What to do with a problem like Germany? Cut interest-rates further….

Over the past year there has been something of a sea change for the economy of Germany. After a period of what in these times was strong economic growth the engine of the Euro area has stuttered and coughed. If we look at it in annual terms economic growth went from the 2.2% of 2016 and 2017 to 1.4% last year and the latter was the story of two halves as the second half saw the economic contract in the third quarter and flat line in the fourth. This fits with our subject of yesterday Deutsche Bank which has seen its share price fall by 36% over the past year as both it and its home economy have struggled. Oh and that new bad bank plan rallied the share price for a day and a bit as it is back to 6.03 Euros. So it looks like another new plan is singing along with Queen.

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust.

What Next?

The opening quarter of this year offered some relief as Germany saw the economy grow by 0.4%. However yesterday in its June report the Bundesbank pointed out that it was not convinced that this represented a genuine turn for the better. 

Special effects that contributed to a noticeable rise in gross domestic product in the first quarter are either expiring or being reversed.

Google Translate is a little clunky here but we see that it feels that the construction industry will not have boosted the economy.

So is the construction industry on a quarterly average with certain Rebound effects. Due to weather conditions, construction activity had widened considerably in the winter months.

Also it feels that the ongoing problems with sales of diesel engined cars which we see pretty much everywhere we look will impact again after flattering things as 2019 opened.

Furthermore, due to delivery difficulties as a result of the introduction of the new emissions test procedure WLTP (Worldwide Harmonized Light Vehicles Test Procedure) last fall. Deferred car purchases have been made up for the most part.

It notes that the industrial production sector had a rough April.

Industrial production decreased in the April 2019 strongly. In seasonally adjusted account it fell below the previous month’s level by 2½%. As a result, industrial production also fell sharply compared to the mean of the winter months (- 2%).

Do the business surveys back this up?

If we start with construction then here is the latest from Markit.

After a solid performance in early-spring, the German
construction sector continued to lose momentum during May, recording its weakest rise in total activity for four months……It’s been a largely positive start to the year for the sector, but a first fall in new orders in nine months points to some downside risks to the short-term outlook.

So broadly yes and maybe further slowing is ahead. 

However as we look wider Markit is more optimistic than the Bundesbank.

The Composite Output Index continued to point to a modest
pace of growth across Germany’s private sector. At 52.6, the latest reading was up from 52.2 in April and the highest in three months, but still below the long-run series average of 53.4 (since 1998).

That is interesting as central banks love to peruse PMI numbers. Mind you perhaps they had advance warning of this released this morning from the ZEW Institute.

The German ZEW headline numbers for June showed that the economic sentiment index arrived at -21.1 versus -5.9 expectations and -2.1 last. While the sub-index current conditions figure jumped to 7.8 versus 6.0 expected and 8.2 booked previously, bettering market expectations. ( FXSTREET )

There is a little irony in the present being better than expected but it is rather swamped by the collapse in expectations. The ZEW is an arcane index that is hard to get a handle on so we should not overstate its significance but the change is eye-catching.

A policy response

I was going to point out that this was going to be an influence on the policy of the European Central Bank or ECB. This comes in two forms as firstly Germany is such a bell weather for the Euro area and according to recently updated ECB capital key is 26.4% of it. Also of course there is the thought that overall ECB policy is basically set for Germany. Thus I was expecting some news or what have become called “sauces” from the ECB summer camp at Sintra which opened last night. This morning we have already learned that President Draghi packed more than his shorts, sun cream and sunglasses.

In this environment, what matters is that monetary policy remains committed to its objective and does not resign itself to too-low inflation.

Here he is setting out his stall and the emphasis is his. There is a clear hint in the way that he is pointing at “too-low inflation” as in the coded language of central bankers it leads to this.

Looking forward, the risk outlook remains tilted to the downside, and indicators for the coming quarters point to lingering softness.

So now not only do we have too-low inflation we have a weak economy too. So if we were a pot on the stove we are now gently simmering. Then Mario turns up the gas.

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.

First though we have to wait as he continues with the dead duck that is Forward Guidance.

We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation.

After all if it worked we would not be here would we? But then we get to boiling point.

This applies to all instruments of our monetary policy stance.

Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.

And the APP still has considerable headroom.

For newer readers the APP is the Asset Purchase Programme or how it has operated what has become called Quantitative Easing or QE. This is significant because if there is a country which lacks headroom it is our subject of today Germany. This is because it has been running a fiscal surplus and reducing its national debt which combined with the existing ECB purchases means there are not so many to buy these days. Not Italy though as there are plenty of its bonds around.

Finally we get a reinforcement of the theoretical framework with this.

What matters for our policy calibration is our medium-term policy aim: an inflation rate below, but close to, 2%. That aim is symmetric, which means that, if we are to deliver that value of inflation in the medium term, inflation has to be above that level at some time in the future.


We may have seen the central banking equivalent of what is called a “one-two” in boxing. Yesterday the German Bundesbank talks of an economic contraction and today Mario Draghi is hinting that more easing  is on its way.  What this may mean is that whilst the Bundesbank is unlikely to be leading the charge for easier policy it will not stand in its way. Also if Mario Draghi is going to do this there is not a lot of time left as he departs in October, does he plan to go with a bang?

This has already impacted German financial markets as they look at the newswires and price German bonds even higher. After all if you expect a large buyer why not make them pay for it? So it is now being paid even more to borrow as the benchmark ten-year yield reaches another threshold at -0.3%. Or if you prefer the futures contract has hit all time highs in the 172s.

Of course if the easing worked we would not be here so there is an element of going through the motions about this. Also let’s face it only central bankers and their cheerleaders think low inflation is a bad idea. Sadly the media so rarely challenge them on how they will make people better off via them being poorer.



Will fiscal policy save the US economy or torpedo it?

One of the features of the credit crunch era has been the shift in some places about fiscal policy. For example the International Monetary Fund was rather keen on austerity in places like Greece but then had something of a road to Damascus. Although sadly Greece has been left behind as it ploughs ahead aiming for annual fiscal surpluses like it is in a 2012 time warp. Elsewhere there have been calls for a fiscal boost and we do not need to leave Europe to see them. However as I have pointed out before there is quite a distinct possibility that President Donald Trump has read his economics 101 textbooks and applied fiscal policy into an economic slow down. Of course life these days is rarely simple as his trade policy has helped create the slow down and is no doubt a factor in this from China earlier..

Industrial output grew 5.0 percent in May from a year earlier, data from the National Bureau of Statistics showed on Friday, missing analysts’ expectations of 5.5% and well below April’s 5.4%. It was the weakest reading since early 2002. ( Reuters).

Also there has been another signal of economic worries in the way that the German bond future has risen to another all-time high this morning. Putting that in yield terms holding a benchmark ten-year bond loses you 0.26% a year now. Germany may already be regretting issuing some 3 billion Euros worth at -0.24% on Wednesday although of course they cannot lose.

US Fiscal Policy

Let us take a look at this from the perspective of the South China Morning Post.

The US budget deficit widened to US$738.6 billion in the first eight months of the financial year, a US$206 billion increase from a year earlier, despite a revenue boost from President Donald Trump’s tariffs on imported merchandise.

So we can look at this as a fiscal boost on top of an existing deficit. The latter provides its own food for thought as the US economy has been growing sometimes strongly for some years now yet it still had a deficit. In terms of detail if we look at the US Treasury Statement we seem that expenditure has been very slightly over 3 trillion dollars whereas revenue has been 2.28 trillion. If we look at where the revenue comes from it is income taxes ( 1.16 trillion) and social security and retirement at 829 billion and in comparison corporation taxes at 113 billion seem rather thin to me.

The picture in terms of changes is as shown below.

So far in the financial year that began October 1, a revenue increase of 2.3 per cent has not kept pace with a 9.3 per cent rise in spending.

If we look at the May data we see that the broad trend was exacerbated by monthly expenditure being high at 440 billion dollars as opposed to revenue of 232 billion. Marketwatch has broken this down for us.

Most of the jump can be explained by June 1 occurring on a weekend, which forced some federal payments into May. Excluding those calendar adjustments, the deficit still would have increased by 8%, with spending up by 6% and revenue up by 4%.

In terms of a breakdown it is hard not to think of the oil tankers attacked in the Gulf of Oman yesterday as I note the defence numbers, and I have to confess the phrase “military industrial complex” comes to mind.

What will recur are growing payments for Medicare, Social Security and defense. Medicare spending surged 73% — mostly because of the timing shift, though it would have rose 18% otherwise. Social Security benefits rose by 11% and defense spending rose 23%.

So we have some spending going on here and its impact on the deficit is being added to by this from February 8th last year.

The final conference committee agreement of the Tax Cuts and Jobs Act (TCJA) would cost $1.46 trillion under conventional scoring and over $1 trillion on a dynamic basis over ten years,

Thus policy has been loosened at both ends and the forecast of the Congressional Budget Office that the deficit to GDP ratio would be 4.2% this year looks like it will have to be revised upwards..

National Debt

This was announced as being 22.03 trillion dollars as of the end of May, of which 16.2 trillion is held by the public. Most of the gap is held by the US Federal Reserve. Just for comparison total debt first passed 10 trillion dollars in the 2007/08 fiscal year so it has more than doubled in the credit crunch era.

Moving to this as a share of the economy the Congressional Budget Office puts something of a spin on it.

boosting debt held by the public to $28.5 trillion,
or 92 percent of GDP, by the end of the period—up
from 78 percent now.

The IMF report earlier this month was not quite so kind.

Nonetheless, this has come at the cost of a continued increase in the debt-to-GDP ratio (now at 78 percent of GDP for the federal government and 107 percent of GDP for the general government).

Where are the bond vigilantes?

They have gone missing in action. The financial markets version of economics 101 would have the US government being punished for its perceived financial profligacy by higher bond yields on its debt. Except as I type this the ten-year Treasury Note is yielding a mere 2.06% which is hardly punishing. Indeed it has fallen over the past year as it was around 2.9% a year ago and last November went over 3.2%.

So in our brave new world the situation is one of lower bond yields facing a fiscal expansion. There is an element of worries about the economic situation but the main player here I think is that these days we expect the central bank to step in should bond yields rise. So the US Federal Reserve is increasingly expected to cut interest-rates and to undertake more QE style purchases of US government debt. The water here is a little murky because back at the end of last year there seemed to be a battle between the Federal Reserve and the President over future policy which the latter won. So much for the independence of central banks!

The economy

Let me hand you over to the New York Federal Reserve.

The New York Fed Staff Nowcast stands at 1.0% for 2019:Q2 and 1.3% for 2019:Q3. News from this week’s data releases decreased the nowcast for 2019:Q2 by 0.5 percentage point and decreased the nowcast for 2019:Q3 by 0.7 percentage point.

That compares to 2.2% annualised  for a month ago and 3.1% for the first quarter of the year. So the trend is clear.


As we track through the ledger we see that the US has entered into a new period of fiscal expansionism. The credit entries are that it has been done so ahead of an economic slow down and at current bond yields is historically cheap to finance. The debits come when we look at the fact that the starting position was of ongoing deficits after a decade long period of economic expansion. These days we worry less about national debt levels and more about the cost of financing them, although as time passes and debts rise that is a slippery slope.

The real issue now is how the economy behaves as a sharp slow down would impact the numbers heavily. We have seen the nowcast from the New York Fed showing a slowing for the summer of 2019. For myself I worry also about the money supply data which as I pointed out on the 8th of May looks weak. So this could yet swing either way although this from February 8th last year is ongoing.

The deep question here is can we even get by these days without another shot of stimulus be it monetary,fiscal or both?


How can UK GDP be reported as rising and falling at the same time?

Let us open the week noting an area which is one part of something where the UK is strong. From the UK PPL.

In 2018 Ed Sheeran was once again the most played artist in the UK, according to data from music licensing company PPL. He has held the top spot in three of the last four years – 2018, 2017 and 2015 – and since his first album was released in 2011 he has been in the top five most played artists five times.

Whilst Ed may single-handedly be doing a good job there is far more to it than that.

The PPL said nine of the top 10 most-played artists were British, with Pink being the exception.

The charts were revealed ahead of at its AGM, where the society is due to announce that it collected £246.8 million on behalf of 105,192 performers and rights holders over the last year.

Seven of the top ten tracks also feature British talent, cementing a successful year for the UK industry.

Also let’s here it for the girls.

Her rise ( Jess Gynne) has contributed to a new milestone for the charts; 2018 was the first time that the majority of most played acts were, or featured, women, taking six out of the top ten spots.

Whilst these are domestic numbers according to UK Music much of the success is repeated abroad.

UK Music have today revealed our 2018 Measuring Music report, revealing that UK music industry exports rose by 7% to a record £2.6 billion last year. The UK music industry grew by 2% in 2017 to contribute a record £4.5 billion to the economy – up by £100 million on 2016, a new report by UK Music reveals today.

We do not know the figures for 2018 as we note that the world industry seems finally to be coming to terms with the issue of people in effect hiring or renting rather than buying their product. Trying to criminalise your consumers and customers was a non too bright strategy.


The topic reminded me of the way that the UK film industry has been booming. Although I do not need much reminding because Battersea Park is regularly used by the film industry these days. From the British Film Industry or BFI.

The UK film industry’s GVA in 2016 was £6.1 billion. According to data published by the government in November 2017,
the GVA for all UK creative industries in 2016 was £91.8 billion, so film accounted for almost 7% of all creative
industries’ value added.
As Figure 4 shows, since 2007 GVA for film has increased by over 140%. In 2016 for the film industry as a whole,
distribution accounted for 50% of the total value added, production 40% and exhibition 10%.

As to can see the numbers from the industry do not yet fully reflect the growth we have seen.

Today’s Data

In the circumstances of the numbers reflecting what was supposed to be the post Brexit period we opened the batting solidly.

Rolling three-month growth was 0.3% in April 2019, down from 0.5% in March, but on par with growth rates at the start of 2019.

We can break that down.

The services sector had a positive contribution to rolling three-month growth in April 2019, increasing by 0.2%. The production sector increased by 0.7%, within which manufacturing grew by 1.2%, making it the second-largest contributor to rolling three-month growth. Construction also had a positive contribution, growing by 0.4% in the three months to April 2019.

Every sector was growing with services making GDP rise by 0.16% and construction by 0.02% and production by 0.09%. As we will be looking it in detail I will note that manufacturing was 0.11% ( so other parts of production were weak).

As this included March 29th when businesses had expected us to Brexit that was okay. However it came with a bad number for April.

Monthly GDP growth was negative 0.4% in April 2019, as the production sector and manufacturing sub-sector contracted.

If we look into this we find that we should have been expecting it.

Monthly growth in production was negative 2.7% in April, driven by manufacturing, which contracted by 3.9%.

Why? Well the UK motor industry or SMMT had already told us this.

UK car production falls -44.5% in April with 56,999 fewer units built in extraordinary month. UK commercial vehicle manufacturing declines -70.9% in April, with 2,162 units produced. British engine manufacturing falls -23.4% in April as UK car plant Brexit shutdowns affect demand.

These fed into the wider data and were half the April fall in manufacturing. Actually nearly all the manufacturing categories fell with only wood and paper and electrical equipment showing some growth and they were small amounts.

If we look at the trend we see a different perspective.

Rolling three-month growth in the production sector was 0.7% in April 2019, while manufacturing increased by 1.2%. Within manufacturing, the two largest positive contributors to growth were manufacture of food products and pharmaceutical products. Monthly growth in production was negative 2.7% in April, driven by manufacturing, which contracted by 3.9%.

Or to put it another way it fits this nursery rhyme.

Oh, The grand old Duke of York,
He had ten thousand men;
He marched them up to the top of the hill,
And he marched them down again.

And when they were up, they were up,
And when they were down, they were down,
And when they were only half-way up,
They were neither up nor down.

Are the numbers inconsistent?

Yes they are as the quarterly and monthly numbers are more different than you might think for two reasons.

high growth into February 2019 raised output significantly above the level of output seen in the months November 2018 to January 2019. Despite the declines in March and April, the average output of the current three months is still above that of the previous three months.

Also the quarterly numbers ( Q1,  Q2 etc.) benefit from the other two ways of calculating GDP which are the income and expenditure data.  So it might be better to call them Gross Value Added to distinguish them.


We have learnt quite a bit today. The first point is the the failure of the UK government and Parliament over Brexit has real word consequences. Remainers will argue we should not be leaving and Brexiters will say we would now be getting on with it. This way round we have had the side-effects headlined by the motor industry changing the date of its annual shut downs without in the end there being any reason for it. So it just looks incompetent.

Moving to the broad trend that remains in line with my argument that the trajectory is of the order of the UK growing by about 0.3% to 0.4% per quarter. The danger is that the trade war issue and signs of slow downs elsewhere build up. For example last week saw interest-rate cuts from two of the competitors at the cricket world cup, with India and Australia playing yesterday. Also there is a warning as economic growth in the services sector seems to have slowed.

Maybe we are seeing the beginnings now of a response to the lower bond yields. As I have been suggesting they will impact fixed-rate mortgage costs.

The average two-year fixed rate has fallen by 0.03% from 2.52% in January 2019 to 2.49% this month, while the average five-year fixed rate decreased by 0.09% from 2.94% to 2.85% over the same period. ( Moneyfacts )




What to do with the problem that is Germany?

Sometimes we find ourselves facing a situation where we have the equivalent of a drumbeat that goes on and on and on. This has been provided by the surge in world bond markets which has a particular headliner. If we look towards Europe we see that the Federal Republic of Germany has set a new record for itself this morning as its benchmark ten-year bond yield has fallen to -0.23%. So it is being paid ever more to borrow which I will let sink in for a moment.

We can look at this in price terms as the September future peaked at 171.35 earlier today. In itself this provides a perspective because bond contracts are defined around the price being 100, so it has been “Boom! Boom! Boom!” for quite some time for bond investors. More recently there have been ebbs and flows but the present trend started just over three months ago when the future was below 163. For a bond market that is a strong move in such a period so if you have been long then well played to you.

Those who have followed the situation will recall it was considered an issue when the two-year and then five-year yields went negative. So there has been a spread along the maturity spectrum or a type of contagion. It has influenced even the very long term bonds as the thirty-year yield is a mere 0.4%. So pretty much any infrastructure plan looks viable when you can borrow that cheaply.

So let is look at why this is happening?


The issue regarding the domestic economy was highlighted by the statistics office earlier.

April 2019 (provisional): new orders in manufacturing 
+0.3% on the previous month (price, seasonally and calendar adjusted)
-5.3% on the same month a year earlier (price and calendar adjusted)

What is considered to be the engine of the German economy has been stuttering and it started back in February last year when the growth ended but the real fall began last October when the index was 110.6 ( compared to 2015 at 100) as opposed to the 105.5 of April. Too much precision is dangerous as the numbers are erratic but the detail is not quite what you might expect. Whilst there was a “trade war” effect for a while more recently non-Euro orders have picked up. It has been orders from within the Euro area itself and then declining orders from within Germany that have driven the fall in 2019.

But the economic theme has been of a weak manufacturing sector which has put something of a brake on the overall economy.

The German economy continued to grow at the beginning of the year……The gross domestic product (GDP) increased by 0.4% (after price, seasonal and calendar adjustment) in the first quarter of 2019 compared with the fourth quarter of 2018. The German economic performance last declined slightly in the third quarter of 2018 (-0.2%) and stagnated in the fourth quarter of 2018 (0.0%).

I am not so sure about the “continued to grow” point as it previously stagnated after a contraction. But we get a relevant perspective from this.

+0.7% on the same quarter a year earlier (price and calendar adjusted)

That contrasts with the front page of the statistics office which quotes a 1.4% economic growth rate for 2018. Or the 1.1% growth of the first quarter of 2017 alone.

If we look ahead this week’s business survey from Markit showed that this phase is not yet over.

Business activity in the service sector continues to
grow almost unabated, indicating that domestic
demand conditions remain strong. With the drag from
falling manufacturing production lessening in May,
the Composite Output Index has ticked up, although
it remains in territory historically associated with only
modest growth in GDP.

This was enhanced by this earlier today.

After a solid performance in early-spring, the German
construction sector continued to lose momentum during May, recording its weakest rise in total activity for four months.

External Events

One way of looking at this is simply to note that the Reserve Bank of India has joined the Reserve Bank of Australia in cutting interest-rates this week as we note this morning’s announcement.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.75 per cent from 6.0 per cent with immediate effect.

That adds to the hint from Jerome Powell of the US Federal Reserve and the 3.2% annualised contraction in the economy of South Africa where sadly the electricity blackouts are taking quite a toll. This has been added to by the Markit business surveys.

Global surveys indicated the weakest pace of economic growth for three years in May, with business optimism down to a survey low……….Global at lowest since 2012 with 13 out of 30 countries now in decline. Germany again reported the steepest downturn but, of the largest countries, the biggest change was seen in the US, where the PMI fell to its lowest since 2009 ( @WilliamsonChris )

So we see something of a rhythm section building up for the world economy and hence bond markets although some seem to be struggling to name that tune.

Despite increased international turmoil and reduced market growth, interest rates in Norway are set to rise going forward……….We have assumed three interest rate hikes of 0.25 percentage points by the end of 2022, the first of which is expected in June this year. The interest rate on credit lines will then rise to 3.6 per cent in 2022.

That was from Norway Statistics earlier who also left me wondering if they realised it is June! Anyway if they do as planned they need not worry any more about a weak Krone.

Official Interest-Rates

The Deposit Rate of the ECB is presently -0.4% and more to the point will have been negative for five years next week. Indeed it is set to last according to official policy.

The Governing Council expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary.

I wonder if we are seeing an impact from a principle highlighted by the band Ace so years ago.

How long has this been going on
How long has this been going on
Well, your friends
With their fancy persuasion
Don’t admit that it’s part of a scheme
But I can’t help but have my suspicion
‘Cause I ain’t quite as dumb as I seem

It may be that the length of the period we have had them for has built up the influence on the bond market.


There is much to consider here and it has been added to by the announcement of 4000 job losses at Volkswagen as I have been typing this. But as well as the obvious domestic issues where we have been seeing a sort of reverse rebalancing there are other factors at play. As well as the domestic issues there are external ones and let me add one more.

This is the issue of investing in what are considered to be safe assets. Let me quickly point out that safety is a relative term but a German economy where the public finances are being run at a surplus and with a falling national debt has attractions. Putting it another way after the purchases of the ECB ( 519 billion Euros) you can make a case for there being a shortage of German bonds. Hence the price has risen with two categories of buyers. Those with nowhere else to go and international investors happy to accept a running yield loss because they have some combination of fear for events elsewhere and hope for appreciation of the Euro.

But there is a catch because monetary policy in Germany as we have observed is and has been extraordinarily loose. Except the economy has plainly slowed making us wonder if that was it?


Perhaps we need to spare a thought for those landing on the beaches in Normandy all those years ago, including my maternal grandfather. We should also be thanking them and note that sometimes we do not know how lucky we are.


What does a Greek bond yield below 3% tell us?

Sometimes it is good to look at things from another direction so let me start by looking at the current situation through the prism of financial markets rather than the real economy. From @tracyalloway.

Greek government bond yields below 3%

I will return to the why and therefore of this in a moment but let me first move onto the stock market. Here is an article from Forbes from Saturday.

Greece’s stock market rose sharply this week, following a big defeat of the ruling leftist coalition in Regional and Euroelections last Sunday.

The Global Shares X FTSE shares (GREK) have gained 9.10%, as most financial markets around the world lost ground. Banks were particularly strong, leading the rally.

As you can see that was different to many other equity markets and continues stronger performance this year. If we move to the ASE General Index it at 828 is just under its high for the year and is up nearly 9% this year and around 35% on a year ago.

Some Perspective

If we return to the bond market then there are two clear perspectives. The first is that we have yet another day of singing along with the Black-Eyed Peas.

Boom boom boom
That boom boom boom
That boom boom boom
Boom boom boom

We have seen yet another all-time high for the benchmark German bond or bund as the ten-year yield has fallen to -0.21%. That has something of an ominous portent for the world economy if traders are correct. As we note that this time around Greece has joined the party there are nuances.

EFSF financial assistance, part of the second programme, ran from March 2012 through June 2015. In this programme, the EFSF disbursed a total of €141.8 billion, of which €130.9 is outstanding………….Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt. ( European Stability Mechanism)

So as you can see there are a lot fewer Greek bonds in circulation than there were, as they have been subsumed into EFSF/ESM system. This has had a consequence for volumes in the market as @Birdyworld points out.

When people are talking about Greek government bond yields it’s worth remembering that it’s basically not a market any more. The average month from 2001-2010 saw 42bn euros in secondary market transactions. The ENTIRE transaction volume 2011-2019 is 29bn euros.

This is a point I remember making back in the early days of the crisis when the ECB was buying Greek bonds to support the market that volumes went off the edge of a cliff. So the bond market does not tell us what it used to.

Also the stock market has improved but when we note it was previously above 5000 we can see that some context is required there too.


We can continue with something of a positive gloss as we note this from earlier this morning.

The Greek manufacturing sector strengthened further in
May. Production and new order growth remained sharp,
with employment continuing to rise. Domestic and foreign
demand were still resilient as new export orders rose strongly………… Currently, IHS Markit forecasts a 3%
increase in industrial production in 2019, with the rate of
unemployment set to fall to 18.3% by the end of the year.

That was from the Manufacturing PMI release which contrary what you might think was in fact lower at 54.2 as opposed to the previous 56.6. But according to this measure there has been a sustained improvement.

The latest headline PMI figure extended the current sequence of expansion to two years.

However some care is needed because if we look at the official data the numbers have improved so far in 2019 but if we look back the two years to March 2017 we see that output is in fact a little lower than the 104.92 of back then. The current reading of 104.03 is also a fair bit lower than the around 110 of last July.

Trade Problems

This is a crucial area because this was the modus operandi of the IMF (International Monetary Fund). The problem is highlighted by these figures from the Bank of Greece.

In March 2019, the current account deficit came to €1.5 billion, up by €352 million year-on-year, as a result of an increase in the deficit of the balance of goods, and notwithstanding the improved services balance. Additionally, the primary and secondary income accounts deteriorated………..In the first quarter of 2019, the current account deficit came to €3.7 billion, up by €420 million year-on-year, as the improved services balance and primary income account only partly offset a deterioration of the balance of goods and the secondary income account.

When we consider the extent of the economic depression that Greece has been through this is a pretty shocking result. All that pain to still be in deficit. Even worse any sort of stabilisation and maybe improvement seems to come with more imports of goods.

 Imports of goods grew by 6.0% at current prices and 4.1% at constant prices. ( first quarter 2019).

The Greek shipping industry seems to be booming against the world trend but was unable to offset the higher imports.

Sea transport receipts rose by 18.9%.

Money Supply

The good news is that narrow money growth or M1 has been picking up in 2019. However at 6.3% in April it remains below that of the wider Euro area so that is not entirely heartening. The numbers were especially weak around the turn of the year so we cross our fingers for tomorrow’s economic growth release for the first quarter.

Also we need to be cautious as Greece does not have its own money supply so these are numbers which make more assumptions than usual. Central bankers will find something to cheer in this however.

According to data collected from credit institutions,(1) nominal apartment prices are estimated to have increased on average by 2.5% year-on-year in the fourth quarter of 2018, whilst in 2018 the average annual increase in apartment prices was 1.5%, compared with an average decrease of 1.0% in 2017.

If you want to see a bear market though this has provided it with the overall index being at 60.5 at the end of 2018 where 2007 =100.


There have been some changes in the Greek situation but some things look awfully familiar. From Kathimerini.

There will be no service on the Athens metro and tram from 9 p.m. on Monday as workers walk off the job to protest understaffing, cutbacks and the privatization of public transport.

Also considering its share price you might think Deutsche Bank would have better things to do than troll Greece.

Greece should not sacrifice the credibility and discipline it has earned with such sacrifice in the past few years to short-term measures, warns Ashok Aram, Deutsche Bank’s regional CEO for Europe.

The Greek economy was sacrificed on the altar of turning the public finances into a sustained surplus. It is hard to believe that it was supposed to return Greece to economic growth ( 2.1% was forecast for 2012) whereas the contraction approached 10% at times. Sometimes I have to pinch myself when I see the media proclaiming the views of those responsible for this as being of any use, but that is the world we live in. But the reality is that after a depression which contracted the economy by around a quarter we still have to look hard for clear signs of a recovery or if you prefer the shape of it is an L rather than a V.

The world can be so upside down at times that we cannot rule out we might see a Greek bond with a negative yield.

Weekly Podcast

I look at why bond yields have dropped so sharply in the past few weeks.


UK manufacturing surges as we see some Mervyn King style “rebalancing”

Today brings a torrent of UK economic data bringing us up to the end of the first quarter of this year. Actually this particular “theme day” provides too many numbers and data points to be analysed in one go and is another in a sadly long list of examples of our national statisticians barking up the wrong tree. Moving to the numbers themselves this morning’s news has already unwittingly provided its own critique. From the BBC.

A replacement for how Britain’s emergency services communicate is set to go over budget by at least £3.1bn, a spending watchdog has warned.

The Home Office has already delayed switching off the existing system by three years to 2022.

But the National Audit Office (NAO) has raised doubts about whether the project will be ready by then

We observe another in a growing list of IT infrastructure projects for the NHS which are both late and way over budget. The track record is so poor that we may end up being grateful it works at all, assuming it does. But here is the GDP link because that extra £3.1 billion is likely to go straight to the future UK GDP bottom line in an example of us being worse off but it being recorded as a gain. That is the problem with using a measure which counts spending as an automatic gain rather than a type of inflation.

On a more technical level I looked at the area of the public-sector and GDP a few years back when I provided some technical advice to Pete Comley for his book on inflation. He had investigated the deflator ( inflation measure) used for GDP in the public-sector and found it to have more holes than a Swiss cheese.


This week has seen some extraordinary progress into the Champions League and Europa League finals but what is it worth in economic terms? @SwissRamble has produced some estimates.

Due to the significant increase (around 50%) in Champions League revenue in 2018/19, all English clubs will earn much more than prior season (2017/18 comparatives in brackets). As it stands:

€107m (€81m)

€102m (€61m)

€93m (€64m)

€93m (€40m)

As you can see it was a good year to do well as there is much more money in it and for those of you wondering why Liverpool and Spurs have not done much better than the two Manchester clubs it is because Manchester City got more out of the TV pool and because of  a coefficient based on the last 10 years.

On this basis, English clubs received following payments: €31m, €24m, €23m and €16m.

Mind you with the inflation in the price of players that total represents what you might pay for a world-class one. As a Chelsea fan I await the Europa League update with particular enthusiasm.

Today’s Data

Former Bank of England Governor Baron King of Lothbury must be very disappointed that he missed an opportunity to shout “rebalancing” from the rooftops as we were told this in the GDP report.

driven by growth of 2.2% in manufacturing output.

If we look for some detail we see this.

The quarterly increase of 2.2% in manufacturing is due mainly to rises of 9.4% from pharmaceuticals, 2.7% from food products, beverages and tobacco, and 3.2% from metals and metal products.

The first sector is hard to read because we know form past research that the UK pharmaceutical sector has erratic output levels that do not conform to monthly and sometimes quarterly timetables. As to the others I guess maybe nicotine addicts were stockpiling against the horrible fear of going cold-turkey!

Returning to the GDP numbers we see that production gave it a tug upwards.

Production output rose by 1.4% in Quarter 1 (Jan to Mar) 2019, compared with Quarter 4 (Oct to Dec) 2018, due to rises from manufacturing, and mining and quarrying.

There was a minor curiosity in this as we wonder who was getting ready for war?

basic metals and metal products (3.2%), driven by monthly strength during January 2019 from the weapons and ammunition subindustry, which increased by 25.5%.

Continuing our rebalancing journey the usual suspect for UK economic growth was taking something of a breather.

Growth in the services sector slowed to 0.3% in the latest quarter,

The slow down was particularly marked in these areas.

Professional, scientific and technical activities fell by 0.6% in Quarter 1 2019. However, this decrease broadly reflects a fallback following particularly strong growth throughout the second half of 2018. In addition, financial and insurance services output continued to fall in Quarter 1 2019, decreasing by 0.4%. The quarterly fall predominantly reflected a fall in financial service activities, which has not contributed positively to growth since Quarter 1 2017.

Moving to the headline number there was some good news.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.5% in Quarter 1 (Jan to Mar) 2019 having slowed to 0.2% growth in the previous quarter.

If we take this in round numbers terms we see that a combination of production and construction which rose by 1% pulled us up from 0.3% growth to 0.5%. Just addressing the construction numbers they do seem to coincide with my Battersea Dogs Home to Vauxhall crane count of 49 but the official series remains troubled.

The annual picture improved too.

In comparison with the same quarter a year ago UK GDP increased by 1.8% to Quarter 1 (Jan to Mar) 2019; up from 1.4% in the previous period.

This all happened in spite of this.

Monthly GDP growth was negative 0.1% in March 2019, as the services and construction sectors contracted.


This is a more complex issue than some would like to think and indeed have already claimed. Let me illustrate by opening with this.

Breakdown of Q1 suggests stockbuilding added 0.7 percentage points (pp) to quarterly growth, but note that net trade – including the imports being stockpiled -subtracted 0.6pp (excl. volatile components). ( @JulianHJessop)

As you can see the lazy response is to look at the stockbuilding adding to GDP forgetting that a lot of it was probably imported.


Our usual problem was added to by the increase in imports and thus turned into quite a subtraction from the numbers.

The total trade deficit (goods and services) widened £8.9 billion to £18.3 billion in the three months to March 2019, as the trade in goods deficit widened £6.4 billion to £43.3 billion and the trade in services surplus narrowed £2.5 billion to £25.0 billion.

There are several issues with this. As I regularly point out we have very little idea of our services trade data which tends to be fleshed out a year or two after the event. Also the fact we are large custodians of and traders in gold makes discerning the true trade position even more complex.

Excluding erratic commodities, such as non-monetary gold, the total trade deficit increased £3.1 billion to £14.5 billion in the three months to March 2019.


These numbers especially the pick-up in the annual rate of GDP growth are good news for the UK. There are of course issues looking ahead and one of them seems set to be in the headlines today as the Chinese arrive to meet President Trump. The news looks bad but was there a reason why the Chinese stock market rose by more than 3% today?

Moving back to GDP then a couple of media establishment themes took a knock from the GDP breakdown. Let me start with business investment.

Following four consecutive quarters of decline throughout 2018, business investment grew by 0.5% in the first quarter of 2019, driven by higher investment in IT equipment and other machinery and equipment.

The wider concept of investment provided more food for thought.

Gross fixed capital formation (GFCF) increased by 2.1% in the first three months of 2019

And as for austerity?

Government consumption increased by 1.4% in Quarter 1 2019, following growth of 1.3% in Quarter 4 (Oct to Dec) 2018.

Pump-priming? Well they were at play in the investment ( GFCF) numbers too.

mainly reflecting the 8.1% increase in general government investment.

So perhaps the Rolling Stones summed it all up some years ago.

You can’t always get what you want
You can’t always get what you want
You can’t always get what you want
But if you try sometimes you might find
You get what you need




Can Portugal continue its economic success story?

Today is the anniversary of the oldest alliance in the world as England signed the Treaty of Windsor with Portugal back in 1386. So let us take the opportunity to peer under the bonnet of the Portuguese economy which has been seeing better times after the struggles created by the Euro area crisis of the early part of this decade. Back then it was illustrated by an unemployment rate and benchmark bond yield in the high teens in percentage terms. The Euro area crisis saw the economy shrink at an annual rate of over 4% for a while which not only saw unemployment soar but also questioned the solvency of the nation which is why bond yields went with it. The latter point was an issue because like Italy Portugal had built up a history of not being able to sustain economic growth beyond 1% per annum but was unfortunately able to participate in any declines.

What about more recently?

A recovery began in 2014 but it was only slow growth and 2015 saw a rise but it was not until the third quarter of 2016 that we saw a real change with annual GDP growth going above 2% to 2.3%. This welcome rally continued and the first half of 2017 saw annual GDP growth at 3.1%. After the rough times of the credit crunch followed quickly by the Euro area crisis Portugal badly needed this.

2017 was the peak year as the second half maintained an annual growth rate of 2.5% so Portugal for once was not only joining in with a period of Euro area growth it was exceeding it. The latter theme continued in 2018 with Portugal slowing but doing considerably better than the average, although the catch is that in the last half of 2018 this happened.

In comparison with the third quarter of 2018, GDP increased 0.4% in real terms (0.3% in the previous quarter)


This meant the annual rate slowed to 1.7% and it was accompanied by something familiar.

The contribution of net external demand to GDP year-on-year rate of change shifted from -0.3 percentage points in the third quarter to -1.6 percentage points, with a decrease in real terms of exports of goods. The positive contribution of domestic demand increased to 3.3 percentage points in the fourth quarter


This is familiar on two counts. Firstly Portugal has a long history of going to the IMF due to balance of trade problems. Next comes the fact that problems with exports were a theme of the latter part of 2018 and has me wondering if this is related to the automotive sector in Portugal which is around 4% of the economy? Through the better period that sector has been a success but now times have got much harder illustrated by the fact that for example car sales by the largest Chinese manufacturer SAIC fell 20% on a year ago in April.

Moving to the Euro area strategy of “internal devaluation” which essentially means lower real wages that collided at the end of 2018 with the world trade issues, which of course are in the news right now. Next comes the role of the European Central Bank summarised here by its President Mario Draghi.

 I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery……..We view this as – but I don’t think I’m the only one to be the crucial driver of the recovery in the eurozone. At the time, by the way, when also other drivers were not really – especially in the first part, there was no other source of growth in the real economy.

If you take Mario at his word then QE and negative interest-rates were the driver of the recovery in Portugal. Thus the fading of growth should be no surprise as the monthly QE flow was tapered and then ended. Anyway that is Mario’s view and we should also note that he is hardly independent in this regard.


This is perhaps the clearest signal of better times.

In the 1st quarter of 2019, the unemployment rate stood at 6.8%, higher than the previous quarter value by
0.1 percentage points (pp) and lower than the year-on-year rate by 1.1 pp.

If we ignore for the moment the quarterly move we see that in comparison to the move above 17% ( 17.5%( in early 2013 things have got much better in this regard. Another way of putting it is that Portugal Statistics calculates a very broad measure including underemployment and thinks this.

Albeit of the quarterly increase in the 1st quarter of
2019, the unemployed population and the labour
underutilisation have displayed downwards trends since
the 1st quarter of 2013, having decreased in total
61.8% and 49.8%, respectively (corresponding to
573.2 thousand and 731.8 thousand people in each

Looking Ahead

The Bank of Portugal tells us this.

The Portuguese economy is expected to continue to grow by 2021, although at a slightly slower pace than in the past few years. After a 2.1% increase in 2018, gross domestic product (GDP) is expected to grow by 1.7% in 2019 and 2020, and by 1.6% in 2021, drawing closer to potential growth.

Let us start with the good news within this.

Projected growth for economic activity in Portugal outpaces that projected by the European Central Bank for the euro area, which indicates slight progress in the Portuguese economy’s convergence towards average income levels in the euro area.

Mind you with the trade war issue continuing there has to be doubt over this bit.

The Portuguese economy should continue to benefit from a favourable economic and financial environment, including an average growth in external demand of 3.4% and the maintenance of favourable financing conditions for economic agents.

National Debt

This has led to another favourable situation for Portugal which is the change in trend for the Public Finances. The annual deficit was running at an annual rate of 7.2% of GDP as 2015 began but is now running at an annual rate of 0.5%. This means that the national debt has finally begun to fall in relative terms to 121.5% of GDP. So we again see how economic growth can improve matters in this area.

However an “Obrigado Mario” is due as the ECB QE programme has unequivocally helped matters here with Portugal now having a ten-year yield of a mere 1.1%.


Let me continue with the good news theme with this from the Bank of Portugal this morning.

In 2018 real GDP was 1.2% higher than in 2008……The unemployment rate stood at 7.0%, the lowest figure in Portugal since 2004…… Although slowing down, tourism exports increased by 7.5% in 2018 and, together with car exports, were at the root of market share gains for Portuguese exporters,

Now let me move to the issues as it sees it.

However, labour productivity, measured as gross value added (GVA) per worker, declined by 0.6%……… Portuguese GDP per capita in 2018 stood at 58% of GDP per capita in the euro area.

If we take those issues in reverse we see that in spite of the recent stronger phase the troubles of the past leave Portugal mulling what happened to the promises of economic convergence made by the Euro area founders. Also last year saw Romania overtake Portugal in terms of total output but not on an individual basis.

However that issue is driven by the first statistic in my opinion. It stands out in two respects, as it is a disappointment compared to the rate of economic growth and compares very unfavourably with what we were looking at for America yesterday. More deeply it is systemic to Portugal which has long struggled with such issues with the stereotype being of old industries and old practices.

Finally the central bank may be happy about this but first time buyers will not be.

In the 4th quarter of 2018, the year-on-year change of median price of dwellings sales in Portugal was +6.9%,
increasing from 932 €/m2
in the 4th quarter of 2017 to 996 €/m2
in the 4th quarter of 2018. Lisboa stood out from the
other cities with more than 100 thousand inhabitants as it scored the highest house price (3 010 €/m2
) and also the
highest growth compared to the same period in the previous year: +23.5%….. Apart from Lisboa, the cities of Porto (+23.3%), Amadora (+20.3%) and Braga (+18.3%)
observed significant variations too.

Plenty of wealth effects for it to claim but how much lower would real GDP growth be if owner-occupied housing costs were not ignored by the inflation measures used?