

The economic recovery in Australia is stronger than earlier expected and is forecast to continue. The outlook for investment has improved and household and business balance sheets are generally in good shape.

So do all states of the economy require support these days?

The Economy

The latter vibe continues as we note this.

National income is also being supported by the high prices for commodity exports.

That boost may well carry on if the analysis in The Conversation turns out to be accurate.

The panel expects actual living standards to be higher than the bald economic growth figures suggest.

This is because high iron ore prices boost Australians’ buying power (by boosting the Australian dollar) and boost company profits in a way that isn’t fully reflected in gross domestic product.

In recent months, the spot iron ore price has been at a record US$200 a tonne, a high the budget assumes will collapse to near US$63 by April next year as supply held up in Brazil comes back online.

The panel is expecting the iron ore price to stay high for longer than the Treasury — for at least 18 months, ending this year near a still-high US$158 a tonne.

So a windfall for Australia although they have omitted the “Dutch Disease” issue where the higher Aussie Dollar they mention deters other sectors of the economy such as manufacturing.

Another signal is going well according to the RBA.

The labour market has continued to recover faster than expected. The unemployment rate declined further to 5.1 per cent in May and more Australians have jobs than before the pandemic.

There may even be hope for some wages growth.

Job vacancies are high and more firms are reporting shortages of labour, particularly in areas affected by the closure of Australia’s international borders.

Although later it appears to think it will take quite some time.

The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

House Prices

The situation is in rude health from a central banking perspective.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.

Well if you will pump it up as we note that “investors” are on the case.

The final draw-downs under the Term Funding Facility were made in late June. In total, $188 billion has been drawn down under this facility, which has contributed to the Australian banking system being highly liquid. Given that the facility is providing low-cost fixed-rate funding for 3 years, it will continue to support low borrowing costs until mid 2024.

This is a type of copy cat central banking where the RBA has copied the policy which has juiced the UK housing market. Looking at the credit data there is a lot of investor activity as total mortgage credit for that category was 669 billion Dollars at the end of May as opposed to 1.258 trillion for owner-occupiers.

Anyway here is the consequence.

CoreLogic’s monthly home price index rose 1.9 per cent in June, led by 3 per cent growth in Hobart and 2.6 per cent in Sydney.

The index rose 13.5 per cent over the past financial year just ended, with Darwin (+21pc), Hobart (+19.6pc), Canberra (+18.1pc) and regional markets (+17.7pc) leading the way.

That is the strongest annual rate of growth recorded by CoreLogic nationally since April 2004.


Switching to the supposed target then things are in hand as long as you ignore the above.

In the central scenario, inflation in underlying terms is expected to be 1½ per cent over 2021 and 2 per cent by mid 2023. In the short term, CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter because of the reversal of some COVID-19-related price reductions a year ago.


There are quite a few familar themes here as we note that even recoveries these days need support rather than the old standard of taking away the punch bowl just before the party gets really started. I think we can safely say that the housing  market has the volume turned up if not to 11 very high. This means that for central bank action we return to the prophetic words of Glenn Frey and Don Henley of The Eagles.

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

There is an Australian spin in the way that all roads here seem to lead to 2024. Is that a type of release valve? It looks like that at first but there is a catch. We have seen that central banks may reduce the rate at which they buy bonds under QE but they never reverse it. The one main effort by the US Federal Reserve was followed by it buying ever more. In the end central banking roads have so far ended at this destination.

Come on let’s twist again,
Like we did last summer!
Yeaaah, let’s twist again,
Like we did last year! ( Chubby Checker )

Where next for the economy of France?

Sometimes we find that one segment of news does fit more than one piece of the economic puzzle. This morning that has come from La Belle France.

In May 2021, output decreased in the manufacturing industry (–0.5%, after –0.1%), as well as in the whole industry (–0.3%, after +0.1%). Compared to February 2020 (the last month before the first general lockdown), output remained in sharp decline in the manufacturing industry (–6.9%), as well as in the whole industry (–5.6%). ( INSEE )

Late spring saw a couple of declines in manufacturing which caught out the forecasters mostly I would imagine because of this.

The easing of COVID-19 lockdown restrictions contributed
to a further strong improvement in business conditions in
the French manufacturing sector during May. Output and
new orders both increased at accelerated rates. ( Markit IHS PMI)

In fact they went further.

The seasonally adjusted IHS Markit France Manufacturing
Purchasing Managers’ Index® (PMI®) – a single-figure
measure of developments in overall business conditions –ticked up to 59.4 in May from 58.9 in April, signalling a further substantial improvement in business conditions in the French manufacturing sector, and one that was the most marked since September 2000.

A reading of the order of 60 is supposed to be up,up and away growth not the contraction that was seen. Just in case it was some sort of quirk they rammed the output point home.

The trend in new orders was matched by that for output, with production increasing at the sharpest pace since January 2018.

Car Production

There was no magic bullet here as the main issue came from an area one should have been expecting after all the reports about chip shortages causing problems for modern vehicles, which use so many of them.

In May, output fell back sharply in the manufacture of transport equipment (–5.4% after –0.8%) due to shortages of raw materials in the automotive industry.

Manufacturing for the transport sector in France peaked in December of last year when it made 94.1 where 2015 equals 100. Since then it has been downhill with a very sharp fall of the order of 10 points in February and now we are at 76.2.

In terms of a breakdown we have this which compares to pre pandemic levels.

It slumped in the manufacture of transport equipment (−29.7%), both in the manufacture of other transport equipment (−30.0%) and in the manufacture of motor vehicles, trailers and semi-trailers (−29.2%).

So it is this sector with a little help from a 13.3% fall in the fuel sector that fas dragged things down. The other areas have done much better with some even managing a little growth.

Compared to February 2020, output declined more moderately in “other manufacturing” (−4.0%) and in the manufacture of machinery and equipment goods (−4.4%). Output was above its February 2020 level in mining and quarrying, energy, water supply (+1.9%) and in the manufacture of food products and beverages (+0.9%).

There have been some wild swings with of course the annual figures looking quite a triumph until you see what they are being compared with.

Over this one-year period, output bounced back sharply in the manufacture of transport equipment (+46.1%), in the manufacture of machinery and equipment goods (+35.4%) and in “other manufacturing” (+30.4%).

Overall Economy

After the above you might like to take the next bit with a pinch of salt as we see what Markit IHS tell us from their latest survey on the French economy.

We’ve witnessed a complete quarter of growth for the first
time since the pandemic began, and the growth
momentum needed to drive a sustained recovery is
likely to build as pent-up demand is released and operating capacities expand.

Bank of France

Its projections are upbeat and tell us this.

After dropping markedly in 2020, French economic activity is experiencing a strong rebound in 2021. Following a start to the year marked by ongoing public health restrictions, the phased lifting of the lockdown and acceleration of the vaccination campaign should allow the economy to recover in earnest in the second half. According to our economic surveys, economic activity started to recoup lost ground in the second quarter, despite the emergence of supply difficulties in certain sectors. It should rebound particularly strongly in the third and fourth quarters, as the gradual easing of the public health restrictions leads to strong household consumption growth.

In terms of specific numbers we get this.

In 2021, GDP is projected to expand by 5¾% in annual average terms (which is higher than the euro area average of 4.6%). It should then grow by 4% in 2022 and by 2% in 2023

Which means this.

Activity should start to exceed pre-Covid levels as of the first quarter of 2022, which is one quarter earlier than foreseen in our March projections.

A lot of this is  the by now familiar idea of the savings that have been built up mostly involuntarily will be spent.

The strong GDP growth should essentially be driven by domestic demand in 2021 and 2022, both from consumption and investment. Household purchasing power was on the whole preserved in 2020, and should start to rise again in 2021 and 2022. Household consumption and investment spending are expected to accelerate further in 2022 thanks to the excess savings accumulated previously.

They are a little more specific here and as they do not say the savings ratio was previously 4-5%.

and the household saving ratio should decline from 22% in the second quarter of 2021 to 17% in the final quarter of the year, and then to below its 2019 level in 2022 and 2023

We can also put this “wave” in terms of Euros.

After reaching EUR 115 billion at the end of 2020, the financial savings excess is expected to rise at a more moderate pace in 2021, thanks to the fall in the household saving ratio , and should peak at up to EUR 180 billion at end-2021.


If we remain in the territory of the Bank of France there are various different stories in play. It tells us this.

Inflation as measured by the Harmonised Index of Consumer Prices (HICP) has risen significantly in recent months, climbing from 0.8% in February 2021 to 1.6% in April 2021.

We can update that to 1.8% in May continuing the upwards move which Isabel Schnabel of the ECB wants more of.

higher inflation prospects need to visibly migrate into the baseline scenario, and be reflected in actual underlying inflation dynamics,

Well it can be found in the Markit survey.

Finally, survey data revealed intensifying price pressures
during June. Cost inflation reached a 17-month high,
linked to greater supplier fees and shortages of inputs. The
combination of strong demand and rising expenses led firms to hike their selling charges in June. Furthermore, the rate of output price inflation was the steepest in almost a decade.

Or if they take a look at the cost of buying a house.

In Q1 2021, the house prices in metropolitan France continued to rise, but slowed down a bit: +1.3% compared to the previous quarter with seasonnally adjusted (s.a.) data, after +2.3% in Q4 2020. Year on year, house prices increased this quarter (+5.5% after +5.8%).


The situation is officially positive backed up by today’s PMI survey. But the official manufacturing data driven by the problems in the transport sector suggest a doubt. To that we can add this.

PARIS, July 4 (Reuters) – Health Minister Olivier Veran on Sunday urged as many French people as possible to get a COVID-19 vaccine, warning that France could be heading for a fourth wave of the epidemic by the end of the month due to the highly transmissible Delta variant.

That would be awkward just after this.

France lifted the last of its major restrictions on Wednesday, allowing unlimited numbers in restaurants, at weddings and most cultural events, despite fast-rising cases of the Delta variant. ( the national news)

So we wait and see what happens next especially in these areas.

and the start of a return to normal in tourism and aeronautics, France’s stronghold export sectors ( Bank of France)


The Covid Pandemic poses new challenges for the use of GDP

This week has brought rather a flurry of news about UK GDP as we have changed this century and today the last quarter. Let us start with this morning’s headline.

UK gross domestic product (GDP) is estimated to have decreased by 1.6% in Quarter 1 (Jan to Mar) 2021, revised from the first estimate of a 1.5% decline.

The level of GDP is now 8.8% below where it was pre-pandemic at Quarter 4 (Oct to Dec) 2019, revised from a first estimate of 8.7% below.

So a marginal downgrade but not much in the scheme of things. However there is a fair bit going on below the surface including something which I was the first to point out last summer.

Nominal GDP fell by a revised 0.2% in Quarter 1 2021, while the implied deflator increased by 1.4%. Compared with the same quarter a year ago, the implied GDP deflator increased by 4.8%, mainly reflecting an increase in the implied price change of government consumption.

The nominal GDP issue is a consequence so let us zero in on a cause which is the way that the widest inflation measure in the economy has been bounced around by the way we measure real government consumption. Compared to other inflation measures a quarterly rise of 1.4% and an annual one of 4.8% is a lot. For example we were being told back then there was very little consumer inflation.

The Consumer Prices Index (CPI) rose by 0.7% in the 12 months to March 2021, up from 0.4% to February.

Education Education Education

The famous phrase from former Prime Minister Tony Blair has echoed in the GDP numbers.

The downward revision in education output reflects a monthly reprofiling of education output across the first quarter of 2021 because of updated attendance data, and estimates reflecting the effect of remote learners.

We end up with an Alice Through The Looking-Glass situation caused by this.

In volume terms, the measurement of education output is based on cost-weighted activity indices.

In theory a good idea but in practice this has happened.

have required us to keep innovating…….we have reviewed and aligned our measurement approaches …….We have also adapted our measurement for the further school closures and change in policy regime in the first few months of 2021,

Whilst these are worthy efforts you get big swings as for example the initial impact of the changes was to reduce the numbers by £2.3 billion or to reduce that quarters GDP by 0.5%. This time around the change had a smaller impact but it was still this.

The move to remote learning for the majority of pupils was the largest contributor to the 2.1% fall in services output in Quarter 1 2021

Education went from -0.86% to -1.06% in the services numbers via the latest revision.

Nominal GDP

There is a bit of a defeat here for the methodology as we are guided towards ones with no inflation measure or deflator at all.

Nominal GDP estimates – which may be more comparable –show that Canada and the United States are now above their Quarter 4 2019 levels.

There are two sides to this as for example it makes no difference ( okay 0.1%) for Japan as you might expect, But if you compare the UK with Spain it makes an enormous difference. Using the real GDP numbers we have both seen falls of around 9% but using nominal GDP the UK has seen a fall of 3% and Spain 8.7%.


These numbers regularly see significant revisions and we have both the pandemic and the final Brexit move to add to the issues. So we are about as uncertain as we ever are about the latest numbers so let me switch to another issue highlighted in the deeper series.

The UK’s net international investment position liability position narrowed by £56.4 billion to £582.9 billion as the revaluation impact on UK debt securities decreased the value of UK liabilities more than the fall in the value of UK assets.

They do their best but they simply do not know this as it gets worse as you delve deeper.

In Quarter 1 2021, the gross asset and liability positions decreased by £446.5 billion and £502.8 billion respectively. This was mostly because of a large decrease in financial derivative activity as market volatility continued to recede from the height of the coronavirus (COVID-19) pandemic.

So I suggest you take any investment position data with the whole salt cellar. The numbers depend entirely on assumptions which frankly have a tenuous grip on reality and sometimes not even that.


There has been a deeper review of things and it has led to this which does feed into one of my themes. That is that things were not as good pre credit crunch as was recorded at the time.

average annual volume GDP growth over the period 1998 to 2007 is now 2.7%, revised down from 2.9%; average annual volume GDP growth stands at 2.0% from 2010 to 2019, revised up from 1.9%.

A factor in play here has been something I have mentioned before which has been the work of Diane Coyle on inflation in the telecoms sector.

In addition, we have introduced new ways of removing the effects of price changes in both the telecoms and clothing industries. These mean ‘real’ GDP (where we’ve removed the impact of price changes) grew a little less than we previously estimated in the years before the financial crisis and a little more in the years after it.

They hope this will allow them to allow for inflation more accurately.

To give an example, when previously estimating the value of goods produced from a furniture maker over time we would measure the value of the tables being sold, remove the cost of the wood, then adjust for inflation by removing the changing cost of the tables only. Under the new system we will separately be removingthe impact of inflation from the changing cost of the wood and the changing cost of the tables, giving an improved and more detailed estimate of changes in the economy.

That will be interesting to follow but sadly will not help with the education issue because the problem there is that there is no price in the first place.

Also  this change should help with the issue I reported to the Bean Review which was over the lack of detail in services data and trade especially.

we will also introducea new Financial Services Survey, which will give much more detailed information about the activities and outputs of the financial sector, which makes up around 7% of GDP.


As you can see there is much more doubt than we are usually told and we can take a sideways look at another issue. Remember my official complaint about the claimed surge in wages? Well it would appear that the GDP numbers agree with me.

Wages and salaries increased by 0.4% in Quarter 1 2021,

Looking at this series wages growth over the past year is 3% in nominal terms as opposed to the 4.5% in the average earnings series.

Let me switch now to a subject in the news if you follow military matters which in my opinion is an issue for GDP.

New light tanks that have so far cost the army £3.2 billion have been withdrawn for a second time after more troops reported suffering hearing loss during trials,has learnt.All trials involving the Ajax armoured vehicle were paused in mid-June on “health and safety grounds” amid concerns that mitigation measures put in place to protect soldiers — including ear defenders — were not sufficient. ( The Times)

This may end up being a debacle like the Nimrod programme. But how do you measure it in GDP terms? For the income version it is easy as people have been paid so you count it. But for the output version we face the prospect that there will not be any. If you are feeling generous you might make an R&D allowance but of what 10% of what has been spent…. It seems some aspects of military procurement love their Arcade Fire.

If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back
You know I would love to waste it again
Waste it again and again and again

What can we expect next from the Bank of England?

Welcome to Super Thursday as it is Bank of England day. Well of a sort anyway as they actually voted yesterday evening in one of former Governor Mark Carney’s changes where he preferred bureaucratic convenience( having the Minutes ready) over the risk of a market leak. The latter has in fact happened with if I recall correctly The Sun newspaper being in the van of providing an “early wire” into the last QE expansion.

There is a particular significance due to the change in the situation and this was highlighted yesterday by some news from the United States.

Now the one thing you said, which is something that we are looking at, is that when I talk to businesses, they are saying that it’s going to be temporary, but temporary is going to be a little longer than we had expected initially. So rather than it being a two- to three-month, it may be a six- to nine-month factor. And this is something that we’re going to have to pay attention to see if that changes how people approach the economy.

That was Raphael Bostic of the Atlanta Fed and the emphasis is mine. It was not only me noting that as the next question from NPR shows.

KING: And if it is six to nine months, as opposed to two to three months, is there something specific that the Fed should be doing?

The reply is fascinating.

BOSTIC: Well, I think there are a couple of things that we would do. First of all, we’d monitor very closely what’s happening with expectations. That is the key to determining whether there are some real structural changes in how the economy is playing out. And then the second is really to dive deeper into this to see if there are things that policymakers might be able to do to break the – those dynamics and leave the crisis to return to normal.

So basically nothing and here he is later explaining that.

We’re still 7.5 million jobs short of where we were pre-pandemic, and that is a benchmark that I think we all need to keep our eye on.

Later he told reporters this.

“Given the upside surprises and recent data points, I pulled forward my projection for a first move to late 2022” Adds he has 2 moves in 2023 ( @bcheungz )

So not much use for now and in fact it gets worse because he is projecting interest-rate moves for years in which he is a non-voter. Also there was a question which will have discomfited them as it asked about an area they normally ignore which is necessities which in central banking terms are mostly non-core.

Are we seeing the rise – a rise in prices of basics, things that families need, like bread and milk and diapers?

Pack animal behaviour

The reason I am emphasising the points about is that these days central bankers the world around are mostly like clones. So they believe and do the same things, to the extent that they believe anything. Thus the points made apply to the Bank of England as well. So it too is more bothered about unemployment than inflation. It too will look through the recent inflation rise and will suggest interest-rate rises that are far enough away to be meaningless as right now we can only see a few months ahead.Actually the Bank of England has already played that card when Gertjan Vlieghe told us this at the end of last month.

In that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, with
some modest further tightening thereafter.

There is a curious link in that he will not have a vote then like Raphael Bostic. But the point is the same especially as we recall the period of Forward Guidance with all its promises of interest-rate rises when in fact the next move was a cut.


This is an issue with several contexts. The simplest is that we are now above the inflation target and with the numbers from producer prices look set to remain there for at least a bit. Then there is the way that the numbers ignore the rises in house prices which are well above such levels.

UK average house prices increased by 8.9% over the year to April 2021, down from 9.9% in March 2021.

This was reinforced yesterday by a metric which the Bank of England regularly tells us it follows as the Markit PMI headline included this.

 but inflationary pressures also strengthen

It went on to ram the point home.

Also hitting previously unsurpassed levels, however, were rates of inflation of input costs and output prices as supply-chain disruption fuelled price pressures.

And later.

The rate of input cost inflation accelerated for the fifth month running and was the joint-fastest on record, equal with that seen in June 2008. While inflation continued to be led by the manufacturing sector, service providers also posted a marked increase in input prices. In turn, the rate of output price inflation hit a fresh record high for the second month running.

The Economy

The same survey told us it was pretty much full speed ahead.

Businesses are reporting an ongoing surge in demand in
June as the economy reopens, led by the hospitality sector,
meaning the second quarter looks to have seen economic
growth rebound very sharply from the first quarter’s decline.

I did my little bit by going out for some drinks and dinner, the first tome I has been out in that way for 7 months.


A picture like that would have conventional central bankers taking away the stimulus and maybe even raising interest-rates. According to Getjan Vlieghe that was all wrong.

First, given the proximity of the effective lower bound (even with the possibility of modestly negative rates),
tightening too early would be a much costlier mistake than tightening too late

A curious assertion considering we have seen interest-rates only reach 0.75% Next is a curiosity as central bankers keep chanfing their mind on this as I recall the ECB telling us that policy responses had slowed.

Second, monetary policy does, in fact, work quite quickly

Indeed he rather contradicts his prediction of future interest-rate rises.

That was apparent before we were hit by the Covid shock, when Bank Rate was just 0.75% and inflation pressures were too weak.

If 0.75% was too high then and things are worse now well you do the maths.

As you can see there are good reasons for the Bank of England to change course but I do not expect it too and today will be unchanged. It seems set to mimic the four stage plan described in Yes Minister.

Sir Richard Wharton“In stage one, we say nothing is going to happen.”

Sir Humphrey Appleby“Stage two, we say something may be about to happen, but we should do nothing about it.”

Sir Richard Wharton“In stage three, we say that maybe we should do something about it, but there’s nothing we can do.”

Sir Humphrey Appleby“Stage four, we say maybe there was something we could have done, but it’s too late now.”




The UK Services sector powered GDP ahead in April

This morning has brought a combination of good news and what used to be familiar news for the UK economy. If we start with the good we see this.

UK gross domestic product (GDP) is estimated to have grown by 2.3% in April 2021, the fastest monthly growth since July 2020, as government restrictions affecting economic activity continued to ease.

So the hopes of a good April for the economy became true and if you want to briefly bathe in an extraordinary number there is this.

In comparison with April 2020, monthly GDP in April 2021 is estimated to have grown by 27.6%.

Of course the numbers here are heavily affected by the pandemic last year and thus are not much of a guide to anything.

The familiar element of the numbers came with something of a return to form.

The service sector grew by 3.4% in April 2021, with consumer-facing services re-opening in line with the easing of coronavirus restrictions and more pupils returning to onsite lessons.

We see that the growth was broad based.

The growth in services was driven by a rise in 12 out of the 14 sectors in the Index of Services, the largest contributions to growth being from wholesale and retail trade, education, and accommodation and food service activities.

However there were particular niches in it with the leader of the pack being no real surprise.

There was strong growth for hotels and short-stay holiday accommodation (which includes cottages, chalets, and apartments). However, the sub-industry leading the growth was camping grounds and caravan parks.

As someone who enjoyed a regular summer week at a caravan park in Selsey as a boy with my grandparents I am pleased they are still a thing. Simple pleasures but a pleasure none the less. The next area of strong growth is a surprise in the sense that I am struggling to get my head around how an area can be fully booked but also 25% down?

Personal services activities saw strong month-on-month growth at 63.5%, which was driven by other beauty treatments and by hairdressers.  Although hairdressers and beauty salons reported having no available appointments in the weeks after reopening because of the level of demand for their services, output was still 25.0% below its February 2020 level.

These areas have seen wild swings due to the lockdowns and if we return to accommodation we see there is plenty of ground still to recover.

The accommodation industry grew by 68.6% between March 2021 and April 2021 after lockdown restrictions were eased, although output was still 59.9% below its February 2020 level.


I thought I would pick this out as the way the UK measures it has led us to be at first a relatively poor performer and now a relatively strong one.

Education grew by 11.2% between March 2021 and April 2021, although this meant that output was still 4.7% weaker than its February 2020 level. The growth in education output was driven by schools being open for a full calendar month to all pupils for the first time since November 2020.

The UK uses an output measure for GDP here which is why I have highlighted the school re-opening part which boosts us now but hurt us when they closed and went online. Most other countries use the income measure which whilst teachers are paid avoided such swings.

Imputed Rent

I often get asked about it so for those curious it rose by 0.2% in April. Also there were a couple of curious numbers in the report. For example with all the new dogs and puppies about you might think that vets were in demand whereas output fell by 2.8%. Also domestic service fell by 13.2% when I would have thought the falls would have come in lockdown.


There was a fair bit going on here and the headline was disappointing.

Monthly production fell by 1.3% between March 2021 and April 2021 leaving it 3.1% below its February 2020 level;

However this was not as it might seem as we it was driven by the maintenance cycle for North Sea Oil and Gas.

The industry within the mining and quarrying sector that contributed most (1.1 percentage points) to the fall in production was extraction of crude petroleum and natural gas, which fell by 18.2%.

Speaking of disappointments there was another one for the Markit PMI survey which had predicted near record growth with its 60.9 for April but now faces a reality of this.

While eight of its thirteen subsectors displayed upward contributions to growth, the manufacturing sector as a whole saw output fall by 0.3%. The reduction in growth was led by the basic pharmaceutical products and transport equipment industries.

Regular readers will be familiar with the erratic nature of the pharmaceuticals with the basic products section falling by 16%. That industry seems to run on either a 4 week or 5 week cycle rather than a monthly one giving what seems much more likely to be a reporting issue than an output one.

One area that saw strong growth was curious because I thought we were all getting sozzled in lockdown and now we are drinking even more to celebrate its winding down?

The main growth area within manufacture of food products and beverages was the manufacture of alcoholic beverages industry, which saw monthly growth of 26.5%, largely because of the reopening of outdoor hospitality across the UK during April 2021. Brewing observed stronger growth than the manufacture of spirits.


There have been more than a few difficulties in normal times in measuring this area which must have been magnified by the pandemic. However such as they are here are the numbers.

Monthly construction output fell by 2.0% in April 2021 compared with March 2021 because of declines in both new work (2.9%) and repair and maintenance (0.6%). Despite the monthly fall, the level of construction remains 0.3% above its February 2020 level.

For a more up to date reading my Nine Elms crane count is 32. Some of the work now is complete as highlighted by the Sky Pool hitting the news wires.


The position here worsened in April

Total imports of goods, excluding precious metals, increased by £1.4 billion (3.9%) in April 2021, with increases seen with both non-EU and EU countries……….Total exports of goods, excluding precious metals, fell slightly by £0.1 billion (0.6%) in April 2021

But the numbers were distorted by the knock-on effects of a famous blockage.

Imports of goods from China fell across many commodity types, including office machinery, cars, general miscellaneous manufactures, and electrical machinery. These commodities are typically transported by ship, and therefore may have been affected by the blockage of the Suez Canal, an important passage for ships travelling between Asia and Europe, at the end of March 2021.

There also seems to be the beginnings of a shift away from the European Union.

Monthly goods imports from non-EU countries, excluding precious metals, were the highest since records began in January 1997.


Whilst recent growth has been strong we should not forget that we still have a road to travel.

 but remained 3.7% below its level in February 2020, which was the most recent month not affected by the coronavirus (COVID-19) pandemic.

We are well ahead of official forecasts and as ever my first rule of OBR Club ( that the OBR is always wrong) has seen even by its standards quite a triumph.

The resurgence in infections, imposition of another lockdown, and temporary disruption to
UK-EU trade are expected to cause output to fall by 3.8 per cent in the first quarter of 2021
(Chart 1.4). This drags the level of output down to 11 per cent below pre-pandemic levels
and slightly below our November central forecast.

It is quite a spectacular effort to in March get the level of output wrong by 5%. These are uncertain times but even so. We have looked at this previously via the public finances which will be on a quite different path to the OBR forecasts.

Should we continue on this sort of path we will be back to pre pandemic levels of output in the autumn. Then we move onto further challenges such as the end of the furlough scheme and the implications thereof as well as the fact that pre pandemic economic growth was weak.


The long and great depression affecting Greece

Later today we get the policy announcement from the ECB or European Central Bank but I am not expecting much if anything. Perhaps some fiddling with the monthly purchases of the emergency component ( called PEPP) of its QE bond buying scheme. They have been buying around 80 billion Euros a month. But no big deal. So let us look at a strategic issue for the ECB and one which has its fingerprints all over it. We get a perspective from this.

If anyone had doubts about why I keep calling it a great depression the graph explains it. In the west we had got used to economic growth but Greece has replaced that not only with a lost decade but a substantial decline over 14 years. Back in 2007 people might reasonably have expected growth and indeed we have kept receiving official Euro area projections of annual growth of 2% per annum. Including one which (in)gloriously metamorphosed into a 10% decline. Along the way we get a reminder that economic output in Greece is far from even throughout the year.

It is intriguing that Yanis has chosen nominal rather than real GDP for his graph of events. Perhaps it flatters his period in office. If he replies to me asking about that I will post it. But it does open a door because it does provide a comparison with the debt load as most of it ( Greece does have some inflation -linked bonds) is a nominal amount. Of course Greece does not have control over its own currency as it lost that by joining the Euro. Along the way it has seen its debt soar as its ability to repay it has reduced.

National Debt

According to the Greek Debt Office this was 374 billion Euros for central government at the end of 2020 or up some 18 billion. It was more like 150 billion when this century began and really lifted off as a combination of the credit crunch and then the Euro area crisis hit. In 2012 some 107 billion Euros or so was lopped off by the Private Sector Involvement. or haircut although in a familiar pattern debt according to the official body only fell by around 50 billion. The ECB was involved here as it essentially was willing for anyone except itself to see a haircut ( regular readers will recall it insisted all bonds were 100% repaid).

This has meant that the debt to GDP ratio has soared, Initially a target of 120% was set mostly to protect Italy and Portugal  but that backfired hence the PSI. Then there was a supposed topping out around 170% but now we are told it ended 2020 at 205.6%.

There is a structural difference in the debt because so much is in what is called the official sector as highlighted below.

The majority (51%) of Greek debt is held by the European Stability Mechanism and this ensures low interest rates and a long repayment period.

Whilst it has exited in terms of flow the IMF is still there and with the various other bodies means the official sector now holds 80% of the stock.

That 80% is both decreasing and increasing. What do I mean? Well Greece is now issuing bonds again and here is this morning’s example.

The reopening of a 10-year bond issue by Greek authorities on Wednesday attracted 26 billion euros in bids and the interest rate of the issue was set 0.92 percent (Mid Swap + 82 basis points), down from an initial 1.0%. (keeptalkinggreece )

The actual issue is some 2.5 billion Euros and for perspective is much cheaper than the US ( ~1.5%) and a bit more expensive than the UK ( ~0.75%). A vein which the Greek Prime Minister is keen to mine.

Another sign of confidence in the Greek recovery and our long-term prospects. Today we issued a 10-year bond with a yield of approximately 0.9%. The country is borrowing at record low interest rates.

If only record low interest-rates were a sign of confidence! In such a world Greece would soon be surging past the US. Meanwhile we can return to the factor I opened with which is the ECB.

When it comes to ECB QE, Greece is different. The ECB has bought €25.7bn in GGBs under the PEPP so far, which is about €24bn in nominal terms, or 32% of eligible debt securities (GGB universe rose by €3bn in May, and by €11bn ytd). So, what happens next? ( @fwred )

As you can see Greece has been issuing new debt but overall the ECB has bought more than it has issued. There are two ironies here as its purchases back in the day were supposed to be a special case and here it is back in the game. Also Greece is not eligible under its ordinary QE programme. Probably for best in technical terms because if it was it would be breaking its issuer limits.


This is a really thorny issue because this remains the plan for Greece.

Achieve a primary surplus of 3.5% of GDP over the

That is from the Enhanced Surveillance Report of this month. That is the opposite of the new fiscal policy zeitgeist. Not only is it the opposite of how we started this week ( looking at the US) but even the Euro area has joined the game with its recovery plan and funds. The catch here is that everything is worse than when the policy target above was established.

The Greek economy contracted by 8.2% in 2020,
somewhat less than expected, but still considerably more than the EU as a whole, mainly on
account of the weight of the tourism sector in the economy……Greece’s primary deficit monitored under enhanced surveillance reached 7.5% of GDP
in 2020.

In terms of the deficit more of the same is expected this year and then an improvement.

The authorities’ 2021 Stability Programme
projects the primary deficit to reach 7.2% of GDP in 2021 and 0.3% of GDP in 2022.


There is a clear contradiction in the economic situation for Greece. The austerity programme which began according to US Treasury Secretary Geithner as a punishment collapsed the economy, By the time the policy changed to “solidarity” all the metrics had declined and the Covid-19 pandemic has seen growth hit again and debt rise.  The debt rise does not matter much these days in terms of debt costs because bond yields are so low and because so much debt is officially owned. The problem comes with any prospect of repayment as the 2030s so not look so far away in such terms now. That brings us back to the theme I established for the debt some years ago, To Infinity! And Beyond!. But for now the Euro area faces a conundrum as the new fiscal opportunism is the opposite of the plan for Greece.

We can find some cheer in the more recent data such as this an hour or so ago.

The seasonally adjusted Overall Industrial Production Index in April 2021 recorded an increase of 4.4% compared with the corresponding index of March 2021……..The Overall Industrial Production Index in April 2021 recorded an increase of 22.5% compared with April 2020.

Although context is provided by this.

The Overall IPI in April 2020 decreased by 10.8% compared with the corresponding index in April 2019

Plenty more quarters like this would be welcome.

The available seasonally adjusted data
indicate that in the 1st quarter of 2021 the Gross Domestic Product (GDP) in volume terms increased by 4.4% in comparison with the 4th quarter of 2020, while in comparison with the 1st quarter of 2020, it decreased by 2.3%.

For a real push tourism would need to return and as we are already in June the season is passing. But let us end on some good cheer and wish both their players good luck in the semi-finals of the French Open tennis.



India expands QE bond buying as Wholesale inflation rises

Today we can look East and catch-up on the state of play in India. The crucial message from the Reserve Bank of India or RBI earlier was this.

Taking these factors into consideration, real GDP growth is now projected at 9.5 per cent in 2021-22, consisting of 18.5 per cent in Q1; 7.9 per cent in Q2; 7.2 per cent in Q3; and 6.6 per cent in Q4:2021-22

This is a 1% downgrade as previously it was guiding towards 10.5% as the economic growth rate for the year. The rationale for this is the problems with the pandemic.

Turning to the growth outlook, rural demand remains strong and the expected normal monsoon bodes well for sustaining its buoyancy, going forward. The increased spread of COVID-19 infections in rural areas, however, poses downside risks. Urban demand has been dented by the second wave, but adoption of new COVID-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity, especially in manufacturing and services sectors that are not contact intensive.

This means that India is slowing down as other economies expect to pick-up. Also for once the weather is not taking the blame.

 On June 1, the India Meteorological Department (IMD) has forecast a normal south-west monsoon, with rainfall at 101 per cent of the long period average (LPA). This augurs well for agriculture.

Policy Response

For now interest-rate cuts seem to be out of favour.

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent.

The RBI is not restricted by 0% in the way that many other central banks now are but we find that policy action is now seen what we used to call the unconventional sector.

Taking these developments into account, it has now been decided that another operation under G-SAP 1.0 for purchase of G-Secs of ₹40,000 crore will be conducted on June 17, 2021. Of this, ₹10,000 crore would constitute purchase of state development loans (SDLs). It has also been decided to undertake G-SAP 2.0 in Q2:2021-22 and conduct secondary market purchase operations of ₹1.20 lakh crore to support the market. The specific dates and securities under G-SAP 2.0 operations will be indicated separately.

So we will see another 1.2 trillion Rupees of QE which is a 20% increase on the first quarter of the financial year. Looking at the number below we see that if this continues it looks set to be around a fifth of issuance.

It has facilitated the successful completion of central and state government borrowing programmes of close to ₹22.0 lakh crore at record low costs with elongated maturity during 2020-21.

Also the RBI is indulging in some credit easing.

In order to mitigate the adverse impact of the second wave of the pandemic on certain contact-intensive sectors, a separate liquidity window of ₹15,000 crores is being opened till March 31, 2022 with tenors of up to three years at the repo rate.

Although it is for a particular and in central banking terms unusual sector.

Under the scheme, banks can provide fresh lending support to hotels and restaurants; tourism – travel agents, tour operators and adventure/heritage facilities; aviation ancillary services – ground handling and supply chain; and other services that include private bus operators, car repair services, rent-a-car service providers, event/conference organizers, spa clinics, and beauty parlours/saloons.

So we have interest-rates kept at a record low, more QE and credit easing.


This is a more difficult area for the RBI which must have heaved a sigh of relief when it saw the monsoon forecast. There are the generic issues we have been looking at elsewhere such as higher oil and commodity prices which will also impact on India. So they will have welcomed this news.

Headline inflation registered a moderation to 4.3 per cent in April from 5.5 per cent in March, largely on favourable base effects. Food inflation fell to 2.7 per cent in April from 5.2 per cent in March, with prices of cereals, vegetables and sugar continuing to decline on a y-o-y basis. While fuel inflation surged, core (CPI excluding food and fuel) inflation moderated in April across most sub-groups barring housing and health, mainly due to base effects.

But the problem is whether this is credible?

Taking into consideration all these factors, CPI inflation is projected at 5.1 per cent during 2021-22: 5.2 per cent in Q1; 5.4 per cent in Q2; 4.7 per cent in Q3; and 5.3 per cent in Q4:2021-22; with risks broadly balanced.

For example if we look further along the inflation chain we see this.

In April, 2021 (over April, 2020) , the annual rate of inflation (YoY), based on monthly WPI,
stood at 10.49% (Provisional) . The annual rate of inflation in April 2021 is high primarily because of
rise in prices of crude petroleum, mineral oils viz petrol, diesel etc, and manufactured products as
compared the corresponding month of the previous year.

There was quite a push on a monthly basis.

The monthly rate of inflation, based on month over month movement of WPI index, in April
2021 stood at 1.86% (Provisional) as compared to March 2021

I am sure that some in India will also be thinking of this from the United Nations yesterday.

The FAO Food Price Index (FFPI) averaged 127.1 points in May 2021, 5.8 points (4.8 percent) higher than in April and as much as 36.1 points (39.7 percent) above the same period last year.

As you can see there has been quite a surge in food inflation which will be a really big deal for India’s many poor.

The May increase represented the biggest month-on-month gain since October 2010. It also marked the twelfth consecutive monthly rise in the value of the FFPI to its highest value since September 2011, bringing the Index only 7.6 percent below its peak value of 137.6 points registered in February 2011. The sharp increase in May reflected a surge in prices for oils, sugar and cereals along with firmer meat and dairy prices.

It does not do an onion index to give us a specifically Indian flavour but as Glenn Frey pointed out the heat is on.


The Rupee has been mostly quiet compared to other periods we have looked at and is at 73 versus the US Dollar. Perhaps it is being boosted by this from Shortpedia.

According to #RBI data, India’s foreign exchange reserves surged by $2.865 billion to a record high of $592.894 billion for the week ended May 21.


There are various contexts here. If we look at the traditional store of value for Indians which is Gold it has seemingly found the air too thin above US $1900 and has fallen to $1873 as I type this. So one Rupee alternative has disappointed over the past year as you might reasonably have expected more than an 8% return. More recently Bitcoin has also struggled so these may be factors helping the Rupee.

Looking at QE we see the RBI expanding its programme as others are talking about reductions, Indeed it mat have been minor but this from the US Federal Reserve on Wednesday was a type of QT.

The Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin gradual sales of its holdings of corporate bond exchange-traded funds (ETFs) on June 7, consistent with plans announced by the Board of Governors to begin winding down the SMCCF portfolio.

This means that should inflation persist the RBI will be left looking like it has missed the boat deliberately like so many of its central banking fraternity.



Can Mario Draghi reform the economy of Italy?

We have the opportunity today to look at this morning;s positive news for the economy of Italy. So as that is a not that common event let us take it. It has come from the Markit Purchasing Managers Index.

The Composite Output Index* registered 55.7 in May, rising
from 51.2 in April, and signalled the quickest expansion
in Italian private sector output for over three years. At the
sector level, manufacturing growth remained amongst the
strongest on record, while services saw the first upturn since last July.

Care is needed as the PMI is far from an infallible guide but it looks to be showing an improvement, which is welcome indeed. We can cross our fingers and hope that this is also true.

Looking ahead, Italian companies recorded the strongest
ever level of confidence towards output for the coming year.

In terms of the breakdown we can start with this from services.

Moreover, at 53.1, the headline figure pointed to
the strongest growth since March 2019.
Central to the renewed upturn in the sector was the first
increase in new business for three months.

Although the improvement here was all domestic demand.

Gains to demand came solely from domestic markets during May, however, as new export orders continued to decline.

This added to a record improvement in Italy’s manufacturing sector.

posting a fresh series high of 62.3 in May and
signalling the most marked improvement in manufacturing
conditions since the survey began in June 1997.

This has backed up the official surveys from last week.

In May 2021, the consumer confidence index increased from 102.3 to 110.6 thanks to a rise in all its components, but mostly in the future climate and the economic one. In more details, the future climate surged from 109.6 to 122.5, the economic one progressed from 91.6 to 116.2, the personal one grew from 105.9 to 108.7 and, finally, the current one rose from 97.4 to 102.6.

If the official surveys are any guide then construction is going through the roof.

The confidence index in construction went up from 148.5 to 153.9

There is a difference with the Markit surveys as this one shows services improving but not yet returning to outright growth.


We were reminded on Monday of the state of play.

In the first quarter of 2021 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by +0.1 per cent with respect to the previous quarter and decreased by
0.8% in comparison with the first quarter of 2020.

Rather ironically that could easily pass for a normal situation in Italy at least until you look at the time pattern. For example a positive situation like this is unusual.

The carry-over annual GDP growth for 2021 is equal to 2.6%.

In terms of a further context quarterly GDP in 2015 prices was 403 billion Euros as opposed to the 432 billion of the third quarter of 2019. The latter is significant as it was the first time Italy was close to achieving again the levels of the summer of 2011.


This was an issue recorded in the PMI surveys as this example from the manufacturing one shows.

Inflationary pressures remained the principal concern
in May, with input costs continuing to surge and firms
raising their average charges to a series record degree as
a result.

Also in services.

As a result, Italian service providers increased their average charges for the first time in nearly two years. Respondents linked the increase to the pass-through of greater input costs to clients.

The Euro area now has consumer inflation at target ( 2%) so looking ahead there may be issues here in terms of ECB policy. Although in isolation Italy has more headroom as its CPI is 1.3%. However it will be feeding more directly into this.

In April 2021, compared with April 2020, industrial producer prices increased by 7.6% in both the euro area and the EU.

Italy saw a 1% increase in March and 1.2% in April so the surveys are picking up increases in addition to this.

Mario Draghi

He has been reviewed in glowing terms by the Financial Times today.

In his eight years as president of the European Central Bank, Mario Draghi developed an almost legendary ability to rein in borrowing costs for eurozone governments. Investors appear to be crediting him with similar powers as Italy’s prime minister, judging from the calm that has descended on the region’s bond markets since he took office in February.

Actually most bond markets have been calm the last 2/3 months after the yield rises that began the year. But it then goes further.

Analysts at Goldman Sachs have dubbed the former ECB chief’s power over bond markets the “Draghi put”. “The pricing of Italian sovereign risk points to confidence in Draghi’s ability to contain political risk,” the bank wrote in a note to clients last week.

The idea of a put option for the Italian bond market surely belongs with the present President of the ECB Christine Lagarde though. For instance the new QE post pandemic QE bond purchasing programme introduced on her watch had bought some 157 billion Euros of Italian bonds as of the end of March. There was also the existing QE programme which bought some 3.2 billion Euros of them in April. Whilst noting the role of Christine Lagarde let me congratulate her on this from last night.

I am deeply grateful to have been awarded the Turgot Prize of Honour by former @ecb   President Jean-Claude Trichet on behalf of @CercleTurgot . I have been privileged to witness Europe’s progress first-hand, and am honoured to be able to continue doing my part. ( @lagarde)

Quite a turn-around from her conviction for negligence in 2016 isn’t it?

Returning to Italy much depends on this.

Investors have signalled their support for the prime minister’s plans to overhaul Italy’s bureaucracy while spending €205bn of EU recovery money.

Italy has gained the largest share of the recovery fund and that is a success for Super Mario.

Some fund managers sense an opportunity to shake Italy out of decades of low-growth torpor.

I have to say that the situation here reminds me of Prime Minister Abe in Japan. Whilst Mario Draghi has not been Prime Minsiter before he has been at the top of the establishment and past reforms have gone wrong. For example the Italian banking sector with all its problems and indeed collapses is governed by what are called the “Draghi Laws”.

They are betting the stability provided by Draghi’s national unity coalition provides an ideal backdrop for the reform programme as Italy deploys one of the largest shares of the EU’s €750bn pandemic recovery fund. The government has established a watchdog to oversee disbursement of the cash, and introduced measures to streamline bureaucracy and speed up infrastructure development.


Let us wish Mario Draghi well as we hope for an upturn in Italy’s economic fortunes. He has helped with stability for now although at the cost of another Prime Minister being imposed rather than elected. Also he was able to negotiate for Italy’s share of the recovery fund. But deeper questions remain about reform and should there be any then issues like this highlighted by Ansa remain.

ROME, MAY 26 – Italy’s brain drain has risen 41.8% in the last years, the Audit Court said Wednesday.
“Limited job prospects and low pay are pushing ever more graduates to leave the country, with a rise of 41.8% over 2013.” said the court.
Italy like other countries is seeing more and more young people graduating, but is losing more and more of them unlike other countries, the court said.

Demographics in Italy have seen a net rise over past years as Italians have left but more migrants have arrived.

So we find ourselves returning to the Italian conundrum. It has economic strengths such as the manufacturing sector in the north. But that never seems to filter into the rest of the economy leading to the “girlfriend in a coma” theme. Euro membership was hoped to change this whereas it may have made it worse.