The UK Services sector is the shining star of the economy and GDP

Today brings us a whole raft of data on the UK economy or what out official statisticians call a theme day. Actually we get too much in one burst with the trade data usually being ignored which may well be a Sir Humphrey Appleby style plan. But before we get to that we can look at the economy from the viewpoint of the Bank of England.

Turning to prices, the headline price balance sees a flat trend in house price inflation. However, there is once again a mixed picture across the UK with negative momentum in London and the South East, and solid gains in Northern Ireland, Scotland and the North West.

Looking ahead, price expectations for the coming three months stand at -16% pointing to a modest decline on a UK-wide basis. However, the twelve-month outlook points to a turnaround, with +18% more respondents expecting prices to rise (rather than fall) over the coming year.

That is from the Royal Institute of Chartered Surveyors or RICS. As you can see there are no “wealth effects” to be found presently unless they can somehow only draw Governor Carney’s attention to the North or Scotland and Northern Ireland.

A little innovation will be required to present this as good news.

 In keeping with this, newly agreed sales fell, with a net balance of -27% (from -11% previously), with activity reportedly slipping in virtually all parts of the UK. As far as the near-term outlook is concerned, sales expectations stand at -9%, suggesting sales will remain subdued in the coming three months………This will not only be a direct hit on the housing market itself but could have ramifications for the wider economy as the normal spend on furniture, fittings and appliances that typically accompanies a house move is also put on hold.

One possibility for the morning staffer presenting such information to an irascible Governor is to appeal to his plan to be a fearless climate change champion and say it is in line with this.

The TCFD provides the necessary foundation for the financial sector’s role in the transition to net zero that
our planet needs and our citizens demand.

He is indeed so enthusiastic about this that he has flown to Tokyo to point this out. This contrasts the highly important nature of his flights as to the extremely unimportant climate change causing flights of plebs like us.

This backs up what the Halifax told us on Monday and the emphasis is mine because the date is pretty much when the effect of the Funding for Lending Scheme arrived,

“Annual house price growth slowed somewhat in September, rising by just 1.1% over the last year. Whilst
this is lowest level of growth since April 2013, it remains in keeping with the predominantly flat trend we’ve
seen in recent months.”

UK GDP

This brought some welcome news.

UK GDP grew by 0.3% in the three months to August 2019.  Rolling three-month GDP growth increased for the second consecutive month after falling in Quarter 2 2019.

It is put in neutral terms but the UK moved away from recession in this period although in monthly terms it did so in a slightly odd fashion.

Monthly gross domestic product (GDP) growth was negative 0.1% in August 2019, following growth in both June and July 2019…….Overall, revisions to monthly GDP growth were small. However, both June and July 2019 have been revised up by 0.1 percentage points, giving extra strength to the most recent rolling three-month estimate.

As you can see we had a dip in August ( assuming that is not revised higher over time) but that was more than offset by upwards revisions in both June and July. For those of you wondering if the June figure affects the second quarter contraction of -0.2% the answer is not so far although it must have an impact if we move another decimal place.

The shift to Services

I have long argued that the services sector must now be over four-fifths of the UK economy and it seems the Office for National Statistics is picking this up.

The main contributor to gross domestic product (GDP) growth in the three months to August 2019 was the services sector, which grew by 0.4%. This was driven by widespread strength across the services industries in June and July, following a period of largely flat growth in the previous three months. Meanwhile, the production sector fell by 0.4% in the same period, while construction output grew by 0.1%.

For newer readers this has been the trend for years and indeed decades or as Talking Heads put it.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

This means somewhat ironically that the UK may well do relatively well in the manufacturing recession that we are seeing in much of the world. The irony is that we have often wanted to be more like Germany with its success in this area but for now out more services based model works better. This does not mean that the manufacturing sector we have is avoiding the chill winds blowing.

Rolling three-month growth in the production sector was negative 0.4% in August 2019, with growth in manufacturing at negative 1.1%.

There were widespread falls across manufacturing, offset partially by the manufacture of transport equipment, which is still seeing a bounce back from the weakness in April 2019 as a result of car production plants bringing forward their summer shutdowns.

There is another example of same as it ever was if we look at the detail of the services growth.

However, the sub-industry that had the largest contribution to gross domestic product (GDP) growth was motion pictures (including TV and music), which has been one of the best performing sectors over the last year, growing at a notably faster rate than services as a whole.

So if you pass a Luvvie today please be nice to them as they are doing a sterling job.

August

It looks as though there was something we have been noting for several years was behind the 0.1% GDP fall in August.

Within production, manufacturing fell by 0.7%. This was driven largely by a fall-back in the often volatile manufacture of pharmaceuticals, following strong growth in July.

It would seem that the production pattern is not monthly and thus is over recorded and  then under recorded. So that the  truth seems likely to be that we should take a bit off July and add it to August. More fundamentally it exposes one of the problems of producing a monthly GDP series.

Comment

As I look at the numbers I note that yet again we see to be reverting to the mean growth level of around ~0.3% per quarter that I suggested a couple of years ago. In the current circumstances that is pretty good although I note Torsten Bell of the Resolution Foundation calls it “Growth is really rubbish”. Mind you I note that he is retweeting something which describes the 0.3% rise in the quarterly or 3 monthly growth rate as a “small rebound” which speaks for itself.

The situation is that we should be grateful for our services sector which is keeping the UK out of a recession for now. So instead of the “march of the makers” promised by former Chancellor George Osborne we are seeing a “surge of the services”. This brings its own issues but at a time like this we should welcome any growth we can find. A particular success is the film and music industry and some of this is near to me as Battersea Park is regularly used these days. In a away this represents cycles as what has suited Germany (manufacturing) fades and we see something where the UK is strong (services) replacing it. How long that will last I do not know.

Meanwhile some of you may have followed my debate with former Bank of England policymaker Danny Blanchflower on social media. When I pointed out to him that today saw 2 more upwards revisions to UK GDP ( as opposed to his continual promises of downwards ones) he replied thus.

So what? Go and look at the supporting data

 

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Japan gets paid to issue debt and yet it has just tightened its fiscal policy!

Today I am looking east to the country which is hosting the rugby world cup and let me congratulate them on their victory over Ireland. But there is another area where Japan is currently standing out and that is the arena of fiscal policy. The current establishment view is that it is time that fiscal policy took up the slack after years and indeed in Japan’s case decades of easy monetary policy. One feature of that type of thought is seen by the cheapness of public borrowing in Japan where the ten-year yield is -0.22% and the thirty-year is a mere 0.35%. So Japan is either paying very little or being paid to borrow right now.

Consumption Tax

Last week it did this.

After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )

This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.

Things get complex as we note that there are offsetting measures.

The 2 percentage point boost is estimated to inflict about a ¥5.7 trillion burden on households. However, making preschool education free of charge, keeping the 8 percent rate for food and nonalcoholic beverages and beefing up social welfare are expected to lessen that burden to around ¥2 trillion — about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan. ( The Japan Times )

As you can see this takes away a lot of the point of making the change in the first place! According to the government the net effect will be a bit more than a third of the gross. Also it means the government interfering in more areas leafing to transfers of cash from one group to another. Now whilst free preschool education is welcome we have seen extraordinary transfers in the credit crunch era via policies such as negative interest-rates and QE bond buying.

As ever the numbers seem in doubt as NHK News thinks the impact will be larger.

Half the revenue will be spent on making preschool education and childcare free of charge, easing the financial burden of higher education, among other things. The rest will go to restoring the country’s fiscal health.

The economic impact

The very next day Japan’s Cabinet Office released this bombshell.

The Consumer Confidence Index (seasonally adjusted series) in September 2019 was 35.6, down 1.5 points from the previous month.

The Japan Times covered it like this.

A Cabinet Office survey showed earlier this week that consumer sentiment in Japan weakened for the 12th straight month in September, hitting its lowest since the survey started in April 2013……….The index was lower than the 37.1 marked during the first stage of the hike in April 2014.

The last sentence is especially ominous if we consider the impact of the 2014 Consumption Tax rise. If we return to the survey we see from the series that it has been falling since some readings above 44 in late 2017 and the fall has been accelerating. In terms of detail there is this.

Overall livelihood: 33.9 (down 0.9 from the previous month)
Income growth: 38.7 (down 0.8 from the previous month)
Employment: 41.5 (down 0.7 from the previous month)
Willingness to buy durable goods: 28.1 (down 3.6 from the previous month)

So all elements fell and the employment one is particularly significant when we note this.

 The number of unemployed persons in August 2019 was 1.57 million, a decrease of 130 thousand or 7.6% from the previous year…..  The unemployment rate, seasonally adjusted, was 2.2%. ( Japan Statistics Bureau )

As an aside this makes the various natural and equilibrium levels of unemployment look laughable. For newer readers that is demonstrated by the Bank of England thinking it is 4.25% when Japan has an unemployment rate around half that.

This morning has brought news that things have gone from bad to worse.

TOKYO (Reuters) – A key Japanese economic index fell in August and the government on Monday downgraded its view to “worsening”, indicating the export-reliant economy might face slipping into recession.

The outlook was mostly driven by this.

The separate index for leading economic indicators, a gauge of the economy a few months ahead that’s compiled using data such as job offers and consumer sentiment, dropped 2.0 points from July, the Cabinet Office said.

Fiscal Policy

The other side of this particular coin was illustrated by the response of Fitch Ratings to the Consumption Tax hike.

Japan’s consumption tax hike supports medium-term fiscal consolidation efforts, and the country’s sovereign credit profile, Fitch Ratings says. We estimate it will lower Japan’s debt ratio by about 8pp of GDP by 2028; however, very high public debt will remain a key credit weakness.

They further crunched the fiscal numbers here.

Total annual revenue from the tax hike is estimated by the government at about 1% of GDP, half of which is earmarked to reduce debt (the remainder will be used to permanently increase spending for education and long-term care). This would result in Japan’s gross general government debt-to-GDP ratio falling to just over 220% by 2028, from 232% at present.

It hardly seems worth it when it is put like that. Also perhaps unwittingly they let the cat out of the bag as to why Abenomics is so keen on raising the level of inflation.

We estimate that Japan’s public debt dynamics have stabilised due to the resumption of nominal GDP growth in recent years.

Nominal GDP growth includes inflation.

Comment

This is a story with several facets so let us open with the driving force of this which was the IMF or International Monetary Fund and the case it made in the earlier part of this decade for Japan to improve its national debt to GDP ratio. Here is the IMF Blog after the 2014 Consumption Tax rise.

Japan’s GDP declined by almost 7 percent in the second quarter, more than many had forecast including us here at the IMF.  Many cite the increase in the sales tax this April for this decline.  But that is not the full story.

That opening suggests there were other reasons for the fall but fails to state them as it then discusses general rather than specific issues. Oh and it does not day but it means annualised fall in GDP. The impact was so great that the 2015 rise was delayed to now rather ironically because of the recession risk. What it means is that Japan ends up doing this at a very risky time if we look at the world economic outlook.

We now find also that IMF fiscal conservatism is being applied just as it has switched to expansionism. That is quite a mess! No wonder Christine Lagarde shot out of the door. After all Japan can borrow quite cheaply mostly due to the fact that The Tokyo Whale ( Bank of Japan for newer readers ) owns so much of it. The IMF has just published a Working Paper on this so let me give you some numbers from 2017.

As shown in the Fiscal Monitor, Japan’s PSBS stands out as one of the largest PSBS in the world, with assets and liabilities of 533 percent of GDP in 2017. Japan’s
PSBS also includes cross-holdings of assets and liabilities within the public sector, exceeding 210 percent of GDP in 2017—the largest in the IMF’s PSBS database. Much of these come from public corporations’ financing of central government liabilities. ( PSBS = Public Sector Balance Sheet)

Next let me help the author out as the situation below is explained by world wide trends accompanied thsi decade by the enormous purchases of The Tokyo Whale.

Several previous studies considered it puzzling that the stock of Japanese Government Bonds (JGBs) has been increasing but their yields have been declining
for the last three decades.

Next we get a higher estimate for the national debt.

However, these may not fully explain why Japan has been able to build up 288 percent of GDP in public sector borrowing.

Also it is not only The Tokyo Whale that has bought this.

In 2017, the public sector finances 150 percent of GDP of public sector borrowing,

In some ways it has been buying off other parts of the public-sector.

For example, the Post Bank
reduced allocations to public sector financing from 95 percent of its total assets at its peak in
1998 to 33 percent in 2017. The social security funds also reduced asset allocations to public
sector financing from 77 percent at its peak in 1998 to 34 percent in 2017.

Oh what a tangled web we weave……

Meanwhile it would appear that even extraordinary fiscal expansionism has not done much good.

Borrowing of general government ballooned in the 1990s and 2000s. It was 60 percent of GDP in 1990 and
increased to 226 percent of GDP in 2017.

The ordinary Japanese may have a job but real wages are falling again and fell at an annual rate of 1.7% in August.

Podcast

 

 

The story of India, its banks and five interest-rate cuts in a year

This morning has brought us a reminder of what has become one of the certainties of life. Oh for the time when we thought they were simply death and taxes whereas now we can add interest-rate cuts to this list. So without further ado let me look to thw sub-continent and had you over to the Reserve Bank of India,

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (October 4, 2019) decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15 per cent from 5.40 per cent with immediate effect.
Consequently, the reverse repo rate under the LAF stands reduced to 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40 per cent.
The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

As you can see the 0.25% interest-rate cut has been accompanied by some Forward Guidance of more being on the way. This is another reminder of my point earlier this week that central bankers are pack animals as to any impartial observer the whole concept of Forward Guidance has not worked or we would not be where we are. Still it does flatter central banking egos and make them feel important. After all it was only on the 4th of April I was pointing out they were telling us this.

The MPC also decided to maintain the neutral monetary policy stance.

Now I do not know about you but five interest-rate cuts in a year only three-quarters finished does not especially look neutral to me. So they were certainly not singing along with the Who.

I can see for miles and miles
I can see for miles and miles
I can see for miles and miles and miles and miles and miles
Oh yeah

Indeed there was dissent back then about the rate cut.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

Furthermore it is worse than this because when I have contact with central bankers and point this out I do get the reply that it does not matter if Forward Guidance is wrong. This proves that the thin air up in top of their Ivory Towers does affect the brain.

What has caused this?

We have another reminder of central bankers being pack animals. What is Indian for Johnny Foreigner anyway?

Since the MPC’s last meeting in August 2019, global economic activity has weakened further……..The macroeconomic performance of major emerging market economies (EMEs) was weighed down by a deteriorating global environment in Q3…….worsening global growth prospects.

You could circle the world via central bankers doing this but would then be reminded of the wisdom of Maxine Nightingale.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from

In terms of the domestic economy there was this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

So we are reminded of a couple of things. In addition to the slowing growth we have the fact that 5% GDP growth is considered slow in India. Oh and they mean second quarter as it is slightly unusual to present the numbers in a fiscal year style.

Now the central banking Johnny Foreigner facade crumbles away.

Of its constituents, private final consumption expenditure (PFCE) slowed down to an 18-quarter low.

So the weakness was mostly domestic after all. Perhaps they were hoping no-one would read this far down the report.

You will not be surprised to learn that there was also an issue here.

Industrial activity, measured by the index of industrial production (IIP), weakened in July 2019 (y-o-y), weighed down mainly by moderation in manufacturing. In terms of uses, the production of capital goods and consumer durables contracted……… The Reserve Bank’s business assessment index (BAI) fell in Q2:2019-20 due to a decline in new orders, contraction in production, lower capacity utilisation and fall in profit margins of the surveyed firms.

Also this is hardly hopeful.

The sales of commercial vehicles, a key indicator for the transportation sector, contracted by double digits in July-August.

Meanwhile as this is India there is also a reflection on the Monsoon season.

Abundant rains in August and September have led to improved soil moisture conditions in most parts of the country, particularly central India, compared to the corresponding period of the last year. Overall, the prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand.

Some Perspective

The Statistics Times has crunched some numbers so let us start with a perspective on what the growth rate was only recently.

Real GDP or Gross Domestic Product (GDP) at constant (2011-12) prices in the year 2018-19 is estimated at ₹140.78 lakh crore showing a growth rate of 6.81 percent over First Revised Estimates of GDP for the year 2017-18 of ₹131.80 lakh crore.

I often get asked about GNP, well as GNI is the new GNP.

GNI (Gross National Income)  ₹139.32 lakh crore

If we look further back.

In new series, figures are available since 2004-05. GDP of India has expanded by 2.57 times from 2004-05 to 2018-19.

According to IMF World Economic Outlook (April-2019), GDP (nominal ) of India in 2019 at current prices is projected at $2,972 billion. India contributes 3.36% of total world’s GDP in exchange rate basis. India shares 17.5 percent of the total world population and 2.4 percent of the world surface area. This projection would make India as 5th largest economy of the world.

Trouble,Trouble Trouble

One of my earliest themes as a blogger was that central banks have lost control of real world interest-rates.

Monetary transmission has remained staggered and incomplete. As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. However, the WALR on outstanding rupee loans increased by 7 bps during the same period.

In terms of economic theory this is along the lines of what was called Liquidity Preference Theory at least in terms of principles. It is why I think interest-rate cuts below around 1.5% are ineffective and at times can make things worse and not better. We now have a new nuance that due to its unique circumstances India has some features of this at interest-rates of around 5%.

Comment

If we start with an international perspective then we have another week where Australia and India have cut interest-rates. This means that the number of interest-rate cuts in the credit crunch era must be pushing past 750 confirming my view of them being one of the new certainties of life.

Next comes the issue of “The Precious! The Precious!” which I have avoided so far explicitly although of course regular readers of my work will have spotted the implicit reference via the transmission of interest-rate cuts. Let me make me point with this from the RBI on the 26th of September.

Rumours are being circulated in sections of social media about operations of banks to create panic among the public. All are advised not to fall prey to such baseless and false rumours.

And Tuesday.

There are rumours in some locations about certain banks including cooperative banks, resulting in anxiety among the depositors. RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours.

The trigger for this is described by @fayedsouza

The RBI must communicate with depositors 1. When will they get access to their money? 2. How did the bank fraud go unnoticed for a decade? 3. Which other bank fraud have you missed while napping over the last 10 years? #PMCBankScam

 

Portugal has house price growth of 10% but apparently negative inflation!

It is time to turn our telescope towards Portugal as we have not looked at it for a while and signals abound that the times they are a-changing. Let me give you an example of that from this morning.

“The eurozone economy ground to a halt in
September, the PMI surveys painting the darkest
picture since the current period of expansion began
in mid-2013. GDP looks set to rise by 0.1% at best
in the third quarter, with signs of further momentum
being lost as we head into the fourth quarter,
meaning the risk of recession is now very real.” ( IHS Markit )

Actually those surveys were already projecting growth at 0.1% so I am not sure how it stays there with the reading falling from 51.9 to 50.1. Perhaps it is a refreshing acknowledgement that the survey is much blunter than using decimal points. Also ther are some grim portents looking ahead.

Export trade remained a key source of new
business weakness as highlighted by another
monthly decline in overall new export orders.
According to the PMI figures, exports have been
falling throughout the past year and September’s
deterioration was the sharpest since composite
export data were first available just over five years
ago.

There is a nuance here in that the Euro area PMI survey is for the larger economies so not Portugal. But it does provide a background as well as likely trend. Also I have looked at the export trend in particular as this is an issue for Portugal on several fronts. If we look back in time we see that its regular visits to the International Monetary Fund or IMF for help and aid have been driven by trade deficits. Next if we move forwards to the Euro area crisis from around 2011/12 one of the policies applied was called “internal devaluation” which was to make the economy more competitive in trade terms. Oh and as an aside “internal devaluation”  essentially means lower real wages, it just sounds better.

This feeds into a current feature of the Portuguese economy which has been the growth of the motor sector which accounts for around 4% of economic output or GDP. This has been a trend in that against the stereotype car production in the Euro area has headed south into the Iberian peninsular. Portugal has benefited from this with the flagship being the large Volkswagen operation there. In January Caixa Bank did some research on the sector showing its significance.

 in the latter part of 2018, exports of the automotive industry reached 13.0% of the total exports of goods (the highest figure since the end of 2004) and 3.7% of GDP (an all-time high). In addition, as can be seen in the second chart, in October 2018 the sector’s exports registered a growth of 39.4% year-on-year (reaching 7.5 billion euros for the 12-month cumulative total).

This has been a good news story but we now look at it with not a little trepidation as it was only yesterday we looked at manufacturing problems which have been driven by the motor sector. The reputation of Volkswagen is not what it was either.

Trade Figures

If we look at the official data we see this.

In July 2019, exports and imports of goods recorded nominal year-on-year growth rates of +1.3% and +7.9%
respectively (-8.3% and -3.7% in the same order, in June 2019). The emphasis was on the increase of 27.9% in
imports of Transport equipment, mainly Other transport equipment (mostly Airplanes), contributing by +4.2 p.p. to the total year-on-year rate of change.

If we take out what was presumably an aircraft purchase by TAP we see that import growth was at 3.7% well above export growth and not only was there a deficit but it is growing.

The trade balance deficit amounted to EUR 1,751 million in July 2019, increasing by EUR 452 million when compared
to the same month of 2018.

So we see a troubling picture. But we can add to this as monthly figures are unreliable in this area and we are not allowing for a strength of Portugal which is tourism so let us widen our search.

The goods account deficit increased by €2,028 million and the services account surplus declined by €137 million year on year.

In the first seven months of the year, exports of goods and services grew by 3% (2.2% in goods and 4.6% in services) and imports rose by 7.4% (6.7% in goods and 10.8% in services). ( Bank of Portugal )

As you can see the general picture remains the same of a rising deficit although the nuance changes as the export picture gets better. It looks as though tourism has helped but has been swamped by imports of unspecified services.

Before I move on the motor industry has more than a few similarities with the UK.

Lastly, despite the buoyancy of exports in the automotive sector as a whole, in net terms the sector’s trade balance remains negative. However, this situation has improved considerably in the last year: in October 2018, the balance of the automotive sector stood at –1.3 billion euros, compared to –2.7 billion euros in October 2017.  ( Caixa Bank)

Production

On Monday we were updated but as you can see there is little detail.

Industrial Production year-on-year change rate was -4.8% in August (-2.4% in the previous month). Manufacturing
Industry year-on-year change rate was -1.7% (-0.4% in July).

According to Trading Economics we do have some car production data for the month before.

Car production in Portugal decreased 4.2 percent year-on-year to 20,969 units in July 2019.

We do have the official view on September though for manufacturing overall.

In Manufacturing Industry, the confidence indicator decreased in September, reversing the increase observed in
August. The evolution of the indicator reflected the negative contribution of the balances of the opinions on global
demand and on the evolution of stocks of finished products, while the opinions on the production perspectives
stabilized.

Comment

Before this new phase there was much to like about the economic performance of Portugal. The cold recessionary and indeed depressionary winds of the Euro area crisis had been replaced by some badly needed economic growth. This meant that the unemployment situation has improved considerably from the crisis highs.

The provisional unemployment rate estimate for August 2019 was 6.2% and decreased by 0.2 pp from the previous month.

Indeed the past was revised higher still last month.

Gross Domestic Product (GDP) grew 3.5% in real terms in 2017, where the high growth of Investment stands out
(11.9%). In 2018, GDP presented a growth rate of 2.4% in real terms, where Investment remained as the most
dynamic component (growth rate of 6.2%).

So the number I looked at back on the 9th of May will be better than this now.

In 2018 real GDP was 1.2% higher than in 2008…

So far the official data still looks good.

In comparison with the first quarter of 2019, GDP increased by 0.5% in real terms, maintaining the growth rate
recorded in the previous quarter.

The fear though is that the growth phase was driven higher by the Euro boom and ECB policy and to add to the trade fears above there is this.

The House Price Index (HPI) increased 10.1% in the 2nd quarter of 2019, when compared to the same period of 2018, 0.9 percentage point (pp) more than in the previous quarter………On a quarter-to-quarter basis, the HPI grew 3.2%.

This leaves me with two thoughts for you. Firstly Portuguese first time buyers must wonder how there can be no inflation?

The estimate of the Portuguese Harmonised Index of Consumer Prices (HICP) annual rate of change was -0.3% (-0.1% in August).

Next that it was overheating issues that have led to my long-running theme for Portugal that economic growth does not average more than 1% for long. Can anybody spot any signs of that?

The Investing Channel

Helicopter Money is not the answer to our economic problems

One of the features of the credit crunch era is the way that policies which seem extraordinary have a way of coming to fruition. We have seen many examples of this in the world of monetary policy. The two headliners would be negative interest-rates and Quantitative Easing or QE bond buying. The latter had previously only been a feature of the response to the “lost decade” in Japan but is now widespread. If it had worked we would not be discussing the “lost decades” but that seems to bother only me. Also these moves are invariably badged as temporary but so far none of them have gone away. Indeed in my home country the Bank of England is currently making QE look about as permanent as it can be.

As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).

It will reinvest another £1.27 billion today but it is tomorrow that will be the real example of “To Infinity! And Beyond!” when it buys long and ultra-long dated Gilts.

These themes were on my mind when I noted this in the Daily Telegraph.

A radical world of “helicopter money” – where central banks fund government spending – is “inevitable” as policymakers run out of ammunition ahead of the next recession, top economists have warned.

Central banks are likely to “explore more unconventional policies” in the next downturn and blur the lines between fiscal and monetary policy with radical new tools, such as monetary financing, Deutsche Bank argued.

Let us just mark the issue that Deutsche Bank are top economists and move on. As to the details here is the original suggestion from Milton Friedman.

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

Those of you who follow me on social media will know that I note the daily RAF Chinook flights over Battersea as they could carry a lot of notes. Perhaps they could name them “Carney’s Cash” and “Broadbent’s Bonanza” for the occasion.

The one time this sort of thing was tried it was in fact via a tax rebate in Japan and amounted to £142 if my memory serves me correctly. However being Japanese they mostly saved it so it was not repeated. So any UK repetition of this would be different as if you look at out habits we would be likely to spend it which starts well but then of course would be likely to make our current account deficit worse. Here from this morning is a reminder of it.

The UK current account deficit narrowed by £7.9 billion to £25.2 billion in Quarter 2 (Apr to June) 2019, or 4.6% of gross domestic product (GDP).

Whilst it is welcome we did better the overall picture is this.

The UK has run a current account deficit in each quarter since Quarter 3 (July to Sept) 1998 or, when considering annual totals, 1983.

So there is an issue although I have many doubts about the accuracy of the numbers especially when we get to investment flows. Let me give an example from the savings numbers released this morning.

The most notable recent revision was in 2017, when the previously published lowest annual saving ratio on record was revised upwards from 3.9% to 5.3%, meaning that the lowest annual saving ratio on record is now observed in 1971 where it stood at 4.8%.

If you remember the media furore at the time that is quite a big deal. Also it gets worse.

The annual households’ saving ratio in 2018 was revised upwards 1.9 percentage points to 6.1%.

Let’s us move on by noting how an emergency measure is being presented as almost normal which of course is more than familiar. We will know when they intend to begin it because we will see a phase of official denials as they get their PR spinning in first.

GDP Growth

This morning’s UK release was rather inconvenient for the monetary expansion apologists as we saw this.

UK gross domestic product (GDP) contracted by an unrevised 0.2% in Quarter 2 (Apr to June) 2019, having grown by an upwardly revised 0.6% in the first quarter of the year.

This meant that the annual rate of growth rose to 1.3% which is better than the Euro area’s 1.2%. I point this out because Michael Saunders of the Bank of England was telling us on Friday that we were in a weaker position. Also there was this.

Annual GDP growth in 2017 is now estimated at 1.9%, revised up from 1.8%,

So we move on knowing that the past was better than we thought. or if you prefer that economic growth has slowed by less than we thought.

Money Supply

There has been an improvement in recent months and here is this morning’s release from the Bank of England.

Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFCs) and NIOFCs. In August, money holdings rose by £10.4 billion, with positive contributions from all sectors.

 

The total amount of money held by households rose by £4.6 billion in August. This was primarily due to a large increase in non-interest bearing deposits. The total amount of money held by NIOFCs rose by £3.3 billion, while the amount held by PNFCs rose by £2.5 billion.

Sorry for their love of acronyms and NIOFCs are non intermediating financial companies.

This means that the annual rate of growth for broad money is 3.3% as opposed to the 1.8% registered in May. The main changes have come in July and now August.

If we switch to M4 lending which is sometimes a useful guide then things have improved considerably as the rate of annual growth has pushed up to 5.5%. As mortgage lending remained pretty similar it has been driven by this.

Borrowing by financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs), rose to £16.6 billion in August, the largest amount since monthly figures were first collected in 2009. Fund managers were the largest contributor to this strength.

Thus as so often with this sort of data ( bank lending) we are left wondering what the economic impact will be?

Consumer Credit

This continues on its merry way.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.9 billion in August, slightly below the £1.0 billion average since July 2018.

The Bank of England are keen to point out this.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%. This remains considerably lower than its peak of 10.9% in November 2016, and is the lowest level since February 2014.

There are several elements of context to this. Firstly the rate of growth has been so fast it has raised the total to £218.6 billion so percentages would naturally fall. Also the weakening of the car market has contributed. Next the numbers are still much higher than anything else in the economy.

Small Business Loans

Remember when the monetary easing was supposedly for smaller businesses? Well there is a reason why that went quiet.

In contrast, the growth rate of borrowing by SMEs weakened slightly to 0.7%.

Comment

If we consider the overall situation we find several problems with helicopter money. The first is that it is supposed to be an emergency response when we keep being told we are not in an emergency but rather a recovery. It is a bit like putting an electric shock on a heart which is still beating. The next is that it would be an extraordinary move and yet again a big change would be made by unelected technocrats. This reminds me that some years ago I made the case for Bank of England policymakers to be elected. Finally it is just another way of the establishment making things easier for itself at the expense of the wider population.

This is because the wider population would be at risk of inflation and maybe much more inflation. This need not be consumer inflation as so far in the credit crunch era we have seen moves in asset prices such as bonds, equities and house prices. The latter of course allows the establishment to claim people are better off when first-time buyers are clearly worse off. Putting it another way this is why they are so resistant to putting house prices in the inflation indices and the new push to use fantasy rents suggests they fear helicopter money and negative interest-rates are on the horizon.

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What can we expect next from the economy of France?

During the Euro area slow down France has mostly been able to avoid the limelight. This is because it has at least managed some economic growth at a time when Germany not always has. It may not be stellar growth but at least there has been some.

In Q2 2019, GDP in volume terms grew at the same pace as in the previous quarter: +0.3% (revised by +0.1% from the first estimate).

However  there are questions going forwards which plugs into the general Euro area problem which got a further nudge on Monday.

The IHS Markit Eurozone Composite PMI® fell to
50.4 in September according to the ‘flash’ estimate,
down from 51.9 in August to signal the weakest
expansion of output across manufacturing and
services since June 2013………The survey data indicate that GDP looks set to rise by just 0.1% in the third quarter, with momentum weakening as the quarter closed.

As you can see growth is fading and may now have stopped if the PMI is any guide and this was reflected in the words of the Governor of the Bank of France in Paris yesterday.

For the past ten years, there is little doubt that ECB monetary policy under Mario Draghi’s Presidency has made a decisive contribution not only to safeguarding the euro in 2012, but also to the significant recovery of the euro area since 2013. Over this period, more than 10 million jobs have been created. Our unconventional measures are estimated to add almost 2 percentage points of growth and of inflation between 2016 and 2020.

It is revealing that no mention is made of growth right now as he concentrates on what he considers to be past glories. He has rounded the numbers up too as they are 1.5% and 1.9% respectively. Let me give him credit for one thing though which is this although I would like him to say this to the wider public as well.

Since I am talking to an audience of researchers I should of course emphasise that such numbers are subject to uncertainty.

Also raising inflation in the current environment of weak wage growth is likely to make people worse and not better off.

France

The situation here was better than the Euro area average but still slowed.

At 51.3 in September, the IHS Markit Flash France
Composite Output Index fell from 52.9 in August,
and pointed to the softest expansion in private sector
activity for four months.

Actually manufacturing is doing okay in grim times with readings of 49.7 and 50.3 suggesting flatlining. The real fear here was that the larger services sector is now being sucked lower by it.

However, with services firms registering their
slowest rise in activity since May, fears of negative
spill over effects from the manufacturing sector are
coming to fruition. Any intensification of such effects
would likely dampen economic growth going
forward.

This leaves me mulling the record of Markit in France as several years ago it was criticised for being too pessimistic by the French government and more recently seems to have swung the other way.

What about fiscal policy?

This did get a mention in the speech by the Governor of the Bank of France yesterday.

Failing that, a second answer is for fiscal policy to step in. Fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long-term growth.

The problem with that argument is that even the French run IMF could not avoid pointing out this in July.

France’s public debt has been consistently rising over the last four decades, increasing by 80 percent of GDP since the 1980s to reach close to 100 percent of GDP at end-2018. This reflects the inability of successive governments to take full advantage of good times to reverse the spending increases undertaken during downturns.

Actually some of the IMF suggestions look rather chilling and perhaps in Orwellian language.

rationalizing spending on medical products and hospital services; improving the allocation of resources in education

Also and somewhat typically the IMF has missed one change in the situation which is that at present France is being paid to borrow. It’s ten-year yield went negative at the beginning of July and has mostly been there since. As I type this it is -0.32%. It still has to pay a little for longer terms ( the thirty-year is 0.48%) but as you can see not much.

So the situation is that France does have quite a lot of relatively expensive debt from the past but could borrow now very cheaply if it chose to do so.

Banks

Whilst he s referring to macroprudential policy it is hard not to have a wry smile at this from the Governor of the Bank of France.

 To start with, as of today, our toolkit is very much bank-centric.

Especially when he add this.

We are making some progress to extend macroprudential policy beyond the banking sector.

Returning to the banks they are just like elsewhere.

PARIS (Reuters) – Societe Generale (SOGN.PA) plans to cut 530 jobs in France by 2023, CGT union said in a statement.

Of course BNP Paribas has been taking some brokerage business and employees from Deutsche Bank although it has not be a complete success according to financemagnate.com.

Deutsche’s clients will receive letters explaining how the transfer will work. However, some of them have already moved to competitors such as Barclays, which has won roughly $20 billion in prime brokerage balances.

In a way the French banks have used Deutsche Bank as a shield. But many of the same questions are in existence here. How are they going to make sustained profits in a world of not much economic growth and negative interest-rates?

Unemployment

This is the real achilles heel of the French economy. From Insee

The ILO unemployment rate decreased by 0.2 points on average in Q2 2019, after a 0.1 points fall in the first quarter. It stood at 8.5% of the labour force in France (excluding Mayotte), 0.6 points below its Q2 2018 level and its lowest level since early 2009.

Whilst the falls are welcome it is the level of unemployment and the fact it is only now approaching the pre credit crunch levels which are the issue as well as this.

Over the quarter, the employment rate among the youth diminished (−0.3 points),

Whilst the unemployment rate for youth fell by 0.6% to 18.6% it is still high and the falling employment rate is not the best portent for the future.

Comment

So far the economy of France has managed to bumble on and unlike the UK and Germany avoided any quarterly contractions in economic output. If you look at this morning’s official survey then apparently the only way is up baby.

In September 2019, households’ confidence in the economic situation has increased for the ninth consecutive month. At 104, the synthetic index remains above its long-term average (100), reaching its highest level since January 2018.

Perhaps the fall in unemployment has helped and a small rise in real wages. The latter are hard to interpret as a change at the opening of the year distorted the numbers.

firms might pay a special bonus for purchasing power (PEPA) in the first quarter of 2019, to employees earning less than 3 times the minimal wage.

According to the official survey published yesterday businesses are becoming more optimistic too.

In September 2019, the business climate has gained one point, compared to August. The composite indicator, compiled from the answers of business managers in the main sectors, stands at 106, above its long-term mean (100)

So there you have it everything except for the official surveys points downwards. In their defence the official surveys have been around for a long time. So let me leave you with some trolling by the Bank of France monthly review.

French economic growth has settled into a fairly stable pace since mid-2018 of between 1.2% and 1.4% year-on-year . France has thus demonstrated greater resilience than other euro area economies, particularly Germany, where year-on-year growth only amounted to 0.4% in mid-2019. This growth rate should continue over the coming quarters: based on Banque de France business surveys published on 9 September, we expect quarter-on-quarter GDP growth in the third quarter of 2019 of 0.3%.

Rethinking The Dollar

I did an interview for this website. Apologies if you have any issues with the sound as the technology failed us a little and we had to switch from my laptop to my tablet.

 

 

 

 

Germany has become a weak link for the Euro area economy

This morning has focused our minds again on what has been one of the economic developments of the past eighteen months or so. This is the turn in the trajectory of the German economy which has gone from being what the Shangri-Las would call the leader of the pack to not only a laggard but maybe contracting. So let us get straight to the news,

The German economy contracted in September,
latest flash PMI data showed, as the downturn in
manufacturing deepened and service sector growth
lost momentum. Job creation meanwhile stalled as
firms reported weakening demand and pessimism
towards the outlook for activity. ( Markit PMI )

Manufacturing

If we start with this area then we have to address the fact that things were already really bad so that gives a perspective on the state of play. If we thought the worst was behind us then how about this?

September’s IHS Markit Flash Germany
Manufacturing PMI read 41.4, signalling the
sharpest decline in business conditions across the
goods-producing sector since the depths of the
global financial crisis in mid-2009. ( Markit)

The only time I can recall a series weaker than this was the Greek manufacturing sector which I recall going into the mid-30s back in the day as the economy collapsed, or if you prefer was rescued. I am sure that some there are having a grim smile at this turn of events although of course it will have side-effects for my subject of Friday.

The survey also tries to look ahead but that raises little hope and even adds to the gloom.

The survey showed a sustained decline in underlying
demand, with total inflows of new business falling
for the third month running and at the quickest rate
for seven years. Slumping manufacturing orders led
the decline, recording the steepest drop in more than
a decade in September,

If we switch to the official data we were told this earlier this month.

In July 2019, production in industry was down by 0.6% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In June 2019, the corrected figure shows an decrease of 1.1% (primary -1.5%) from May 2019.

As you can see there June was not as bad as thought only for the number to fall again in July meaning we can get some perspective from this.

-4.2% on the same month a year earlier (price and calendar adjusted)

This means that the index for industrial production is at 101.2 where 2015 = 100 which shows little growth and if we drop construction out of the numbers it falls to 99.5. So in broad terms what Talking Heads would call a road to nowhere. More specifically the seasonally and calendar adjusted figures peaked at 107.2 in May of 2018.

Also we see that the PMI numbers we looked at above are pretty consistent with the official orders data.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in July 2019 a seasonally and calendar adjusted 2.7% on the previous month…….

-5.6% on the same month a year earlier (price and calendar adjusted).

Services

This has been doing much better than the manufacturing sector. But we already know from the numbers above that it has not pulled the manufacturing sector higher so the troubling question is whether it pulled the service sector down?

Growth of business activity in the service sector
slowed sharply since August to one of the weakest
rates seen over the past three years……..Flash Germany Services PMI Activity Index at
52.5 (Aug: 54.8). 9-month low.

Sadly the answer is yes.

though notably there was also a drop in service sector new business – the first recorded since December 2014.

You may not be surprised to learn that much of the trouble is coming from abroad.

Lower demand from abroad also remained a key factor, with both manufacturers and service providers reporting notable decreases in new export orders during the month.

Bringing everything together brought a new development for the Markit PMI series.

“Another month, another set of gloomy PMI figures
for Germany, this time showing the headline
Composite Output Index at its lowest since October
2012 and firmly in contraction territory.
“The economy is limping towards the final quarter of
the year and, on its current trajectory, might not see
any growth before the end of 2019″

That is significant for them as they have been over optimistic for Germany throughout this phase. They have recorded growth when the official data has showed a contraction. Also if we look back to the opening of last year they gave us numbers in the high 50s showing very strong growth whereas as I pointed out on the 20th of last month the reality was this.

Actually back then we did not know how bad things were because the GDP numbers were wrong as the Bundesbank announced yesterday…….In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%).

In some ways it is harsh to point this out because the official data series was wrong too but the PMIs were also more optimistic than what we thought the numbers were then, and sadly were overall simply misleading.

Bonds

There has been an impact here this morning as Germany’s bond market has resumed its rally. The picture had been weaker for a while in an example of buy the rumour and sell the fact on ECB ( European Central Bank ) action. But today the ten-year yield has fallen to -0.58% and the whole curve has gone negative again with the thirty-year at -0.12%.So Germany is being paid to borrow at every maturity.

Comment

There are more than a few questions here and the Ivory Tower of the ECB has been instructed to look into the situation. From a Working Paper released this morning.

In the period from January 2018 to June 2019 the year-on-year growth rate of euro area industrial production (excluding construction) fell by 6.3 percentage points overall, from 3.9% to -2.4%. This is by far the largest fall recorded among major economies in that period……Among the largest euro area countries, the biggest declines were recorded by Germany (10.9 percentage points), the Netherlands (5.7 percentage points) and Italy (5.5 percentage points).

In a broad sweep what has been a long-running success for the Euro area which has been German production leading to the trade surplus has stalled and hit the brakes. Or as Markit put it.

The automotive sector was once again highlighted as a particular source of weakness.

As to the ECB it is looking rather impotent here. It has made its move with even lower interest-rates ( -0.5%) and more bond buying or QE but it was doing that when the German economy turned down at the opening of 2018. Also the hype about the new TLTRO and the issue of tiering for The Precious collapsed as the take-up was a mere 3.4 billion Euros.

Of course Germany could respond with fiscal policy. Here the outlook is bright as it has and is running a fiscal surplus and it would be paid to borrow. Yet it shows little or no sign of doing so. From time to time a kite is flown like the current one about more spending on renewable energy but then the wind stops blowing and the kite falls to the ground.

Meanwhile this morning’s monthly report from the Bundesbank seems rather extraordinary.

Moreover, from today’s vantage point, only a slight decline in GDP is to be expected overall, even including the second quarter. “Such a decline should currently be seen as part of a cyclical return to normality as the German economy emerges from a period of overheating,” according to the experts.

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