Sweden has economic growth of 4% with an interest-rate of -0.5%

We can end the week with some good news as the economic growth figures produced so far today have pretty much varied between better and outright good. For example I note that the 0.5% growth for France makes its annual rate of 1.8% a smidgen higher than the UK for the first time in a while. Also Spain has continued its series of good numbers with quarterly GDP ( Gross Domestic Product) up by 0.9%. But the standout news has come from the country which I have described as undertaking the most extraordinary economic experiment of these times which is Sweden.

Sweden’s GDP increased by 1.7 percent in the second quarter of 2017, seasonally adjusted and compared with the first quarter of 2017. The GDP increased by 4.0 percent, working-day adjusted and compared with the second quarter of 2016.

Boom! In this case absolutely literally as we see quite a quarterly surge and added to that growth in the previous quarter was revised higher from 0.4% to 0.6%. This means that it grew in the latest quarter by as much as the UK did in the last year and is the highest quarterly number I can think of by such a first world country for quite some time.

If we look into the detail there is much to consider. There was something unusual for these times.

Production of goods rose by 3.0 percent, and service-producing industries grew by 1.7 percent

It also looks as though the demand was domestic as trade was not a major factor.

Both exports and imports grew by 0.7 percent

There was a sign of booming domestic consumption here.

Household consumption increased by 1.1 percent

Also investment went on a surge.

Gross fixed capital formation increased by 3.8 percent.

However there is kind of an uh-oh here as I note this from Nordea.

Residential construction continues to be a very important growth driver (scary!), but also other investments seem to have picked up and more than forecast.

We will look at that more deeply in a moment but first let us note that the numbers below suggest that productivity has picked up.

Employment measured as the total number of hours worked increased by 0.8 percent seasonally adjusted, and the number of persons employed increased by 0.6 percent.

The Riksbank

The latest minutes point out that the monetary policy pedal remains pressed pretty much to the metal.

At the Monetary Policy Meeting on 3 July, the Executive Board of the Riksbank decided to hold the repo rate unchanged at –0.50 per cent. The first rate increase is not expected to be made until the middle of 2018, which is the same assessment as in April. The purchases of government bonds will continue during the second half of 2017, in line with the plan decided in April.

Still they did say they were now less likely to push it even harder.

it is now somewhat less likely than before that the repo rate will be cut further in the near term

Rather amazingly they described the policy as “well-balanced” but I guess you have to think that to be able to vote for it. However today’s data will be welcome in a headline sense but is yet another forecasting failure as they expected 0.7% GDP growth. Now a 1% mistake in one-quarter makes even the Bank of England’s failures at forecasting to be of the rank amateur level.

Let us move on with the image of the Riksbank continually refilling the punch bowl as the party hits its heights as opposed to removing it.

What could go wrong?

Even the Riksbank could not avoid mentioning this.

the risks associated with high and rising household indebtedness were also discussed.

Did anybody mention indebtedness?

In June, the annual growth rate of households’ loans from monetary financial institutions (MFIs) was 7.1 percent, which means that the growth rate increased by 0.2 percentage points compared with May.

So the rough rule of thumb would be to subject economic growth and estimate inflationary pressure at 3% which of course would lead to interest-rates being in a very different place to where they are. Also if you look at the issue of the domestic consumption boom you be rather nervous after reading this.

Households’ loans for consumption had a growth rate of 9.4 percent in June, an increase compared with May, when it was 7.3 percent.

I noted earlier the fears over what is happening in the housing market and loans to it have just passed a particular threshold.

In June, households’ housing loans amounted to SEK 3 005 billion, which means that lending exceeded SEK 3 000 billion for the first time. This is an increase of SEK 27 billion compared with the previous month, and of SEK 198 billion compared with the corresponding month last year. This means that housing loans had an annual growth rate of 7.2 percent in June, an increase of 0.1 percentage point compared with May.

Another bank subsidy?

I have noted before that fears that negative interest-rates would hurt bank profits have been overplayed and as we note mortgage and savings rates we get a hint that margins are pretty good.

The average housing loan interest rate for households for new agreements was 1.57 percent in June…….In June, the average interest rate for new bank deposits by households was 0.07 percent, unchanged from May.

I also note that banks remain unwilling or perhaps more realistically afraid to pass on negative interest-rates to the ordinary depositor.

House prices

Of course this will look very good on the asset side of the balance sheets of the Swedish banks.

Real estate prices for one- or two-dwelling buildings rose by almost 4 percent in the second quarter of 2017 compared with the first quarter. Prices rose by nearly 10 percent on an annual basis in the second quarter, compared with the same period last year.

In terms of amounts or price it means this.

The average price at the national level for one- or two-dwelling buildings in the second quarter 2017 was just over SEK 2.9 million.

If we look back we see the index which was based at 100in 1981 ended 2016 at 711 and we learn a little more by comparing it to the 491 of 2008. There was a small dip in 2012 but in essence the message is up, up and away. For owners of Swedish houses it is time for some Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
Aha-ahaaa
All the things I could do
If I had a little money
It’s a rich man’s world

Comment

If we go for the upbeat scenario then it is indeed time for a party at the Riksbank as we see Sweden’s economic performance in the credit crunch era.

The problem with being top of the economic pop charts is that it so often ends in tears. The clear and present danger is the expansion of lending to the housing market and the consequent impact on house prices. Also the individual experience is not as good as the headline as the population grew by 1.5% in the year to May to 10.04 million which of course is presumably another factor in higher house prices.

 

 

The Swedish Riksbank is facing the consequences of its own policy

The Riksbank of Sweden meets today and announces its policy decision tomorrow morning. It is facing a period where its policy if out of kilter with pretty much everything. Long gone are the days when its policy members were called “sadomonetarists” by Paul Krugman of the New York Times. These days it is in the van of those expanding monetary policy as you can see from its last policy announcement.

The Executive Board has decided to hold the repo rate unchanged at −0.50 per cent and to extend the purchases of nominal government bonds by SEK 7.5 billion and the purchases of real government bonds by SEK 7.5 billion. At the end of 2017, the purchases will thus amount to a total of SEK 290 billion, excluding reinvestments. Until further notice, maturities and coupon payments will also be reinvested in the government bond portfolio.

It is using negative interest-rates and QE ( Quantitative Easing) which is putting the pedal close to the metal but is also what can be called pro cyclical as it is expanding into an expansion.

Swedish economic activity is good and is expected to strengthen further over the next few years

Actually if you take any notice of Forward Guidance they even upped their efforts.

The first repo-rate increase is now expected to be made in the middle of 2018. The repo rate path also reflects the fact that there is still a greater probability of the rate being cut than of it being raised in the near term.

They justified this on the grounds that they expected inflation to take longer to reach its target. This shows us a facet of central bank behaviour these days. If the economy slows they use it as an excuse to ease policy but if it is doing well they are then prone to switching to the inflation rate if it is below target in an example of cherry-picking.

What do they think now?

The mid-June business survey from the Riksbank could not be much more bullish.

The strong economic situation will continue in the months ahead……Export companies are encountering ever-stronger demand from abroad. Europe stands out in particular.

Oh and as a warning for an issue we will look at in a bit there was this.

Demand has been strong in the construction and property sectors in recent years and the development of housing construction in particular continues to be very strong.

Today’s manufacturing PMI from Swedbank looks strong as well.

Sweden Jun Manufacturing PMI 62.4 Vs. 58.8 In May

The Kronor

The conventional view is that all the monetary easing should have sent it lower but in fact it has not done an enormous amount in recent times. If we look back to June 2014 the KIX effective exchange-rate averaged 106.7 and last month it averaged 114.4. So a bit weaker ( confusingly higher is weaker on this index) but this must have been a disappointment to the Riksbank especially as it has strengthened since late 2016. As we have noted before 2017 has been a year where many exchange-rates seem to have simply ignored any flow effect from ongoing QE programs.

One conclusion is that the backwash of moves in the US Dollar and the Euro swamp most of Sweden’s apparent currency independence. Especially if we note that a fair bit of the monetary easing is simply keeping up with the Euro area Joneses.

Household Debt

It was hardly a surprise after reading the above that the June Financial Stability Report rather majored on this.

Households’ high and rising indebtedness form a serious threat to financial and macroeconomic stability……….Household indebtedness and housing prices are still rising, and indebtedness is also expected to rise in the period ahead. This entails major risks for the Swedish economy.

What will they do?

Further measures need to be introduced to increase the resilience of the household sector and reduce risks.

So they will raise interest-rates? Oh hang on.

Both measures to achieve a better balance between supply and demand on the housing market and tax reforms to reduce the willingness or ability of households to take on debt are required. Further macroprudential policy measures also need to be taken.

It is interesting these days how central bankers so often end up telling central bankers what to do! Also it is notable that the rise of macroprudential policies ignores they fact that such policies were abandoned in the past because they were more trouble than they were worth.

All this came with an ominous kicker.

The vulnerabilities in the Swedish banking system are linked to its size, concentration and interlinkage, as well as the banks’ large percentage of wholesale funding and their substantial exposures to the housing sector.

A decade into the credit crunch we note that the rhetoric of reform and progress so often faces a reality of “vulnerabilities” and these get worse as we peer deeper.

Liquidity risks arise partly as a result of Sweden having a large, cross-border banking sector with significant commitments in foreign currency.

If you take the two quotes together then you have the feeling that the TARDIS of Dr.Who has transported you back to 2006. Still we know that the interest and concentration of the Riksbank will be on this issue now as the “precious” may have troubles. Oh and they have a sense of humour too.

It is essential that the banks insure themselves

In reality the Swedish taxpayer is likely to find they have got the gig and this is very different to the usual Riksbank rhetoric on foreign-exchange intervention although if you think about it the result they want would be rather likely to say the least!

At the same time, it is necessary that the Riksbank has a sufficiently large foreign currency reserve if liquidity requirements should arise in foreign currency that the banks themselves are unable to manage.

At the end of last month and after the Report Sweden Statistics updated us further on the state of play.

In May, households’ housing loans amounted to SEK 2 977 billion. This is an increase of SEK 18 billion compared with the previous month and SEK 195 billion compared with the corresponding month last year. Housing loans thus had an annual growth rate of 7.1 percent in May,

Some ( obviously not central bankers ) might think that low mortgage rates are a major driver of this.

The average interest rate for housing loans for new agreements was 1.57 percent in May.

House Prices

The Real Estate Price Index was up by 2% in the first quarter of 2017 making it some 8% higher than a year before. Last year’s UBS Bubble index told us that Stockholm was leading the way.

The sharpest increase in the UBS Global Real Estate
Bubble Index in Europe over the last four quarters
was measured in Stockholm, followed by Munich,
London and Amsterdam

Comment

The Riksbank has in its own mind invented a new type of monetary theory where you expand policy into a boom. It so far has ignored the dangers of higher household debt and booming house prices. Being a first-time buyer in Stockholm looks as grim as being one in London. As to the announcement I am not expecting much change after Friday’s wages data showed a slowing. These days wage growth is the crucial number as we looked at last week.

Total average hourly wages for manual workers in April 2017 were SEK 165.80 excluding overtime pay and SEK 168.20 including overtime pay. These numbers reflects an increase increase of 1.7 percent and 1.8 percent compared
to April 2016. The average monthly salary for non-manual workers in April 2017 excluding variable supplements was SEK 38 420 while it was SEK 39 390 including variable supplements. These numbers reflects an increase of 1.5
percent and 1.7 percent compared to April 2016.

Bank of England

I see its staff have voted to strike as Mark Carney’s increasingly troubled reign as Governor continues. My advice to the staff is to keep away from the subject of performance related pay.

 

 

 

 

House price growth in Toronto poses quite a problem for Canada

One of the economic themes of these times has been the boom in asset prices caused by ultra easy monetary policy and the way that establishment’s present this as “wealth effects” leading to economic growth when in fact some and often much of this is in my opinion inflation. For example those investing in government bonds have benefited from rises in prices and this is presented as a “wealth effect” but on the other side of the coin someone taking out an annuity faces much lower yields and much lower income from a set sum. Yet the “wealth loss” for them is not counted. There is also the issue of house prices where again rises are presented as an economic benefit which for some they are but both first-time buyers and those wishing to trade up in the market face higher prices.

The house price issue is one which has dogged economic comment about Canada and merited a substantial mention by the Bank of Canada last week. This is significant because central banks  look away from such matters until they feel they have no other choice. The emphasis is mine.

Housing activity has also been stronger than expected. We have incorporated some of this strength in a higher profile for residential investment, although we still anticipate slowing over the projection horizon. The current pace of activity in the Greater Toronto Area (GTA) and parts of the Golden Horseshoe region is unlikely to be sustainable, given fundamentals. That said, the contribution of the housing sector to growth this year has been revised up substantially. Price growth in the GTA has accelerated sharply in recent months, suggesting that speculative forces are at work. Governing Council sees stronger household spending as an upside risk to inflation in the short-term, but a downside risk over the longer term.

What is happening to house prices in Toronto?

Canada Statistics has an index for the price of new houses.

On the strength of price increases for new houses in Toronto, the NHPI rose 3.3% over the 12-month period ending in February. This was the largest annual growth at the national level since June 2010.

Chart 2 Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase
The metropolitan region of Toronto posts the highest year-over-year price increase

Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase

Toronto recorded an 8.6% year-over-year price increase, the largest among the metropolitan areas surveyed, followed by Victoria (+6.3%), St. Catharines-Niagara (+6.2%), and Windsor (+6.2%). The gain for Windsor was the largest reported since January 1990.

Care is needed with such measures as for example the UK has hit trouble. So let us look further, the editorial of the Toronto Sun told us this yesterday.

house prices are skyrocketing in Toronto (the price of an average detached home is now over $1 million and has risen 33% in the past year)

The Toronto Life has something that is even more eye-catching.

Sale of the Week: The $2.7-million house that proves asking prices are meaningless in Summerhill

Ah too high eh? Nope.

The listing agents say they priced the house at what they thought was market value. Eight offers came in, after which the agents gave everyone the chance to improve. Seven did, and the sellers accepted the offer with the fewest conditions and best price, for more than $750,000 over asking. This may not have been a complete fluke: two other houses on Farnham Avenue have sold in the $2.5-million price range in the past year.

You have to question the listing agents there of course but it is an interesting price for a house which is very smart inside but does not look anything special from the front. We do get perhaps more of a realistic perspective from yesterday’s “sale of the week” as we have a comparison.

Previously sold for: $659,000, in 2007

Okay and now.

The sellers made the easy decision to go with the highest offer, at more than $400,000 over asking, $1,656,000.

Yesterday the Royal LePage house price survey told us this.

In the first quarter, the aggregate price of a home in the Greater Toronto Area increased 20.0 per cent to $759,241, while the price of a home in the City of Toronto rose 17.0 per cent to $763,875. Home prices also increased significantly in the surrounding GTA regions, with suburbs such as Richmond Hill, Oshawa,Vaughan, Markham and Oakville posting increases of 31.5 per cent, 28.2 per cent, 25.8 per cent, 23.2 per cent and 23.1 per cent to $1,209,741, $500,105, $985,534, $970,216 and $987,001

What about monetary policy?

According to the Bank of Canada it is very expansionary or loose.

The neutral nominal policy rate in Canada is estimated
to be between 2 .5 and 3 .5 per cent, 25 basis points
lower than previously estimated

If we maintain a straight face at the chutzpah and indeed fantasy that they know that to that degree of accuracy we can see that with an official interest-rate of 0.5% they are some 2.5% below neutral.

If we look at the exchange-rate then there was another boost as the trade-weighted Loonie or CERI fell from the low 120s in 2011/12 to a low of 89 as 2016 opened. It then rallied a little and over the year from March 2016 has in fact started at 95 and ended there. There are two issues here that need to be noted. Firstly this is an effective exchange rate with an elephant in the room as the US Dollar is 76.2% of it! Secondly due to its plentiful stock of raw materials the currency is often at the mercy of commodity price movements.

Moving to the money supply we see that the taps are open pretty wide. The broad measure has seen its annual rate of growth rise from the 4.5% of late 2010 to 7.7% in February of this year. There was a dip in narrow money growth in March but it is still increasing at an annual rate of 9%.

Household debt

Canada Statistics tells us this.

Total household credit market debt (consumer credit, and mortgage and non-mortgage loans) reached $2,028.7 billion in the fourth quarter. Consumer credit was $596.5 billion, while mortgage debt stood at $1,329.6 billion.

If we compare to incomes we see this.

Household credit market debt as a proportion of adjusted household disposable income (excluding pension entitlements) edged up to 167.3% from 166.8% in the third quarter. In other words, there was $1.67 in credit market debt for every dollar of adjusted household disposable income.

On the other side of the ledger that was something to please the Bank of Canada.

National wealth, the value of non-financial assets in the Canadian economy, rose 1.4% to $9,920.0 billion at the end of the fourth quarter. The main contributors to growth were real estate and natural resources. The value of real estate grew by $93.0 billion while the value of natural resource wealth increased $29.4 billion.

Although the rest of us will wonder how much of that $93 billion is from the Toronto area?

Comment

There is a lot to consider here as whilst the word bubble is over used it is hard to avoid thinking of it as we look at Toronto and its housing market. If we look at wages growth it has been slowing from around 3% to 0..9% in Canada in terms of hourly wages so it is not any sort of driver. The price moves are if anything even more extreme than seen in London.

If we move to the economics then if you own a property in Toronto and want to move elsewhere you have a windfall gain and good luck to you. A genuine wealth effect. But against that all new buyers are facing rampant inflation and there are clear wealth losses for them. We are back to a society of haves and have note here,

A big factor is we see another place where foreign funds are flowing in and like in the other cases we are left to mull this from Transparency International.

Transparency International Canada’s analysis of land title records found that nearly a half of the 100 most valuable residential properties in Greater Vancouver are held through structures that hide their beneficial owners.

Canada is of course far from alone in such worries.

Meanwhile the Bank of Canada finds itself not far off irrelevant which is awkward to say the least for a central planner. Of course where it is relevant it is making things worse.

 

 

What is happening to US auto-loans?

One of the features of expansionary monetary policy has been that it misses some areas and concentrates in others. It reminds me of the word disintermediation which described a similar problem when central banks were trying to restrict the money supply rather than expand it with policies like QE ( Quantitative Easing) ,as the concept was the same albeit in a different direction. I have noted in the past the issue with auto-loans or loans for cars in the United States and am going to look at that in more detail as the situation is showing signs of bubbling under as we worry about it bubbling over.

What is the background?

Last November the Liberty Street Economics blog of the US New York Fed told us this.

The rise in auto loans has been fueled by high levels of originations across the spectrum of creditworthiness, including subprime loans, which are disproportionately originated by auto finance companies.

There was something of a warning tucked in there which was reinforced by this.

Originations of auto loans have continued at a brisk pace over the past few years, with 2016 shaping up to be the strongest of any year in our data, which begin in 1999……..the $1.135 trillion of outstanding auto loans by credit score and lender type, and we see that 75 percent of the outstanding subprime loans were originated by finance companies.

So there are various concerns which are the size of the market and its rate of growth which are highlighted by the way the finance companies seem to have taken over the subprime sector.

The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly six million individuals at least ninety days late on their auto loan payments.

The feeds into the theme of us “forgetting” how we got into the credit crunch or to put it another way the finance sector returning to past behaviours.

Last month it confirmed the 2016 rise.

auto debt (up $93 billion, or 8.7 percent)

Also there were some numbers to cheer any central banker’s heart.

As of December 31, 2016, total household indebtedness was $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. Overall household debt remains just 0.8% below its 2008Q3 peak of $12.68 trillion, but is now 12.8% above the 2013Q2 trough.

I note that auto-loans began their recent rise in 2013 in terms of number of loans.

Used car prices

These are of course the asset in this market as the loans are backed by the cars. We live in a world where Bank of England Governor Mark Carney calls such loans “secured” and UK radio has adverts for buy-to-let cars. But earlier this month the US National Automobile Dealers Association released this.

NADA Used Car Guide’s seasonally adjusted used vehicle price index fell for the eighth straight month, declining 3.8% from January to 110.1. The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble. February’s index figure was also 8% below February 2016’s 119.4 result and marked the index’s lowest level since September 2010.

As you can see prices have been falling for a while and looking at the chart of prices the rate of fall rather resembles that of 2008/09 with a difference which is that we start with prices having been in the low 120s rather than ~108. Last week we saw a warning from one of the companies involved and let me switch to Ed Harrison who has been on this case for a while.

Yesterday, Ally Financial warned that profits would underperform expectations. Now, they did not say that profits would fall or that they were taking credit writedowns. Neverthless, the warning is an important marker and should be of grave concern…………So with Ally, what we are seeing is that these problems have created enough discounting to induce a profit warning at one of the major auto finance companies. Ally is really the former GMAC, the engine of a huge amount of profit for General Motors, as are all of the finance arms of the automakers in the US. So what happens at Ally will definitely pass through to GM and the other carmakers unless the impact is arrested quickly.

There are various issues here but let us start with a clear difference with the housing market where prices have risen and thus boosted the asset value of the lenders books whereas here prices were pushed higher but are now falling. Also if we look we see that in another development familiar from the past the loans were bigger than the car value. Here is an offer I looked up from a company called DCU on what they call second chance auto loans.

Borrow up to 120% of Price – Qualified borrowers can finance up to 120% of NADA retail book value or 120% of the purchase price – whichever is less,

According to the St.Louis Fed yesterday the loans are a lot cheaper than they were.

The interest rate on a 48-month loan from a commercial bank for a new automobile purchase dropped from close to 8 percent prior to the Great Recession to an average of 4.3 percent since the second quarter of 2014.8 Meanwhile, auto finance company rates for new car loans averaged around 5 percent during this same period.

Also it points out this.

Softened underwriting standards have raised concerns regarding the risk associated with the robust growth in auto debt………..lenders have stretched repayment terms and offered higher advance rates, resulting in greater loan-to-value ratios.

In terms of its own region it is seeing this.

Serious delinquency rates among subprime borrowers in Little Rock and Memphis have now markedly increased during two years of an economic expansion.

Asset Backed Securities (ABS)

Yes they are on the scene as we look to see what is happening in a market that Mario Draghi of the ECB is very keen on. Barrons looked into it yesterday.

While delinquencies, liquidation rates and loss severities are higher across subprime ABS deals regardless of the ABS shelf, it appears that certain issuers are seeing larger increases than others. This analysis invites a few questions. Are the capital structures of deeper subprime lenders built to handle larger losses? Which structures, if any, are more likely to take principal losses in their rated debt tranches?

Comment

There are quite a few factors to consider here. Let us start with household debt which will soon pass the pre credit crunch peak. That needs to be compared to GDP ( Gross Domestic Product) which was 12% higher in 2016 than the previous peak of 2007. Regular readers will be aware of my concerns about GDP but for now let us just note that it has grown.

If we move to auto-loans there are a lot of flashing yellow lights. The trend towards subprime lending and the lending going “in-house” for the car lenders only adds to the moral hazards at play. Securitisation of the loans send a chill down the spine and now we see falling used car prices. Even worse the Financial Times has this morning told us not to panic!

Don’t panic about auto loans just yet — tax season isn’t over, after all

This is based on the fact that this year tax refunds have been particularly slow and therefore may well have influenced the February drop but of course not the ones before it. Also there is no panic here but there is a list that is gaining a growing number of ticks on it and this has just popped up under auto loans on Twitter.

Learn How to Get Fast Approved AutoLoans with No Credit Check Requirement in Texas ( @CarLoanBadCred )

Also this.

Gone are the days when you had to wait for getting bad credit auto loans. There are many online auto financing companies who offer competitive interest rates on these loans. Internet is quickly becoming the best place to get a blank check car loans with bad credit history

https://ezautofinance.net/how_to_get_a_blank_check_auto_loan_even_with_bad_credit.html

What could go wrong?

 

 

Norway is apparently very happy but what about house prices?

Today we are taking a trip across the North Sea to what we are told is the happiest country on Earth. From the World Happiness Report.

Norway has jumped from 4th place in 2016 to 1st place this year, followed by Denmark, Iceland and Switzerland in a tightly packed bunch. All of the top four countries rank highly on all the main factors found to support happiness: caring, freedom, generosity, honesty, health, income and good governance. Their averages are so close that small changes can re-order the rankings from year to year.

As I note that Finland is 5th this seems to be a Nordic thing although of course it does make one wonder about the criteria as well as how many copies of this were sold there by Pharrell.

Because I’m happy
Clap along if you feel like a room without a roof
Because I’m happy
Clap along if you feel like happiness is the truth
Because I’m happy
Clap along if you know what happiness is to you
Because I’m happy
Clap along if you feel like that’s what you wanna do

There are clear economic influences here as we note that Africa is apparently “waiting for happiness” and intriguingly China is like this.

People in China are no happier than 25 years ago

But returning to Norway there are clear economic influences at play.

Norway moves to the top of the ranking despite weaker oil prices. It is sometimes said that Norway achieves and maintains its high happiness not because of its oil wealth, but in spite of it. By choosing to produce its oil slowly, and investing the proceeds for the future rather than spending them in the present, Norway has insulated itself from the boom and bust cycle of many other resource-rich economies.

There is a mixture of fact and PR release there so let us look further at the Norwegian economy. Oh and being the top of any list these days poses a question.

Economic growth

This from the Norges Bank last week is not especially inspiring.

In 2016, mainland GDP in Norway grew at the slowest rate recorded since the financial crisis. Growth picked up a little between Q3 and Q4 as projected earlier.

Norway Statistics tells us this.

Continued weak growth Mainland Norway: Growth in the gross domestic product (GDP) for mainland Norway was 0.3 per cent in the 4th quarter of 2016, slightly up from the 3rd quarter.

The annual rate of growth was 1.1% and if we look into the detail there was something familiar for these times.

Consumption of goods increased by 0.6 per cent, after having mostly fallen since the 3rd quarter of 2015. Increased car purchases contributed to more than half of the rise in household consumption of goods.

A hint of easy monetary policy which these days often appears in the car sector. Also something else seems rather familiar.

The declining wage growth that we have seen in recent years will continue, and estimates for 2016 show that the average annual wage growth was 1.7 per cent.

If we return to the Norges Bank report we see that real wages have fallen.

The consumer price index (CPI) rose by 3.6% between 2015 and 2016, while consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) rose by 3.0% in the same period.

A lot of the impact here has been from the oil and gas sector.

What about monetary policy then?

Here we go.

Norges Bank’s Executive Board has decided to keep the key policy rate unchanged at 0.5%. The Executive Board’s current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead.

So like so many other central banks they ignore inflation being above its target ( which is 2.5%) and concentrate on economic growth.

In the wake of the decline in oil prices since summer 2014, the key policy rate in Norway has been reduced in several steps. Monetary policy is expansionary and supportive of structural adjustments in the Norwegian economy,

So far the oil price and industry has been a silent elephant in the room but if we defer that to later let us look at the dangers from low interest-rates which are domestic debt and house prices.

House Prices

Today’s data release tells us this.

On average, prices for new dwellings have increased by 10.4 per cent in the 4th quarter of 2016 compared to the same quarter in 2015…….Prices for existing flats, small houses and detached houses have increased by 15.9, 9.9 and 7.6 per cent respectively from the 4th quarter of 2015 to the 4th quarter of 2016.

If we look into the detail we see that the prices for flats ( multi dwelling apartments) are driving this move. Let us remind ourselves that this compares with wage growth of 1.7% and real wages which are falling and it comes on the back of previous rises. The flats index was at 80 in the first quarter of 2011 and has risen to approximately 117. If we look back for what has happened in the credit crunch are we see that house prices have doubled since 2005 ( to be precise the index is 199.3).

What about debt?

The Norges Bank puts it like this.

Persistently low interest rates may lead to financial system vulnerabilities. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable. By taking into account the risk associated with very low interest rates, monetary policy can promote long-term economic stability.

That lest sentence is a contradiction in terms designed to fool the unwary I think. We see that borrowing was on the march.

Net incurrence of loans increased from NOK 167 billion to NOK 186 billion, while net investments in deposits decreased from NOK 65 billion to NOK 55 billion.

Debt growth was 5.6% in 2016 and that left the debt to income ratio at 2.35.  Back to the Norges Bank.

Growth in household debt accelerated through the latter half of 2016, and debt is still growing faster than household income. The rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable.

The mortgage rate series at Norges Bank was at 3.98% as 2013 ended and 2.49% as 2016 ended so we can see the pattern although the low was 2.35% last August. It is not a surprise to see money supply growth be firm.

The twelve-month growth in the monetary aggregate M3 was 6.5 per cent to end-January, up from 5.4 per cent the previous month.

The debt situation for the government is rather unique. It does have some but if you put in the sovereign wealth fund then net financial assets must be around treble annual GDP.

Comment

If we look at the elephant in the room then the oil and gas sector accounts for around 22% of Norway’s economic output. If we add in the fishing industry then Norway is especially gifted in terms of natural resources. The catch in recent times has been the fall in the price of crude oil which sees the Brent benchmark just above US $51 per barrel as I type this. In terms of an annual comparison the price is higher and Norway is one of the countries which most welcomes that but it is a far cry from the US $100+ of a couple of years ro so ago. This has been picked up in the unemployment data where the unemployment rate headed towards 5%. It has now fallen to 4.4% but there are other worries here.

the seasonally-adjusted unemployment decreased by 0.4 percentage points, or 12 000 persons………the seasonally adjusted number of employed persons decreased by 22 000 persons from September to December.

Meanwhile the central banks eases and pumps up the housing market. Maybe us Brits have set a bad example but what must first-time buyers and the younger generation think of this as a strategy?

Let me leave you with something very Norwegian.

A total of 30 800 moose were shot during the hunting year 2016/2017; a decrease of 300 animals from the previous hunting year and a decrease of 22 per cent from the record hunting year 1999/2000.

 

How many promises about Royal Bank of Scotland have been broken today?

One of the main features of the credit crunch in the UK were the collapse of Royal Bank of Scotland and the UK taxpayer bailout of it. Since then we have been regularly informed that it has recovered and that the sunlit uplands are not only in sight but have arrived. The 27th of January this year was an example of this.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

I am not sure how you can move “further and faster” on something you have supposedly fixed several times before! If we look back to September 2014 we were told something which is likely to echo later in this article.

we expect to spend much of the next 18 months simply marvelling at the sheet size of the RBS’ capital surplus and wondering why it is just sitting there gathering dust,’ he said.

Back in 2012 my old employer Union Bank of Scotland was on the case sort of.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues

The International Financing Review put its oar in as well.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Mind you at least someone had a sense of humour on the way.

If we advance to the figures released in January of 2014 we see that BlueBullet on Twitter had a wry take on events.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Royal Bank of Scotland Today

Which pack was RBS “well ahead of” here?

The Royal Bank of Scotland Group (RBS) did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate.

The rhetoric carries on as Mark Carney is telling us “they (RBS) have made progress” in this morning’s press conference. Although there is a clear warning signal as he deflects a question about it to a colleague. This happens on difficult questions and means that the Governor cannot be quoted in future on the details for RBS.

Reuters sums up the tale of woe for RBS here.

The unexpected result underlines the litany of problems RBS is grappling with, which include a mounting legal bill for misconduct ahead of the 2008 financial crisis and difficulties selling off assets such as its Williams & Glyn banking business.

So “litany of problems” is the new “stronger,safer bank”? So what will it do about this?

The state-backed lender rushed out a statement following the announcement to say it would take a range of actions, including selling off bad loans and cutting costs to make up the capital shortfall identified by the tests of around 2 billion pounds ($2.49 billion).

“Rushed out a statement” is really rather poor when it will have been given advance notice about this but this does echo its response to the 2008 crisis. Meanwhile I guess it cannot go back to the UK taxpayer for more cash as of course it did this only in March.

Royal Bank of Scotland is paying £1.2bn to the Treasury to buy out a crucial part of its £45bn bailout in a step towards returning the bank to the private sector.

This was a way that Chancellor George Osborne massaged and manipulated the UK public finances back then. Was this from Earth Wind & Fire the backing track?

Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

I do hope that he will be called in front of the Treasury Select Committee to explain this and that his diary is not too full as he collects new titles. As I suspect we can file this in the bin.

George Osborne has already said he is hoping to generate £25bn from the sale of three-quarters of its RBS shares in this parliament,

The share price is down nearly 3% at 191.5 pence as I type this and perhaps it should be another 3%. The breakeven for the UK taxpayer is just over £5.

Other UK banks

There were more technical and minor failures to be seen.

Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan…..Standard Chartered…. did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position, including the AT1 it has issued during 2016, the PRA Board did not require Standard Chartered to submit a revised capital plan.

A confession from Mark Carney

We got yet another U-Turn as we were told that household debt is now an issue which I summarised on Twitter like this.

Mark Carney says “thanks” to a question about household debt which means of course the opposite!

The fact that the subject got a mention is extremely revealing. As nobody at the press conference had either the gumption or the courage to ask Governor Carney how his Bank Rate cut and extra QE would improve household debt we were left with a sinking feeling. Which of course is what Governor Carney had been telling us was happening to house hold debt. Also he has a pretty odd view about lending for cars and automobiles.

Does Mark Carney really think “auto lending” is secured debt as he just claimed? What about depreciation?

There used to be quite a few adverts on the radio for Buy To Let lending for cars which I always thought was bizarre. Either Governor Carney wants to boost this or he used his £250,000 a year rent allowance to have a punt. Oh excuse me, long-term investment.

We were also told that he has plenty of “tools” although when I enquired about a definition of them some were ones he may or may not agree with.

A bunch of them, they sit on the committee with me.

I have been warning about the rise of unsecured lending in the UK and my latest piece on the issue was only yesterday. Perhaps the Governor read it.

Comment

There are several issues to consider here. I think that the way Governor Carney has used it to highlight claimed concerns about the rise of household lending is revealing. It enabled him to get this on record with little chance of being challenged as the media rushes to print about RBS. I also note that he shuffled the question about Buy To Let lending to someone else.

Meanwhile RBS continues on its own private ( albeit publicly owned) Road To Nowhere. We have almost infinite inflation in false dawns but a reality of disappointment and failure. After 8 years of this is it time to file the claims of reform in the “Liars Lexicon” mentioned in the comments section yesterday.

Meanwhile we have an example of another of my themes in play. Actual helicopter money from the Indian Air Force.

 

It is time to put Student Loans back in the UK debt numbers

This morning has seen some updated statistics for the amount of debt in the UK released by The Money Charity. In it was something to grab the headlines as this from the BBC shows.

Household debts have spiralled to a whopping £1.5tn in the UK for the first time, new statistics show.

If we go to The Money Charity itself we are told this and apologies for their enthusiasm for capitals.

PEOPLE IN THE UK OWED £1.503 TRILLION AT THE END OF SEPTEMBER 2016. THIS IS UP FROM £1.451 TRILLION AT THE END OF SEPTEMBER 2015 – AN EXTRA £1036.58 PER UK ADULT.

So we cross a threshold and indeed are given a troubling view of the future.

ACCORDING TO THE OFFICE FOR BUDGET RESPONSIBILITY’S JULY 2015 FORECAST, HOUSEHOLD DEBT IS PREDICTED TO REACH£2.551 TRILLION IN Q1 2021.

So debt has risen and is forecast to continue doing so at what must be a faster rate than we have seen. I will look at the position in a moment but we cannot move on without pointing out that the OBR ( Office of Budget Responsibility) forecasts lots of things but even so does not get many right!

Bringing this to a household and individual level

The Money Charity presents us figures for debt per UK household.

THE AVERAGE TOTAL DEBT PER HOUSEHOLD – INCLUDING MORTGAGES – WAS £55,683 IN SEPTEMBER. THE REVISED FIGURE FOR AUGUST WAS £55,523.

And also per person.

PER ADULT IN THE UK THAT’S AN AVERAGE DEBT OF £29,770 IN SEPTEMBER – AROUND 113.7% OF AVERAGE EARNINGS. THIS IS SLIGHTLY UP FROM A REVISED £29,685 A MONTH EARLIER.

It is interesting to see the numbers compared to average earnings but care is needed. A better comparison would be with net or post-tax earnings and even with that there is the issue that as a minimum one has to eat to survive and pay other essential bills.

What does this cost in terms of interest?

Lets take a look at what we are told.

BASED ON SEPTEMBER 2016 TRENDS, THE UK’S TOTAL INTEREST REPAYMENTS ON PERSONAL DEBT OVER A 12 MONTH PERIOD WOULD HAVE BEEN£51.135 BILLION.

If we look at this overall we see that such a number comes from us living in an era of relatively low interest-rates although the 3.4% to 3.5% is nothing like the near zero interest-rate policy that has been applied to UK government debt.  I will break the numbers down in a moment but for now here are some daily and per household numbers.

  • THAT’S AN AVERAGE OF £140 MILLION PER DAY.
  • THIS MEANS THAT HOUSEHOLDS IN THE UK WOULD HAVE PAID AN AVERAGE OF £1,894 IN ANNUAL INTEREST REPAYMENTS. PER PERSON THAT’S £1,013 3.87% OF AVERAGE EARNINGS.

What are the interest-rates paid?

We discover that the vast amount of the debt must be secured or mortgage debt otherwise the interest-rate would not be possible. From the Bank of England.

The effective rate on the stock of outstanding secured loans (mortgages) decreased by 10bps to 2.74% in September and the new secured loans rate fell to 2.27%, a decrease of 4bps on the month. The rate on outstanding other loans decreased by 2bps to 6.76% in September and the new other loans rate decreased by 37bps to 6.65%

The fact that the numbers are decreasing will lower the monthly burden per unit of debt and no doubt would have the Bank of England slapping itself on the back.  However its effective interest-rates series somehow misses what is happening in the world of credit cards and overdrafts so let me help out from its underlying database.

The credit card interest-rate it calculates was 17.94% in October. This is a lot more awkward as you see it was around 15% as we hit the peak of the last boom in the summer of 2007. If we move to the overdraft interest-rate it calculates it was 19.7% October and if we make the same comparison with the summer of 2007 it was around 17.7% or 2% lower back then. Perhaps the soon to be closed staff accounts at the Bank of England have had quite different interest-rates and it occurred to no-one that the wider population was seeing higher as opposed to the officially claimed lower interest-rates. Of course there is an issue of bad debts here but interest-rates of 17.94% and 19.7% when Bank Rate is 0.25% seem to raise the spectre of that of fashioned word usury.

Where is the debt?

Most of it is mortgage debt but as I pointed out last Monday unsecured debt is growing quickly.

OUTSTANDING CONSUMER CREDIT LENDING WAS £188.7 BILLIONAT THE END OF SEPTEMBER 2016.

  • THIS IS UP FROM £176.3 BILLION AT THE END OF SEPTEMBER 2015, AND IS AN INCREASE OF £247.10 FOR EVERY ADULT IN THE UK.

This means that the situation is currently as shown below.

Consumer credit increased by £1.4 billion in September, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.6% and 10.3% respectively.

This means the following on a household level.

PER HOUSEHOLD, THAT’S AN AVERAGE CONSUMER CREDIT DEBT OF £6,991 IN SEPTEMBER, UP FROM A REVISED £6,963 IN AUGUST – AND  £462.19 EXTRA PER HOUSEHOLD OVER THE YEAR.

Also just under a third of this is one of the most expensive forms which is credit card debt.

Time for some perspective

Let us take Kylie’s advice and step back in time for some perspective. I have chosen to go back to September 2007 as it was then as Northern Rock went cap in hand to the Bank of England that warning lights of “trouble,trouble,trouble” were flashing.

Total UK personal debt at the end of September 2007 stood at £1,380bn. The growth rate increased to 10.0% for the previous 12 months which equates to an increase of £120bn. Total secured lending on homes at the end of September 2007 stood at £1,163bn. This has increased 10.9% in the last 12 months. Total consumer credit lending to individuals in September 2007 was £217bn. This has increased 5.8% in the last 12 months.

Back then they were much less keen on using capitals! Also I note that unsecured debt was growing much more slowly then.although it was in total more than now.

Now the theme that we cut our lending in this area has a problem. Let mt take you to a 2012 paper on the subject from the Bank of England.

The stock of student loans has doubled over the five years to 5 April 2012 to £47 billion, and now represents more than 20% of the stock of overall consumer credit. With student loans unlikely to be affected by the same factors that influence the other components of consumer credit, the Bank is proposing a new measure of consumer credit that excludes student loans

Consumer credit fell from £207 billion in June 2012 to £156 billion in August. Problem solved at a stroke…oh hang on!

So yes we cut consumer credit but not as much as the unwary might think.

Student Loans

Sadly we do not have a UK series but here are the numbers for England as they are much the largest component.

The balance outstanding (including loans not yet due for repayment) at the end of the financial year 2015-16 was £76.3 billion, an increase of 18% when compared with 2014-15.

The total is growing fairly quickly as indeed we would have expected.

The amount lent in financial year 2015-16 was £11.8 billion, an increase of 11% when compared with 2014-15.

Thus if they went back into the consumer credit numbers we would see a rather different picture.

Comment

So on today’s journey we have reminded ourselves that the comforting official view on UK household and in particular unsecured credit has been strongly influenced by the removal of student loans from it in the summer of 2012. Otherwise today’s headline would be household debts are now circa £1.6 trillion. A bit like the situation with the official consumer inflation measure where the fastest growing sector of owner occupied housing costs somehow got omitted. The UK establishment has been meaning to put it back for over a decade now!

Meanwhile what to measure this against poses its own problems. Some would argue that a higher value for the housing stock via higher house prices makes the mortgage lending even more secure. The catch of course is that the house prices depend on the lending which the Bank of England fired up with its Funding for Lending Scheme in the summer of 2013. If we move to real incomes then in spite of recent growth it is hard to be reassured as according to the official figures we are still 4% below the summer of 2007.

Meanwhile something troubling for the Bank of England nirvana of higher mortgage debt and house prices emerged over the weekend.

A large house price depreciation can be good for economic growth, research finds ( World Economic Forum)