Imputed Rents do their job of slowing rises in UK inflation

Today we find ourselves reviewing the data on the rise in inflation in the UK in 2017. This has been caused by a couple of factors. The first is something of a world-wide trend where the price of crude oil stopped falling and being a disinflationary influence. The second has been the fall in the value of the UK Pound which accelerated following the vote for the UK to leave the European Union just over a year ago. If we look back a year then the current US $1.269 has replaced the US $1.411 back then. So the inflation which was supposedly dead ( if you recall the Deflation hype and paranoia..) came back on the menu.

The UK establishment responds

If you do not want the public to realise that inflation is rising but do not wish to introduce any policies to stop it then the only option available to you is to change the way the numbers are measured. Last Autumn the UK statistical establishment began quite a rush to increase the use of rents in  a new headline UK inflation measure. There is of course a proper use for rents which is for those who do rent, however the extension was for those who own their house and do not actually rent it out. So yes imputed rents were required to fill the gap. Here is the official explanation.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property. A new index based on CPI but including owner occupier housing costs – CPIH – was launched in 2013.

How has that gone?

This new index had some problems in 2014,

Also there is this.

We have still not yet addressed all of the necessary requirements for CPIH to become a national statistic.

So why the rush? Well last week’s numbers on rents from Homelet will have raised a wry smile for many.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…..May’s decrease in average rental values marks a significant moment for the rented property sector. This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis.

So rents were rushed in as part of the “most comprehensive measure” of UK inflation just in time for them to fall! Those who believe that rental inflation is related to wage growth will no doubt be thinking that wage growth and hence likely rental growth is lower these days. This is all rather different to house prices where lower mortgage rates can set off more price rises and inflation. I have met those responsible for this and pointed out that the word “comprehensive” is misleading as they do not actually measure the owner occupied housing market they simply impute from the rental one.

Today’s data

We see this.

The Consumer Prices Index (CPI) 12-month rate was 2.9% in May 2017, up from 2.7% in April………The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.7% in May 2017, up from 2.6% in April.

So not only is the new measure again below the older one we see that the gap has now widened from 0.1% to 0.2%. As the difference must be the imputed rental section let us take a look.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to May 2017; this is unchanged from April 2017.

As you can see whilst the official data does not have the falls indicated by Homelet it is a drag on the overall inflation measure. Sir Humphrey Appleby would have a broad smile on his face right now. Oh and the reason why it is not showing falls is that the numbers are what might be called “smoothed”. The actual monthly  numbers are quite erratic ( which of course would lead to doubts if people saw them) so in fact the numbers are over a period of time and then weighted. The ONS has been unwilling to reveal the length of the period used but it used to be around 18 months. This is of course another reason why this methodology is flawed and a bad idea because rents from a year ago should be in last years indices not this months.

I have argued for a long time ( this debate began in 2012) that house prices should be used as they are of course actually paid rather than being imputed. Also they behave very differently to rents as a pattern and are more timely which is important. So what are they doing?

Average house prices in the UK have increased by 5.6% in the year to April 2017 (up from 4.5% in the year to March 2017).

As you can see house price inflation is currently treble that of rental inflation. Can anybody think why the UK establishment wanted rents rather than house prices used in the consumer inflation measure?

Our past measure

The Retail Price Index used to be used in the UK.

The all items RPI annual rate is 3.7%, up from 3.5% last month.

So the pattern of higher inflation measures being retired continues. Although it does at least serve two roles. The first is for indexation of things people pay such as mobile phone bills as my contract rises by it as of course do student loans. The second is for the indexation of Bank of England pensions where it seems strange that the establishment attack on RPI somehow got forgotten

Looking ahead

Fortunately we see that the main push is beginning to fade.

The annual rate of factory gate price inflation (output prices) remained at 3.6% for the third consecutive month and slowed on the month to 0.1%, from 0.4% in March and April……….The annual rate of inflation for materials and fuels (input prices) fell back to 11.6% in May, continuing its decline from 19.9% in January 2017 following the recent strength of sterling.

There is still momentum to push the annual rate of inflation higher which will not be helped if the post General Election dip in the value of the UK Pound persists. But the main push has now been seen. We should be grateful that the price of crude oil is around US $48 per barrel in Brent Crude terms.

Comment

The latest attempt by the UK establishment to “improve” the UK measurement of consumer inflation is being shown up for what it is, an attempt to manipulate the numbers lower. I guess things we receive will no longer be indexed to CPI they will be switched to CPIH! Also will the Bank of England switch its inflation target? If so it will complete a journey which has lowered the measure from 3.9% ( where what is called RPIX now is) to 2.7% or a 1.2% change when the target was only moved by 0.5%. In these times of lower wage rises, interest-rates and yields then 0.7% per annum matters quite a bit over time.

An answer to this would be to put the asset price which the Bank of England loves to inflate, house prices, in the inflation index. Let me leave you today with the price of a few basic goods if they had risen in line with them.

 

As I am off later to buy a chicken for dinner I am grateful it has not risen at such a rate.

The economics of the 2017 General Election

Tomorrow the United Kingdom goes to the polls for a General Election. Yesterday’s anniversary of the D-Day invasion of Normandy in France reminded us that the ability to vote is a valuable thing that people have fought and died for. Let me repeat my usual recommendation to vote albeit with the realisation that as far as I can see it has been an insipid and uninspiring campaign. Time for “none of the above” to be on the ballot box I think.

Moving to economics there have been a couple of reminders over the past 24 hours that some themes remain the same. From BBC News.

RBS has finally reached a £200m settlement with investors who say they were duped into handing £12bn to the bank during the financial crisis.

The RBS Shareholders Action Group has voted to accept a 82p a share offer.

The amount is below the 200p-230p a share that investors paid during the fundraising in 2008, when they say RBS lied about its financial health.

If you look at the sums you see that the compensation is nowhere near the problem if you feel that there was a misrepresentation back then. Also as there was a 1:10 stock split back in 2012 is this not really an 8.2p offer? As to the theme of there being no punishment for bank directors there is also this.

A settlement means that the disgraced former chief executive of RBS, Fred Goodwin, will not appear in court.

Of course the UK is not alone in such machinations as I note this from Spain today. From Bloomberg.

Banco Popular Espanol SA was taken over by larger Spanish competitor Banco Santander SA after European regulators determined that the bank was likely to fail…..

The purchase price was 1 euro, according to the statement.

Santander plans to raise about 7 billion euros ($7.9 billion) of capital as part of the transaction. ( Bloomberg ).

That much? The situation has been summed up rather well in a reply to the article.

Santander could be buying a time bomb filled with bad debt. What is the CEO thinking? Why should shareholders bail out Popular?! ( @ ken_tex )

We are left with a general theme that the banking sector carries on regardless and simply ignores things like elections. Democracy has not reached the banking sector. There is a British implication as of course Santander is a big player in UK banking and as an aside this sees the first bail-in of a so-called Co-Co bond.

How is the economy doing?

We have the Bank of England with its foot hard down on the monetary policy pedal with a Bank Rate of 0.25% which as far as I can recall has barely merited a mention in the campaign! Amazing how that and £445 billion of QE ( including the Corporate Bonds) can be treated as something to be pretty much ignored isn’t it? Partly as a result of this we are facing a spell of higher consumer inflation which will lead to a contractionary effect on the economy due to the way it seems set to reduce real wages. But again this seems to have been ignored. Of course the Bank of England will be happy to be outside of the political limelight but when it is such a major part of economic policy there should at least be a debate.

Fortunately the edge has been taken off things by the decline in the price of crude oil back towards US $50 in Brent Crude terms and the rally of the UK Pound to US $1.29. This is a factor in the Markit business survey telling us this on Monday.

The three PMI surveys are running at levels that are historically consistent with GDP growing at a robust 0.5% rate, albeit with the slowing in May posing some downside risks to the near-term outlook.

So the economy continues to grow but at a slow pace overall. Of course the Bank of England will be concerned about this reported this morning by the Halifax.

House prices in the last three months
(March-May) were 0.2% lower than in
the previous three months (DecemberFebruary).

The mood of Bank of England Governor Mark Carney will not be improved by this as it refers back to a time before it began its house price policy push in the summer of 2013.

Prices in the three months to May
were 3.3% higher than in the same
three months a year earlier. This was
lower than April and is the lowest annual
rate since May 2013 (2.6%). The annual
rate is around a third of the 10.0% peak
reached in March 2016.

The Bank of England will also be worried by this signal that emerged yesterday. From Homelet.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…….This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis. The pace of rental price inflation across the UK has been slowing in recent months, having peaked at 4.7% last summer.

Of course whilst there will be concern and maybe some panic at the Bank of England that the £63 billion of the banking subsidy called the Term Funding Scheme has run out of puff. Meanwhile over at HM Treasury someone will be having a champagne breakfast as they slap themselves on the back for starting a rush to get rents in the official UK consumer inflation measure ( CPIH) last Autumn.

Fiscal policy

Back on the 23rd of May I looked at this.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

Whoever wins we seem set for a period of higher taxation and higher expenditure but we remain in a situation where there is a lot of smoke blowing across the battlefield. There is of course also this from Labour.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.

Comment

This has been an election where the economy has been out of the limelight. In a way this is summarised  by the fact that we have heard so little from the current Chancellor of the Exchequer Phillip Hammond. This means that many important matters get ignored such as the apparent devolution of so much economic power to the Bank of England. An issue which is important as in my opinion it was captured by the UK establishment and now pursues policies that politicians would be afraid to implement.

Other important issues such as problems with productivity and real wages which have bedevilled us in the credit crunch era get little debate or mention. To that list we can add the ongoing current account deficit.

Yet some markets are at simply extraordinary levels and it is hard not to raise a wry smile at the ten-year Gilt yield being a mere 0.99%! Whatever happened to pricing an election risk? It also provides quite a boost over time to the fiscal numbers as it is well below the rate of inflation.

 

 

Spain continues to see a strong economic recovery

At the moment we could do with some good news. Saturday night’s dreadful terror attack was at a place I know well beginning from childhood as one set of grandparents lived near to Borough Market. A place that has found some economic good news in the past couple of years or so has been Spain. This followed something of a double whammy as the initial impact of the credit crunch was then followed by the Euro area crisis. As I look back it feels a little strange to see its ten-year bond yield above 7% as it was in July of 2012 when the latter crisis was raging. Of course those with the courage and foresight to buy Spanish government bonds back then were well rewarded if they held onto the position.

Today’s business survey

From Markit:

The recent strong growth rates generated by the
Spanish service sector continued in May. Further
sharp increases were recorded in business activity
and new orders. With workloads rising, and the
prospect of new projects in future, companies took
on extra staff again. Meanwhile, inflationary
pressures moderated during the month.

As you can see there are several points to not here. For example the situation looking ahead is strong.

Moreover, sentiment picked up to the highest in 26
months. More than 55% of respondents predict
output to be higher in 12 months’ time than current
levels.

Also we see that employment is on the rise which is welcome considering the still troubled unemployment picture.

Spanish service providers increased their staffing
levels during May, with new hires needed to work
on current and future projects. The rate of job
creation was solid and only slightly weaker than
April’s nine-month high.

Added to this is a decline in inflationary pressure which starts to make this look rather like a situation where Goldilocks porridge is at exactly the right temperature.

Inflationary pressures showed signs of easing in the
sector during May, with both input costs and output
charges rising at weaker rates than recorded in April.

At the end Markit are very bullish on GDP growth this quarter.

with nearly 1% being signalled for Spain

Should that prove to be true then the forecasts of the Bank of Spain will start to look a little pessimistic.

Based on our estimates, GDP could rise by 2.8% this year, before slipping to more moderate growth rates of 2.3% and 2.1%, respectively, in 2018 and 2019.

Although to be fair it was expecting a growth spurt based on something you do not often hear or read associated with the Euro area.

the expansionary fiscal policy

Official GDP growth

The first quarter of this year was a good one for economic activity in Spain according to its statistics office.

The Spanish economy registers a quarterly growth of 0.8% in the first quarter of 2017. This rate was one tenth higher than that registered in the fourth quarter of 2016.  The growth compared to the same quarter last year stands at 3.0%, the same rate as that recorded the previous quarter.

A phrase so beloved of economists can be deployed which is, export-led growth.

The contribution of net foreign demand of the Spanish economy to annual growth of the quarterly GDP was 0.8 points………Goods and services exports accelerated its rate of growth, increasing from 4.4% to 8.4%

This morning has brought more good news on this front. From Spanish statistics via Google Translate.

The total expenditure of international tourists who visit Spain in April increases by 19.7% compared to the same month of 2016. Average daily spending stands at 137 euros, 5.5% more than in April 2016……..During the first four months of 2017 the total expenditure of international tourists increased by 15.3% compared to the same period of the previous year, reaching 20,394 millions of euros.

Actually Spain was also a good global citizen in that it shared some of the benefits around too.

Imports of goods and services experienced an increase of 4.1 points, from 2.3% to 6.4%

As well as export-led growth there was also investment led growth.

Gross fixed capital formation registered a growth rate of 3.8%, indicating an increase of 1.6 points as compared with the previous quarter.

Unemployment

This is the achilles heel of the Spanish economy as the latest official quarterly survey informs us. Via Google Translate.

The unemployment rate stands at 18.75%, which is 12 cents higher than in the Previous quarter. In the last year this rate has fallen by 2.25 points.

The problem is shown by the fact that even after 3 good years for economic growth unemployment is still at a rate of 18.75% meaning that 4,255,000 Spaniards are recorded as unemployed. The good news is that until this quarter the rate has been falling and with the rate of economic growth the increase seems strange. As does the quarterly fall in employment of 69.800 which tells a different story to the GDP report.

Employment of the economy in terms of jobs equivalent to full-time employment registered a quarterly variation of 0.7%, three tenths higher than that registered in the previous quarter.

Over the past year we see that the two roads give similar answers ( 408k versus 435k) so if pressed one would say that the fall in employment from the labour market survey seems most suspect here. Maybe the 65,000 households surveyed had seen a particularly poor phase.

Monetary policy

This is a little awkward for Spain as the very expansionary policy does not go well with the economic strength we have looked at above. If we look for any sign of the “punch bowl” being taken away as the party gets started we see only a reduction in monthly ECB bond purchases to 60 billion Euros a month from 80 billion. The deposit rate at the ECB remains at -0.4% and helped by some 182.5 billion Euros of buying by the ECB the Spanish government can borrow at negative interest-rates on short-dated bonds and only 0.06% for five year ones. A little bit of a brake will have been applied by the rise in the Euro to around 1.12 versus the US Dollar.

Accordingly policy could not be much looser and it is hard to think of an economy in the past that has tried this sort of experiment in terms of expansionary monetary policy in such a boom.

House prices

So far we are not getting much of a clue from the various indices which tell us that they may be going up or down! This was interesting via Spanish property insight.

The outlier is the 7.74% increase reported by the registrars, using their repeat sales methodology that only looks at the price of property that has sold twice in the period of study.

The catch is that it must be a rather small sample size. Spanish statistics has the annual increase at 4.5%. So is this a case of once bitten twice shy? The index provided by Spanish notaries was set at 100 in 2007 and  was 70.7 at the end of 2016. Mind you for PropertyEU up seems to be the new down or something like that.

Looking at property performance returns in Europe in the last 10 years, Spain is second on the list after Sweden with a 13% return, followed by Ireland and then Portugal with 12 per cent.

Some of the gap can perhaps be provided by rents where as I reported on the 27th of January there has been a boom. From RTN online.

THE AVERAGE price of rental housing in Spain rose 8.8 per cent in the first quarter of 2017 due to increasing demand, according to the rental price evolution report published on Wednesday by Idealista.

Comment

The good news theme coming out of Spain was reinforced by Real Madrid retaining the football Champions League trophy on Saturday evening. The dangers for now seem to be a combination of monetary policy which if we allow for the fact that policy changes take 18 months or so to operate seems way too lax and the way that if a housing boom is underway it is in the rental sector this time around.

Also there is still some ground to be gained as even the really good growth of the last few years has only just got Spain back to its previous peak. With 2010 set as 100 that was the 104.4 of the second quarter of 2008 which if the releases above are accurate should now have been regained. Whichever way you look at that it remains odd that Banco Popular has hit trouble now I think.

Economists letters

In spite of the track record of such events it would appear that some are not deterred.

https://www.theguardian.com/news/2017/jun/03/the-big-issue-labour-manifesto-what-economy-needs

With UK house prices falling and manufacturing booming are we rebalancing?

This morning has brought news which will send a chill down the spine of the Bank of England. This was from the Nationwide Building Society.

House prices show third consecutive monthly
decline for the first time since 2009.

Over the past three months house prices have gone -0.3% ( March), -0.4% ( April) and now -0.2% in May. For quite a few economic variables we look at the three monthly average to get an idea of trend and if we do that here we see that we can see which way the wind is currently blowing according to the Nationwide. If we look further back we see this.

The annual rate of growth slowed to 2.1%, the weakest in almost four years.

That time scale takes us back to pretty much the time that the Bank of England stepped in to boost the housing market with its Funding for ( Mortgage ) Lending Scheme or FLS. It led to a decline in mortgage interest-rates which was pretty quickly of the order of 1% per annum and according to the Bank of England itself reached a peak of 2%. Initially it was high equity to loan mortgages which benefited but this later spread to the lower equity value ones. This fed through into house prices as higher prices became more affordable due to lower mortgage rates. The house price rise over this period has been from £169,000 to just under £209,000 or around 24% which has allowed the Bank of England to claim that wealth effects have spread through the economy. Thus it will not be pleased to see that fading away and indeed showing signs of a reversal.

The other side of the argument is that much of this has been inflation as first time buyers face house price inflation and this is one I support strongly. In my world a fall in house price growth to around 2% is something to welcome and not to fear as it brings it pretty much into line with both economic growth and wage rises. Indeed I could go further and say that we need house price falls to bring things back into line. The argument for that goes as follows we see that house price growth was 24% but real wage growth according to official data was less than one tenth of that as the index has risen from 98.6 to 100.9. Let me give you two extra thoughts on that which is that the real wages number is in my opinion too high as the impact of higher house prices is excluded. But as an aside even on the favourable basis on which it is calculated to me what leaps off the page/screen is how little real wage growth we have had in what has been a good period for economic growth .

Regular readers will be aware that I have been expecting a house price slow down for a while as this from the 4th of January indicates.

What I mean by that is that the rise in house prices looks set to fade and be replaced by house price falls.

Take care

Just to say that the UK has several house price indices all of which give is different answers. The Nationwide should have actual trading prices but will be limited to Nationwide customers which tend to be more from the south. One thing it does offer is the timely nature of the data and this does fit with what we see from the less timely official series.

Average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017). This continues the general slowdown in the annual growth rate seen since mid-2016.

Looking ahead there was also this message sent to me by Dan Cookson.

The non-seasonally adjusted mortgage approvals data took quite a drop in April 

I wonder if there has been something of an Easter effect like we saw in the retail sales data? We will know more next month.

Nine Elms

If there is somewhere which is the leader of the pack right now it looks rather like Nine Elms. That is both convenient as I live near to it and of course inconvenient as I consider the likely impact! For newer readers this is the scale of what is going on there. From Bloomberg.

Almost 20,000 homes are planned for the Nine Elms district, a regeneration site that extends from Lambeth Bridge in the north to Chelsea Bridge in the south.

I can tell you that it takes quite a while to pass it if you are on a Boris bike and actually due to the traffic scheme not a lot less by car. This led to quite a boom.

Prices for existing homes in Nine Elms, where most of the transactions took place, have risen by an average of 43 percent over the same period.

But now something of a bust.

Homes in SW8 postcode district had annual drop of 16% in March.

By some calculations there is a fair bit more to go or as Tube station announcements remind us “Mind the gap”.

Neal Hudson, founder of research firm Residential Analysts Ltd., said in a telephone interview, “Investors have dried up and the bulk of demand for London homes is now from owner-occupiers who can only afford” to pay 450 pounds per square foot.

The Nine Elms homes are priced between 750 pounds and 1,500 pounds a square foot, he said. The apartments are often sold with facilities including gyms, swimming pools and 24-hour concierge services.

Manufacturing

If we switch to a different part of the UK economy then we have just seen some good news. From Markit and its monthly business survey or PMI.

Manufacturing production and new orders both
expanded at above survey average rates.
Companies benefited most from the continued
strength of the domestic market. There was also a
solid increase in new export business as well.

This means that we can hope for a much better performance this quarter than last.

The strong PMI numbers suggest the
manufacturing sector has gained growth
momentum in the second quarter after the sluggish
start of the year.

If we look at the minutiae then the reading dipped from 57.3 in April to 56.7 in May but I doubt anyone believes the measure is that accurate. One intriguing reflection of this if we consider how strong UK employment has been is this.

These underlying dynamics are proving to be a real boon for the manufacturing labour market, with May seeing jobs
added at the fastest pace since mid-2014.

In ordinary times  we would expect to be seeing rises in wage growth and no doubt the Ivory Towers are on the case but the sad reality of the credit crunch era is that we have been singing along with Bob Marley.

I don’t wanna wait in vain.

Comment

As we have had a couple of months of house price falls and a rise in manufacturing then let me take you back to April 2002.

For the Monetary Policy Committee the
challenge is to keep inflation close to the target during a period in which a significant re-balancing of
the British economy will take place.

Sadly for the speaker it took another 15 years for us to have a hint of this and long after his role had ended. Still let me welcome even a flicker of a rebalancing of the UK economy but of course a genuine change would take years. The speaker for those of you who have not guessed was the then Governor of the Bank of England Mervyn King who is now Baron King of Lothbury.

Meanwhile at the Bank of England.

Staff at the Bank of England will begin voting on Thursday on whether to hold a strike this year in protest at below-inflation pay rises, union sources told Reuters.

If only there was an organisation which could help by keeping inflation low……

Sgt Peppers

Fifty years ago this album ( for younger readers music back then came on a piece of circular plastic which had to be put in a protective sleeve which led to some extraordinary and now famous artwork) was released by the Beatles and in my opinion deserves a doff of the cap. Plenty of great songs but my favourite is A Day In The Life.

 

 

 

Will 2017 see an economic rennaisance for France?

This morning has opened with some better economic news for France as GDP ( Gross Domestic Product) growth was revised higher.

In Q1 2017, GDP in volume terms* rose barely less fast (+0.4%) than in Q4 2016 (+0.5%).

The French statistical service have put in it downbeat fashion and you have to read to the end to spot it as it is right at the bottom.

The GDP growth for Q1 2017 is raised from +0.3% to +0.4%.

There was also a good sign in the fact that investment was strong.

In Q1 2017, total GFCF accelerated sharply (+1.2% after +0.5%), especially that of enterprises (+1.9% after +0.9%)……Investment in manufactured goods was more dynamic (+1.6% after +0.4%), notably in equipment goods. Similarly, GFCF in market services accelerated sharply (+1.9% after +0.7%), notably in information-communication and business services.

However it was not a perfect report as there were signs of what you might call the British problem as trade problems subtracted from the growth.

Exports fell back in Q1 2017 (−0.8% after +1.0%), especially in transport equipment and “other manufactured goods”. Imports accelerated (+1.4% after +0.6%)………..All in all, foreign trade balance weighed down on GDP growth by −0.7 points, after a contribution of +0.1 points in the previous quarter.

If we look back there may be an issue building here as import growth was 4.2% in 2016 which considerably exceeded export growth at 2.1%. So it may well be true that the French are getting more like the British which is something of an irony in these times.

You may be wondering how there was any economic growth after the net trade deficit and that is because inventories swung the other way and offset it.

In Q1 2017, the contribution of changes in inventories to GDP growth amounted to +0.7 points (after −0.2 points at the end of 2016). They increased especially in transport equipment and “other industrial goods” (pharmaceuticals, metallurgy and chemicals).

The optimistic view on this is that French businesses are stocking up for a good 2017 with the danger being that any disappointment would subtract for growth later this year.

Also as feels so common in what we consider to be the first world the manufacturing industry continues to struggle.

Manufacturing output fell back (−0.2% after +0.7%), mainly due to a sharp decline in the coke and refined petroleum branch and a slowdown in transport equipment.

Looking ahead

The good news is that the private-sector business surveys are very optimistic at the moment.

The latest PMI data points to further strong growth momentum in the French private sector, with the expansion quickening to a six-year peak.

Of course France has been in a rough patch so that may not be as good as it reads or sounds so let us look further.

The service sector saw activity increase for the eleventh time in as many months. Moreover, the rate of expansion accelerated to a six-year high and was sharp overall. Manufacturing output also continued to rise markedly, albeit to a fractionally weaker extent than in April.

As you can see the service sector is pulling the economy forwards and manufacturing is growing as well according to the survey. Unusually Markit do not make a GDP prediction from this but we can if we note they think this for the Euro area which has a lower reading than France.

consistent with 0.6- 0.7% GDP growth.

So let us say 0.7% then and also remind ourselves that it has not been common in recent years for there to be an expectation that France will outperform its Euro area peers.

However this morning’s official survey on households did come with a worrying finale to the good news stream.

In May 2017, households’ confidence in the economic situation has improved anew after a four-month stability: the synthetic index has gained 2 points, reaching 102, above its long-term average and at its highest level since August 2007.

What could go wrong?

Unemployment

This has been the Achilles heel for France in the credit crunch era but this too has seen some better news.

In Q1 2017, the average ILO unemployment rate in metropolitan France and the overseas departments (excluding Mayotte) stood at 9.6% of active population, after 10.0% in Q4 2016.

The good news is that we see the unemployment rate finally fall into single digits. The bad news is that it mostly seems to be people who have given up looking for work.

The activity rate of people aged 15-64 stood at 71.4% in Q1 2017. It decreased by 0.3 percentage points compared to the previous quarter and a year earlier.

The business surveys are optimistic that employment is now improving as we see here.

Bolstered by strong client demand, French private sector firms raised their staffing numbers in May, thereby continuing a trend that has been evident since November last year. Furthermore, the rate of job creation quickened to a 69-month high.

Monetary policy

Yesterday we heard from ECB ( European Central Bank ) President Mario Draghi and he opened with some bombast.

Real GDP in the euro area has expanded for 16 consecutive quarters, growing by 1.7% year-on-year during the first quarter of 2017. Unemployment has fallen to its lowest level since 2009. Consumer and business sentiment has risen to a six-year high,

You might be wondering about monetary policy after such views being expressed but in fact we got this.

For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monetary accommodation.

Is that a Tom Petty style full speed ahead and “Damn The Torpedoes”? For now perhaps but there are two other influences. In terms of a tactical influence Mario Draghi will have noted the rise of the Euro since it bottomed versus the US Dollar in December last year and would prefer it to be lower than the 1.12 it has risen to. Also more strategically as we have discussed on here before he will be waiting for the Euro area elections to pass before making any real change of course in my opinion. That leaves us mulling once again the concept of an independent central banker as we note that economic growth is on the upswing in election year.

Thus France finds itself benefiting from 293.7 billion Euros of sovereign bond purchases meaning it can issue and be paid for it out to around the 6 years maturity and only pay 0.74% on ten-year bonds. This is a considerable help to the fiscal situation and the government. In addition there are the corporate bond purchases and the covered bond purchases to help the banks. The latter gets so little publicity for the 232 billion Euros on the ECB’s books. Plus we have negative interest-rates and a Euro exchange rate pushed lower.

Has monetary policy ever been so expansionary at this stage of the economic cycle?

House prices

There was some further news to warm the cockles of Mario Draghi’s heart this morning.

In Q1 2017, the prices of second-hand dwellings kept increasing: +1.9% compared to the previous quarter (provisional seasonally adjusted results). The increase is virtually similar for flats (+1.9%) and for houses (+1.8%).

Over a year, the increase in prices was confirmed and strengthened: +3.0% compared to Q1 2016 after +1.5% the quarter before.

Up until now we have seen very little house price inflation in France and whilst the rate is relatively low it does look to be on the rise which represents a clear change. If you add this to the house price rises in Germany that I analysed on the 8th of this month then the ECB will be pleased if first-time buyers will not be.

Comment

It looks as though France is in a better phase of economic growth. This is certainly needed as we look at the unemployment rate issue but there is also another factor as this from French statistics indicates.

 2016 (GDP growth unchanged, at +1.1% WDA), 2015 (−0.2 points at +1.0%) and 2014 (+0.3 points at +1.0%)

As you can see the annual rate of economic growth has been essentially 1% as we note something of a reshuffle in the timing. Indeed in spite of a better couple of quarters the current annual rate of economic growth in France is you guessed it 1%! Somehow 1% became the new normal as we wait and hope for better news as 2017 develops. Should we get that then at this stage of the cycle I fear we may then be shifting to how long can it last?!

 

 

Negative interest-rates and QE have created a house price boom in Germany

A feature of these times is that is called easy monetary policy and this is particularly true in the Euro area. There the European Central Bank has a deposit rate of -0.4% and is undertaking asset or bond purchases of 60 billion Euros a month as well. This means that as of last week over 1.8 trillion Euros of bonds have been bought including some 216 billion Euros of covered bonds which support banks and then mortgage lending. Last week we discovered that some countries “have been more equal than others” in terms of where this 1.8 trillion Euros has ended up. From the ECB.

Excess liquidity has been persistently concentrated within a group of banks located in a limited number of higher-rated countries, i.e. around 80-90 % of excess liquidity is being held in Germany, France, the Netherlands, Finland and Luxembourg (see Chart 1) and even their country shares have been fairly stable across time.

It is fascinating that a country geographically as small as Luxembourg merits a mention. But Reuters updates us on the two main beneficiaries.

The study shows that 60 percent of the money spent by the ECB and national central banks on buying bonds ends up in Germany, where sellers, mainly UK banks, have their accounts. France accounts for a further 20 percent.

Okay and the consequence of this is?

But the fact that the money keeps accumulating in the bloc’s richest countries rather than flowing where it is needed the most risks undoing some of the ECB’s efforts and shows the European Union’s objective to create a banking union is still far from reached.

This makes me wonder about asset prices in the main beneficiary Germany as after all these QE ( Quantitative Easing) policies are claimed to have “wealth effects”.

House Prices in Germany

Let us step into the TARDIS of Dr.Who and go back to February of 2014 when the Financial Times reported this.

House prices in Germany’s biggest cities are overvalued as much as 25 per cent, the Bundesbank warned on Monday, adding to fears that international investment has helped to fuel a property bubble in the eurozone’s largest economy. The German central bank said that residential real estate prices in 125 cities rose by 6.25 per cent on average last year. In October, it reported that property prices in the biggest German cities were 20 per cent overvalued, suggesting the problem is getting worse.

If we move forwards to March 2016 then this from Bloomberg is eye-catching.

German house prices went nowhere for years. Recently they’ve grown faster than the UK.

So what had they done?

House prices have increased 5.6 percent a year over the past five years, according to UBS, which is double the average annual rate of increase since 1970.

As we see in so many other places the rises were concentrated in the major urban areas.

Prices are rising particularly fast in urban areas, where young people increasingly want to live. A gauge of advertised apartment prices in seven major cities including Frankfurt and Berlin rose 14.5 percent in 2015, the most since 2000, according to Empirica, a research institute.

As to “wealth effects” there was something else which is somewhat familiar to say the least.

So far the biggest beneficiaries have been Germany’s listed residential landlords. Cheap debt has enabled them to snap up housing portfolios and smaller rivals, thereby achieving cost savings through scale

What about now?

The Bundesbank calculates its own house price index which covers 127 cities and it rose by 8.3% in 2016 following 7.6% in 2015 and 5.7% in 2014. So according to its own index then prices must be very overvalued now if they were already overvalued back in 2014. Putting it another way the index which was set at 100 in 2011 was at 141.4 at the end of 2016. So quite a rise especially for a nation which has little experience of this as for example the period from 2004 to 2007 which saw such booms in the UK,Spain and Ireland saw no change in house prices in Germany.

In January my old employer Deutsche Bank looked forwards and told us this.

In 2017, we therefore expect rents and property prices in the major German cities, and across the country as a whole, to rise substantially once again…….Munich remains the most dynamic German city when it comes to property, with its fast-rising population and historically low vacancy rate likely to lead to further price increases for many years to come.

There is an element of cheerleading here which of course is a moral hazard issue for banks reporting on property prices which will not be shared by first time buyers in Germany. Those in Berlin will have particular food for thought.

Property prices in Berlin are now twice as high as they were in 2005 and have reached the level of some of the major cities in western Germany.

As of the latest news Europace have constructed an hedonic (quality adjusted) index which rose by 7.6% in the year to March.

What about rents?

These have risen but not by much if the official data is any guide. The rent section of the official Euro area CPI measure rose at an annual rate of 1.6% in March. Although Frankfurt seems to be something of an exception as Bloomberg reports.

The monthly cost of a mid-range two-bedroom apartment in Germany’s financial capital rose 20 percent in 2017 from a year earlier, while the cost of an equivalent living space in London fell by 8 percent, according to a Deutsche Bank study.

Frankfurt rent rises will of course be particularly painful for Deutsche Bank employees.

Comment

There is a fair bit to consider here but what is unarguable is that the easy monetary policy of the ECB has been associated with house price rises. These are noticeable in international terms but are particularly noticeable in a country which escaped any pre credit crunch boom. Also if we use the Bundesbank data above house prices rose by 41.4% in the period 2011-16 whereas real wages only rose by 6.6% ( Destatis) which is quite a gap! I think we know how first- time buyers must feel and yes there is a fair number as whilst Germany has fewer owner occupiers in proportionate terms than the UK they still comprise 51.9% of the housing market.

It is hard to avoid the thought that this house price boom is what central bankers would call a “wealth effect” from their policies, especially if we note that the liquidity seems to have mostly headed to Germany. Of course some of that will be the equivalent of a company name plate on the door but some will be genuine. Meanwhile as we note wealth transfers and inflation there is of course the near record high bond prices and the highs in the Dax 30 equity index seen last week.

 

 

 

The Bank of Mum and Dad feeds UK house prices

One of the features of the UK house market is the way that whilst prices are supposedly affordable so much “help” of one form or another is required by both first time buyers and those looking to trade up. There has been the “Help To Buy” scheme where government assistance is provided. Also many gloss over the fact that the only way that even the establishment can claim that this is “affordable” is because the Bank of England has put an enormous effort into pushing mortgage rates lower. For example it has cut Bank Rate to 0.25% deployed some £435 billion of UK government bond purchases called QE and since last August given banks a new subsidy scheme which already amounts to £57.5 billion.

The problem with these measures are that they are ultimately self-defeating and this is because they just drive house prices even higher. If we look at the Bank of England decision to push mortgage rates lower via its Funding for Lending Scheme in the summer of 2013 we then see according to the official data series that annual house price inflation accelerated to 9.4% in October of 2014. It then returned to that annual rate in June of last year. Moving to actual prices then the average house price in the UK peaked at just over £190,000 pre credit crunch and then fell to just below £155,000 in response to it. But now it is £217,502 as of February. This has led to another more implicit boost to house prices as more and more people believe that the Bank of England will not let house prices fall for more than a short period and will then provide a put option meaning that so many now sing along to Yazz.

Things may be a little hard now
But we’ll find a brighter day……

The only way is up, baby

The essential gap here is between overall house prices which have risen as described above and real wages which have fallen in the credit crunch era.  According to the official data the latter are still some 3% lower than the pre credit crunch period and even worse we face a period where they seem more likely to fall than rise.

Step forwards the Bank of Mum and Dad

Legal and General have looked into the situation where parents help their offspring by providing some or all of the deposit. From the Guardian.

The so-called bank of mum and dad will help fund property purchases worth about £75bn in 2017, the report says, including deposits for more than 298,000 mortgages. The £6.5bn figure is similar to the amount lent by the country’s ninth-biggest mortgage lender, Yorkshire Building Society, according to L&G.

Parental assistance is expected to have risen from an average of £17,000 in 2016 to £21,600 this year. Millennials are the biggest recipients, with 79% of the funding going to people under 30.

I suggest taking a pinch of salt with the exact detail as of course some will hand money over and keep the details private and parents have helped their children since time began but hopefully we are getting a broad sweep of scale here. If we continue with this there is more.

This is a 30% increase on the £5bn loaned in 2016, according to research from Legal & General and economics consultancy Cebr, and means parents will be involved in more than 25% of UK property transactions……..

The south-west of England and London will see the largest average parental contribution per transaction, at £30,000 and £29,400, with Wales the lowest at £12,500.

There should be little surprise at the amount of assistance being highest in the areas with a combination of the highest prices and highest rate of increase. This only adds to the problem described below.

Parents want to help their kids get on in life, and the bank of mum and dad is a testament to their generosity, but it is also a symptom of our broken housing market.

Is the mortgage market adjusting to this?

Yesterday there was this news about changes in the level of deposit required to get a mortgage. From Katie Allen in the Guardian.

Easier access to mortgages with a small deposit has offered some glimmers of hope for first-time buyers struggling to get on to Britain’s housing ladder, according to a new report.

Research on the amount of time it takes to save for a down payment on a home suggests buyers have been helped by the greater availability of mortgage loans at higher loan-to-value (LTV) ratios.

Are you thinking what I am thinking? Firstly that the market is accommodating the Bank of Mum and Dad ( BOMAD ) but secondly how loan to values are rising again. Remember when the establishment told us that such a thing would not be allowed to happen again?! From the Hamptons report.

Lenders are increasingly offering higher loan-to-value mortgages and the rates charged on them have come down more than for any other mortgage type.

It seems that Hamptons are not the only body who have spotted this trend.

A separate report from chartered surveyor e.surv found that buyers who put down a small deposit were making up an increasing share of the market.

What could go wrong? Are there any lessons about this we could learn from history.

Comment

There is an obvious problem here that has at least some of the features of a ponzi scheme. We see that “mum and dad” have a house and have large gains on it especially if they have been house owners for some time. They feel the “wealth effects” so trumpeted by central bankers and pass some of this wealth to their children to allow them to get a deposit together to buy a house they could not otherwise afford. On an individual level this is pretty much human nature in action but on a collective one it is pushing first time buyers up an inflationary pyramid. Their wages have fallen in real terms and yet they end up buying ever more expensive houses so it is no surprise they need ever more help. Actually the real wage picture has been one which is even worse than the median or average as younger people’s wages were hit hard by the credit crunch. Sadly the numbers are behind the times but there would have needed to have been quite a rise to catch up since.  Of course some of the above is a stereotype but the theme is there.

As we look at the situation we see that we are creating another one of “haves” and “have-nots”. Those with parental support will be better off than those without. Indeed as the Guardian pointed out those looking to save a deposit have a long time to wait.

The estate agent Hamptons International said that in the final months of 2016 it would take an average single first-time buyer 11 years and nine months to save a 15% deposit. But reducing the deposit to 10% cut the saving time to eight years and three months. For a deposit of just 5% the time to save was four years.

Meanwhile someone at the Bank of England is probably thinking if we made the deposit 0% they would have to wait at all………