UK GDP growth was strong in January meaning we continue to rebalance towards services

This will be an interesting day on the political front but there is also much to consider on the economic one. We have a stronger UK Pound £ this morning with it above US $1.32 and 1.17 versus the Euro which as usual on such days has been accompanied by the currency ticker on Sky News disappearing. We also heard yesterday from the newest member of the Bank of England Monetary Policy Committee Jonathan Haskel. As it has taken him six months to give one public speech I was hoping for a good one as well as wondering if he might have the cheek to lecture the rest of us on productivity?! So what did we get.

Very early there was an “I agree with Mark (Carney)” as I note this.

see for example speeches by (Carney, 2019) and (Vlieghe, 2019)

The subject was business investment which in the circumstances also had Jonathan tiptoeing around the political world but let us avoid that as much as we can and stick to the economics.

First, as has been widely noted, UK investment has been very weak in the last couple of years, especially
during the last year, see for example speeches by (Carney, 2019) and (Vlieghe, 2019) suggesting that Brexit
uncertainty is weighing on business investment. Second, looking at the assets that make up investment
reveals some interesting patterns: transport equipment has been particularly weak, but intellectual property
products (R&D, software, artistic originals) were somewhat stronger. Third, regarding Brexit, as Sir Ivan
Rogers, the UK’s former representative to the EU, has said (Rogers, 2018), “Brexit is a process not an
event”. That process has the possibility of creating more cliff-edges; the length of the
transitional/implementation period, for example. Since the nature of investment is that it needs payback
over a period of time there is a risk that prolonged uncertainty around the Brexit process might continue to
weigh down on investment.

The issue of business investment is that it has been the one area which has been consistently weak since the EU Leave vote. How big a deal is it?

To fix ideas, Table 1 contains nominal investment
in the UK for 2018. As the top line sets out, it was close
to £360bn. Remembering that nominal GDP is £2.1 trillion, this is around 17% of GDP.

Regular readers will know I am troubled as to how investment is defined and to be fair to Jonathan he does point that out. However this is also classic Ivory Tower thinking which imposes an economic model on a reality which is unknown. Have we see a high degree of uncertainty? Yes and that has clearly impacted on investment but what we do not know is how much will return under the various alternatives ahead. Though from the implications of Jonathan’s thoughts the Forward Guidance of interest-rate increases seems rather inappropriate to say the least.

Raghuram Rajan

There has been a curious intervention today by the former head of the Reserve Bank of India. He has told the BBC this.

“I think capitalism is under serious threat because it’s stopped providing for the many, and when that happens, the many revolt against capitalism,” he told the BBC.

The problem is that a fair bit of that has been driven by central bankers with policies which boost asset prices and hence the already wealthy especially the 0.01%.

The UK economy

The opening piece of official data today was very strong.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018. Services, production, manufacturing and construction all experienced positive month-on-month growth in January 2019 after contracting in December 2018.

Production data has been in the news as it has internationally slowed so let us dip into that report as well.

Production output rose by 0.6% between December 2018 and January 2019; the manufacturing sector provided the largest upward contribution, rising by 0.8%, its first monthly rise since June 2018……In January 2019, the monthly increase in manufacturing output was due to rises in 8 of the 13 subsectors and follows a 0.7% fall in December 2018; the largest upward contribution came from pharmaceuticals, which rose by 5.7%.

We had been wondering when the erratic pharmaceutical sector would give us another boost and it looks like that was in play during January. For newer readers its cycle is clearly not monthly and whilst it has grown and been a strength of the UK economy it is sensible to even out the peaks and troughs. But in the circumstances the overall figure for January was good.

Some Perspective

This is provided by the quarterly data as whilst the January data was nice we need to recall that December was -0.4% in GDP terms. The -0.4% followed by a 0.5% rise is rather eloquent about the issues around monthly GDP so I will leave that there and look at the quarterly data.

Rolling three-month growth was 0.2% in January 2019, the same growth rate as in December 2018.

This seems to be working better and is at least more consistent not only with its own pattern but with evidence we have from elsewhere.Also there is a familiar bass line to it.

Rolling three-month growth in the services sector was 0.5% in January 2019. The main contributor to this was wholesale and retail trade, with growth of 1.1%. This was driven mostly by wholesale trade.

This shows that we continue to pivot towards the services sector as it grows faster than the overall economy and in this instance it grew whilst other parts shrank exacerbating the rebalancing.

Production output fell by 0.8% in the three months to January 2019, compared with the three months to October 2018, due to falls in three main sectors……The three-monthly decrease of 0.7% in manufacturing is due mainly to large falls of 4.0% from basic metals and metal products and 2.0% from transport equipment.

Continuing the rebalancing theme we have seen this throughout the credit crunch era as essentially the growth we have seen has come from the services sector.

Production and manufacturing output have risen since then but remain 6.8% and 2.7% lower respectively for the three months to January 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Overall construction has helped also I think but the redesignation of the official construction data as a National Statistic  after over 4 years is an indication of the problems we have seen here. Accordingly our knowledge is incomplete to say the least.

Returning to the production data this was sadly no surprise.

Within transport equipment, weakness is driven by a 4.0% fall in the motor vehicles, trailers and semi-trailers sub-industry.

Also I will let you decide for yourselves whether this monthly change is good or bad as it has features of both.

 was a 17.4% rise for weapons and ammunition, the strongest rise since March 2017, when it rose by 25.7%.

Comment

We arrive at what may be a political crossroads with the UK economy having slowed but still growing albeit at a slow rate. There is something of an irony in us now growing at a similar rate to the Euro area although if we look back we see that over the past half-year or so we have done better. That was essentially the third quarter of last year when Euro area GDP growth fell to 0.1% whereas the UK saw 0.6%.

If we look back over the last decade or so it is hard not to have a wry smile at the “rebalancing” rhetoric of former Bank of England Governor Baron King of Lothbury who if we look at it through the lens of the film Ghostbusters seems to have crossed the streams. Speaking of such concepts there was a familiar issue today.

The total trade deficit (goods and services) widened £1.3 billion in the three months to January 2019, as the trade in goods deficit widened £2.4 billion, partially offset by a £1.1 billion widening of the trade in services surplus.

Although we got a clue to a major issue here as we note this too.

Revisions resulted in a £0.8 billion narrowing of the total trade deficit in Quarter 4 (Oct to Dec) 2018, due largely to upward revisions to the trade in services surplus.

So in fact we only did a little worse than what we thought we had done at the end of last year. Also one of my main themes about us measuring services trade in a shabby fashion is highlighted yet again as the numbers were revised down and now back up a bit.

In Quarter 4 2018 the trade in services balance contributed £1.1 billion to the upward revision of £0.8 billion in the total trade balance as exports and imports were revised up by £3.3 billion and £2.3 billion respectively.

Pretty much the same ( larger though) happened to the third quarter as regular readers mull something I raised at the (Sir Charlie) Bean Review. This was the lack of detail about services trade. I got some fine words back but note today’s report has a lot of detail about goods trade in 2018 but absolutely none on services.

 

 

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Oh Italia!

Sometimes events just seem to gather their own momentum in the way that a rolling stone gathers moss so let me take you straight to the Italian Prime Minister this morning.

Italy Dep PM Di Maio: Low Growth Views `Theater Of The Absurd’: Messaggero ( @LiveSquawk )

I have to confess that after the way that the Italian economy has struggled for the last couple of decades this brought the Doobie Brothers to mind.

What a fool believes he sees
No wise man has the power to reason away
What seems to be
Is always better than nothing
And nothing at all

Then the Italian statistics office produced something of a tour de force.

In December 2018 the seasonally adjusted industrial production index decreased by 0.8% compared with
the previous month. The percentage change of the average of the last three months with respect to the
previous three months was -1.1.

As you can see these numbers are in fact worse than being just weak as they show a monthly and a quarterly fall. But they are in fact much better than the next one which is really rather shocking.

The calendar adjusted industrial production index decreased by 5.5% compared with December 2017
(calendar working days being 19 versus 18 days in December 2017); for the whole year 2018 the
percentage change was +0.8 compared with 2017.
The unadjusted industrial production index decreased by 2.5% compared with December 2017.

Just for clarity output was 2.5% lower but as there was an extra working day this year then on a like for like basis it was some 5.5% lower. I would say that was a depressionary type number except of course Italy has been in a long-standing depression.

Digging deeper into the numbers we see that on a seasonally adjusted basis there was a rally in industrial production as the 100 of 2015 nearly made 110 in November 2017, but now it has fallen back to 103.9. But even that pales compared to the calendar adjusted index which is now at 93.3. So whilst the different indices can cause some confusion the overall picture is clear. We do not get a lot of detail on manufacturing except that on a seasonally adjusted basis output was 5.5% lower in December than a year ago.

The drop is such that we could see a downwards revision to the Italian GDP data for the fourth quarter of last year which was -0.2% as it is. Actually the annual number at 0.1% looks vulnerable and might make more impact if the annual rate of growth falls back to 0%. Production in a modern economy does not have the impact it once did and Italy’s statisticians were expecting a fall but not one on this scale.

Monthly Economic Report

After the above we advance on this with trepidation.

World economic deceleration has spilled over into Q4, particularly in the industrial sector, which has
experienced a broad-based loss of momentum in many economies and a further slowing in global trade growth.
In November, according to CPB data the merchandise World trade in volume decreased 1.6%.

So it is everyone else’s fault in a familiar refrain, what is Italian for Johnny Foreigner? This is rather amusingly immediately contradicted by the data.

In Italy, real GDP fell by 0.2% in Q4 2018, following a 0.1% drop in the previous quarter. The negative result is
mainly attributable to domestic demand while the contribution of net export was positive.

So in fact it was the domestic economy causing the slow down. This thought is added to by the trade data where the fall in exports is dwarfed by the fall in imports at least in November as we only have partial data for December.

As for foreign trade, in November 2018 seasonally-adjusted data, compared to October 2018, decreased both
for exports (-0.4%) and for imports (-2.2%). Exports drop for EU countries (-1.3%) and rose for non EU
countries (+0.6%). However, according to preliminary estimates in December also exports to non-EU
countries decreased by 5.0%.

Now let me give an example of how economics can be the dismal science. Because whilst in isolation the numbers below are welcome with falling output they suggest falling productivity.

In the same month, the labour market, employment stabilized and the unemployment rate decreased only
marginally.

The future looks none too bright either,

In January 2019, the consumer confidence improved while the composite business climate
indicator decreased further. The leading indicator experienced a sharp fall suggesting a
worsening of the Italian cyclical position in the coming months.

Indeed and thank you for @liukzilla for pointing this out the Italian version does hint at some possible downgrades, Via Google Translate.

The data of industrial production amplify the tendency to reduce the rhythms of
activity started in the first few months of 2018 (-1.1% the economic variation in T4).

Also a none too bright future.

Data on industry orders also showed a negative trend, with a decrease for both markets in the September-November quarter (-1.3% and -1.0% respectively on the market).
internal and foreign).

The Consumer

Yesterday’s data provided no cheer either.

In December 2018, both value and volume of retail trade contracted by 0.7% when compared with the previous month. Year-on-year growth rate fell by 0.6% in value terms, while the quantity sold decreased by 0.5%.

Although on a quarterly basis there was a little bit assuming you think the numbers are that accurate,

In the three months to December (Quarter 4), the value of retail trade rose by 0.1%, showing a slowdown
to growth in comparison with the previous quarter (+0.4%), while the volume remained unchanged at
+0.3%.

Actually there was never much of a recovery here as the index only briefing rose to 102 if we take 2015 as 100 and now is at 101.5 according to the chart provided. Odd because you might reasonably have expected all the monetary stimulus to have impacted on consumer spending.

Population

This is now declining in spite of a fair bit of immigration.

On 1 st January 2019, the population was estimated to be 60,391,000 and the decrease on the previous year was
around 90,000 units (-1.5 per thousand)………The net international migration amounted to +190 thousand, recording a slight increase on the previous year (+188
thousand). Both immigration (349 thousand) and emigration (160 thousand) increased (+1.7% and +3.1%
respecitvely).

Bond Markets

I have pointed out many times that Italian bond yields have risen for Italy in both absolute and relative terms. Let me present another perspective on this from the thirty-year bond it issued earlier this week.

Today Italy issued 8bln 30yr BTPs. Had it issued the same bond last April, it would have received around 1.3 bilion more cash from the market. ( @gusbaratta ).

Comment

This is quite a mess in a lovely country. Also the ironies abound as for example expanding fiscal policy into an economic decline was only recently rejected by the Euro area authorities. They also have just ended some of the monetary stimulus by ending monthly QE at what appears to be exactly the wrong time. So whilst the Italian government deserves some criticism so do the Euro area authorities. For example if the ECB has the powers it claims why is it not using them?

Of course I don’t want to speculate about what contingency would call for a specific instrument but if you look at the number of instruments we have in place now, we can conclude that it’s not true that the ECB has run out of fuel or has run out of instruments. We have all our toolbox still available. ( Mario Draghi )

But just when you might have thought it cannot get any worse it has.

Me on The Investing Channel

Chinese economic growth looks set to slow further in 2019

This morning brings us up to date on what has been a theme for a little while now as we have observed one of the main engines of world economic growth starting to miss a beat or two. This from Bloomberg gives us some context and perspective.

China accounted for more than 36% of global GDP growth in 2016.

That sort of growth has led to this according to the Spectator Index.

China’s GDP as a share of US GDP. (nominal) 2009: 35.4% 2019: 65.8%

This has led to all sorts of forecasts around China overtaking the US in terms of total size of its economy with of course the same old problem so familiar of simply projecting the past into the future. Let us know switch to the official view published this morning.

In 2018, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the general working guideline of making progress while maintaining stability, committed to the new development philosophy, promoted high quality development, focused on the supply-side structural reform, stayed united and overcame difficulties.

And I thought I sometimes composed long sentences! It also provokes a wry smile if we convert that to the country where we are in as I mull Theresa May telling the UK we “stayed united and overcame difficulties.”

Gross Domestic Product

Firstly we are told a version of tractor production being on target.

According to the preliminary estimation, the gross domestic product (GDP) of China was 90,030.9 billion yuan in 2018, an increase of 6.6 percent at comparable prices over the previous year, achieving the set target of around 6.5 percent growth for the year.

But then we get a version of slip-sliding away.

Specifically, the year-on-year growth of GDP was 6.8 percent for the first quarter, 6.7 percent for the second quarter, 6.5 percent for the third quarter, and 6.4 percent for the fourth quarter.

The trend is exactly as we have been expecting. Also let us take a moment to note how extraordinary it is that a nation as described below can produce its economic output data in only 21 days. There’s mud in the eye of the western capitalist imperialists.

By the end of 2018, the total population of mainland China was 1,395.38 million  an increase of 5.30 million over that at the end of 2017.

That brings us to a clear problem which is that we can I think have confidence in the GDP trend but not in the outright number. Not everyone seems to believe that as many have repeated this sort of line.

According to just-released official statistics, ‘s grew 6.6% in 2018. While it’s the lowest annual annual expansion in almost 30 years, it still is quite a robust rate for an that faced — and is facing — several internal and external uncertainties.

That was Mohammed El-Erian of Allianz.

Industrial Production

Perspective is provided as I note that 6.2% growth is described as “slow but stable” and we remain on message with this.

the value added of the state holding enterprises was up by 6.2 percent……. and enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan, up by 4.8 percent.

A clear superiority of the state over foreign private investors and especially the pesky Taiwanese. But they cannot hide this.

In December, the total value added of the industrial enterprises above the designated size was up by 5.7 percent year-on-year, 0.3 percentage point higher than that of last month, or up by 0.54 percent month-on-month.

We are told about the monthly improvement which is welcome but it is still below the average.

The real growth of the total value added of the industrial enterprises above the designated size in 2018 was 6.2 percent, with slow yet stable growth.

So with 6.2% being slow and stable if 5.7% just slow? Many countries would love such a rate of growth but not China.

Services

Again we see a monthly rise being reported.

In December, the Index of Services Production was up by 7.3 percent year-on-year, 0.1 percentage point higher than that of last month.

However this is also against a backdrop of a weakening over the full year.

In 2018, the Index of Services Production increased by 7.7 percent over that of last year, maintained comparatively rapid growth.

That theme continues as we note that year on year growth was 8.3% in December of 2017.

Retail Sales

We find ourselves in familiar territory.

In 2018, the total retail sales of consumer goods reached 38,098.7 billion yuan, up by 9.0 percent over last year which kept fast growth……..In December, the growth of total retail sales of consumer goods was 8.2 percent year-on-year, or 0.55 percent month-on-month.

If we look back the reported growth rate in December 2017 was 10.2%.

Property

This has been an area that has fueled growth in China but Reuters now have their doubts about it.

Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2 percent in December from a year earlier, down from 9.3 percent in November, according to Reuters calculations based on data released by National Bureau of Statistics (NBS) on Monday.

That was just ahead of the slowest pace of growth last year at 7.7 percent recorded for October.

So the two lowest numbers were at the end of the year and compare to this.

For the full year, property investment increased 9.5 percent from the year-earlier period, down from 9.7 percent in January-November.

I note that in the official data whilst prices are still rising volume growth has slowed to a crawl in Chinese terms.

The floor space of commercial buildings sold was 1,716.54 million square meters, up by 1.3 percent. Specifically, the floor space of residential buildings sold was up by 2.2 percent. The total sales of commercial buildings were 14,997.3 billion yuan, up by 12.2 percent, among which the sales of residential buildings were up by 14.7 percent.

Trade

This was a factor in things slowing down as we note the faster import growth over 2018 as a whole.

The total value of exports was 16,417.7 billion yuan, up by 7.1 percent; the total value of imports was 14,087.4 billion yuan, up by 12.9 percent.

Those who consider the trade surplus to be one of the world’s economic imbalances should echo the official line.

the Trade Structure Continued to Optimize

Comment

So we find that the official data is catching up with our view of an economic slow down in China. Those late to the party have the inconvenience of December showing some data a little better on a monthly basis but the trend remains clear. Looking ahead then even the official business survey shows a decline because the 54s and 53s were replaced by 52.6 in December.

However if we switch to my favourite short-term indicator which is narrow money we see that the economic brakes are still on. The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

Still it is not all bad news as it has been a while since there has been so little publicity about the annual shindig in Davos. Perhaps someone has spotted that flying to an Alpine resort to lecture others about climate change has more than a whiff of hypocrisy about it.

China adds to the list of slowing economies

This morning has seen a barrage of economic data released by the National Bureau of Statistics in China. This gives us an opportunity to see if they are catching the economic cold that we have been observing developing amongst us evil western capitalist imperialists. According to the rhetoric things are going really rather well.

In November, under the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the requirement of high-quality development, stuck to the general working guideline of making progress while maintaining stability, adopted the new development philosophy, deepened the supply-side structural reform, and intensified efforts in policy implementation to maintain stability in areas like employment, financial sector, foreign trade, foreign investment, domestic investment, and market expectation. The economy performed within the reasonable range and maintained the generally stable and growing momentum.

That is quite an opening sentence to say the least! Let us add to that with some perspective as we look back.

Next week marks 40 years since China opened up its economy to the world. It’s economy has grown to 80x the size of its 1978 version. For comparison, the U.S. has grown 8x. ( @DavidInglesTV)

So the rhetoric fits that but as we shall see fits what is currently taking place much less well.

Today’s Data

Industrial Production

Whilst the growth rate would be loved by many this is China and things are not what they used to be.

In November, the real growth of the total value added of the industrial enterprises above designated size was 5.4 percent year-on-year, 0.5 percentage point slower than last month.

This wrong-footed expectations based on the ongoing stimulus programme and was the lowest reading since early 2016. In terms of this year the annual growth rate has fallen from the 7.2% of January to a period of apparent stabilisation around 6% and now another leg lower. In terms of a breakdown we were told this.

In terms of sectors, the value added of the mining increased by 2.3 percent on a year-on-year base, the manufacturing grew by 5.6 percent and the production and supply of electricity, thermal power, gas and water grew by 9.8 percent.

Retail Sales

So with production falling was there a potential boost from consumer demand?

In November, the total retail sales of consumer goods reached 3,526.0 billion yuan, a year-on-year rise of 8.1 percent, 0.5 percentage point slower than last month.

If we switch to Reuters we see that it has been quite some time since growth has been at this level.

Retail sales rose 8.1 percent in November from a year earlier, data from the National Bureau of Statistics showed on Friday, below expectations for an 8.8 percent rise and the slowest since May 2003. In October, sales increased 8.6 percent.

If we look at the pattern we see the recent peak was 10.1% in March and the early part of the year saw several readings comfortably above 9%.

From January to November, the total retail sales of consumer goods grew by 9.1 percent year on year.

The official data set also gives us an idea of the scale of urbanisation in China now.

Analyzed by different areas, the retail sales in urban areas reached 2,999.0 billion yuan, up by 7.9 percent year-on-year, and the retail sales in rural areas stood at 527.0 billion yuan, up by 9.3 percent.

I doubt you will be surprised to learn what was particularly pulling the numbers down.

Auto sales fell a sharp 10.0 percent from a year earlier, in line with industry data showing sales dived 14 percent in November – the steepest drop in nearly seven years. ( Reuters).

Slowing auto sales on China are part of a pattern that has rumbled around the world this year. Only yesterday there was news about Ford closing a plant in Blanquefort in France and planning job cuts in Saarlouis Germany.

Service Sector

This was not as weak as the others but has also fallen in 2018.

In November, the Index of Services Production increased by 7.2 percent year on year, the same speed as last month………From January to November, the Index of Services Production increased by 7.7 percent year on year.

Taxes

Another way of looking at economic performance is to analyse what a country can collect in taxes and at first this looks good.

China’s fiscal revenue rose 6.5 percent year-on-year to 17.23 trillion yuan (about 2.5 trillion U.S. dollars) in the first 11 months of 2018, official data showed.

But it too has slowed quite a bit in the last couple of months.

The country’s fiscal revenue stood at 1.08 trillion yuan last month, with a 5.4-percent decline year-on-year, according to the Ministry of Finance.

The decline widened from a drop of 3.1 percent in October, the first fall this year.

In November, China’s tax revenue reached 805.1 billion yuan, down 8.3 percent year on year, compared with a 5.1-percent decline in October, the ministry said.

Some of this has been driven by the tax cuts applied to try to stimulate the economy so we will have to wait and see how this fully plays out.

Money Supply

Reuters updated us earlier this week.

Broad M2 money supply grew 8.0 percent in November from a year earlier, matching forecasts and October’s pace.

Adding to signs of stress on balance sheets and faltering business confidence, M1 money supply rose just 1.5 percent on-year, the weakest pace since January 2014. M1 reflects both the strength of corporate cash positions and whether they may be building up funds for possible future investments.

That is a fascinating perception of narrow money. What we would expect from such data ( the growth rate exceeded 10% in late 2015 and much of 2016) is for it to apply a brake to the Chinese economy and that is exactly what it appears to be doing. Furthermore the brake appears to be tightening.

Switching to broad money trends and subtracting inflation we get a suggestion that future economic growth will head towards and maybe below 6%.

Comment

Whilst the rhetoric may be different China has itself a dose of what the western capitalist imperialists are suffering from in 2018 and that is slower narrow money supply growth. We can argue about definitions and circumstances but as we look around Europe, the US and now China it seems the rhythm section are hammering out the same beat. There are different responses because countries start from different growth levels. For example the impact on France seems to have sent production into negative territory if this morning’s Markit business survey is any guide whereas Chinese production is still recording a growth rate above 5%.

But the direction of travel is the same and China has got used to high growth rates so there will be indigestion from the changes. So we can expect more stimuli and if the recent speeches from the PBOC are any guide some interest-rate reductions I think. They will be a bit late for the next few months though.

And so it begins?

China To Lift Retaliatory Tariff On US Cars For Three Months -Had Imposed 25% Retaliatory Tariff On Cars -To Lift Tariffs From On Jan 1 ( @LiveSquawk )

 

The Italian economy looks to be heading south again

Today has opened with what is more disappointing economic news for the land of la dolce vita. From the Italian Statistics Office or Istat.

In July 2018 the seasonally adjusted industrial production index decreased by 1.8% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was -0.2.
The calendar adjusted industrial production index decreased by 1.3% compared with July 2017 (calendar working days being 22 versus 21 days in July 2017);

As you can see output was down both on the preceding month and on a year ago. This is especially disappointing as the year had started with some decent momentum as shown by the year to date numbers.

 in the period January-July 2018 the percentage change was +2.0 compared with the same period of 2017.

However if we look back we see that the push higher in output came in the last three months of 2017 and this year has seen more monthly declines on a seasonally adjusted basis ( 4) than rises (3). Looking ahead we see that things may even get worse as the Markit PMI business survey for manufacturing tells us this.

Italy’s manufacturing sector eased towards
stagnation during August. Both output and new
orders were lower, undermined by weak domestic
demand, whilst employment increased to the
weakest degree since September 2016……..Expectations were at their lowest for over five years.

This seems set to impact on the wider economic position.

At current levels, the PMI data suggest industry
may well provide a net negative contribution to
wider GDP levels in the third quarter of the year.

With Italy’s ongoing struggle concerning economic growth that is yet another problem to face. But it is something with which it has become increasingly familiar as the industrial production sector is still in a severe depression. What I mean by that is the peak for this series was 133.3 in August of 2007 and the benchmarking at 100 for eight years later (2015) shows what Taylor Swift would call “trouble,trouble,trouble” . The initial fall was sharp and peaked at an annual rate of 26% but there was a recovery however, in that lies the rub. In 2011 Italy saw a bounce back in production to 111.9 at the peak but then the Euro area crisis saw it plunge the depths again. It did respond to the “Euroboom” in 2016 and 17 but looks like it is falling again and an index of 105.2 in July tells its own story.

So all these years later it is still 21% lower than the previous peak. We worry in the UK about a production number which is 6.1% lower but as you can see we at least have some hope of regaining it unlike Italy.

The wider outlook

Italy’s economy is heavily influenced by its Euro area colleagues and they seem to be noting a slow down as well. From @stewhampton

The ECB committee that oversees the compilation of the forecasts now sees the risks to economic growth as tilted to the downside.

Perhaps they have suddenly noted their own money supply data! At which point they are some time behind us.  Also in the language of central bankers this is significant as they do not switch from “broadly balanced” to “tilted to the downside” lightly, and especially not when they are winding down a stimulus program.

So we see that the Italian economy will not be getting much of a boost from its neighbours and colleagues into the end of 2018.

Employment

Yet again this morning’s official release poses a question about the economic situation in July?

In the most recent monthly data (July 2018), net of seasonality, the number of employees showed a slight decrease compared to June 2018 (-0.1%) and the employment rate remained stable.

This modifies the previous picture which had been good.

The year-on-year trend showed a growth of 387 thousand employees (+1.7% in one year), concentrated among temporary employees against the decline of those permanent (+390 thousand and -33 thousand, respectively) and the growth of the self-employed (+30 thousand).

So more people were in work which is very welcome in a country where a high level of unemployment has persisted. We keep being told that the unemployment rate in Italy has fallen below 11% ( in this instance to 10.7%) but then later it gets revised back up again. Of course even 10.7% is high. I would imagine many of you have already spotted that the employment growth is entirely one of temporary jobs which does not augur well if things continue to slow down.

Some better news

Italy is a delightful country so let us note what some might regard as a triumph for the “internal competitivesness” policies of the Euro area.

Italy’s current account position is one of the country’s most improved economic fundamentals since the financial crisis. As the above chart shows, it improved by 6.2 percentage points to a sizable surplus of 2.8% of gross domestic product (GDP) last year—the highest level since 1997—from a deficit of 3.4% of GDP in 2010.

That is from DBRS research who in this section will have the champagne glasses clinking at the European Commission/

external cost competitiveness gains related to relatively slower domestic wage growth.

The Italian worker who has been forced to shoulder this will not be anything like as pleased as we note that some of the gain comes directly from this.

In response to the recession, nominal imports of goods declined significantly by around 5% a year between 2012 and
2013.

Also Italy has benefited from lower oil prices.

Since then, lower energy prices further contributed to the improvement in the current account, and Italy’s imported energy bill bottomed out at 1.6% of GDP in 2016, down from a peak of 3.9% of GDP in 2012.

Not quite the export-led growth of the economics textbooks is it? Still maybe there will be a boost from tourism.

Why everyone is suddenly going to Milan on vacation ( Wall Street Journal)

According to the WSJ Milan has  “been hiding in plain sight for decades ” which must be news to all of those who have been there which include yours truly.

Comment

The downbeat economic news has arrived just as things seemed to have got calmer regarding the new coalition government. Or as DBRS research puts it.

More recently, the leaders have reaffirmed their commitment to adhere to the European Union (EU) framework. In DBRS’s view, this is a positive development.

This has meant that the ten-year bond yield which had risen above 3.2% is now 2.75%. So congratulations to anyone who has been long Italian bonds over the past ten days or so and should you choose you will be able to afford to join the WSJ in Milan as a reward. However bond yields have shifted higher if we return to the bigger picture so this will continue to be a factor.

In DBRS’s view, total interest expenditure as a share of gross domestic product (GDP) may slightly narrow this year compared with the 3.8% of GDP recorded in
2017.

As new issuance has got more expensive than in 2017 I am not sure about the narrowing point.

Also there is the ongoing sage about the Italian banks which has become something of a never-ending story. Officially Unicredit has been the success story here and yet if it is such a success why were rumours like these circulating yesterday?

The other rumour was a merger with Societe Generale of France. Anyway the current share price of around 13 Euros is a long way short of the previous peak of 370 or so. This reminds us of the news stories surrounding the fall of Lehman Bros. a decade ago as it has been a dreadful decade for both Unicredit and Italy as we note the economy is still 5% smaller than the previous peak.

 

 

 

 

 

 

 

 

As UK house price growth fades so has the economy

Today has opened with news that is in tune with my expectations for 2017. This is my view that house price growth will slow and that it may also go negative. Such an event would make a change in the UK’s inflation dynamics as that would mean that official consumer inflation would exceed asset or house price inflation and of course would send a chill down the spine of the Bank of England. Here is the Royal Institute of Chartered Surveyors.

The headline price growth gauge slipped from +7% to +1% (suggesting prices were unchanged over the period), representing the softest reading since early 2013.

The date will echo around the walls of the Bank of England as its house price push or Funding for Lending Scheme began in the summer of 2013. Also the immediate prospects look none too bright.

Looking ahead, near term price expectations continue to signal a flat trend over the coming three months at the headline level……..Going forward, respondents are not anticipating activity in the sales market to gain impetus at this point in time, with both three and twelve month expectations series virtually flat.

Actually flat lining on a national scale conceals that there are quite a few regional changes going on.

house prices remain quite firmly on an upward trend in some areas, led by Northern Ireland, the West Midlands and the South West. By way of contrast, prices continue to fall in London…….. the price balance for the South East of England fell further into negative territory, posting the weakest reading for this part of the country since 2011.

We see that price falls are spreading out from our leading indicator of London and wait to see how they ripple out. Northern Ireland is no doubt being influenced by the house price rises south of the border. A cautionary note is that this survey tends to be weighted towards higher house prices and hence London.

The Real Economy

Let us open with the good news which has come from this morning’s production figures.

In June 2017, total production was estimated to have increased by 0.5% compared with May 2017, due mainly to a rise of 4.1% in mining and quarrying as a result of higher oil and gas production.

It is hard not to have a wry smile at the fact that something that was supposed to be fading away has boosted the numbers! Of the 0.52% increase some 0.51% was due to it and as well as the impact of a lighter maintenance cycle there was some hopeful news.

In addition, use of the re-developed Schiehallion oil field and use of the new Kraken oil field are contributing to the increase in oil production. Both are expected to increase UK Continental Shelf (UKCS) production over the longer-term.

If we move to manufacturing then the position was flat as a pancake.

Manufacturing monthly growth was flat in June 2017.

However this concealed quite a shift in the detail as we already knew that there has been a slow down in car and vehicle production.

Transport equipment provided the largest downward contribution, falling by 3.6% due mainly to a 6.7% fall in the manufacture of motor vehicles, trailers and semi-trailers.

This was mostly offset by increases in the chemical products and pharmaceutical sectors with some seeing quite a boom.

Chemical products provided the largest upward pressure, rising by 6.9% due mainly to an increase of 31.2% within industrial gases, inorganics and fertilisers.

If step back we see that over the past year there has been some growth but frankly not much.

Total production output for June 2017 compared with June 2016 increased by 0.3%, with manufacturing providing the largest upward contribution, increasing by 0.6%

There is an irony here as a good thing suddenly gets presented as a bad one and of course as ever the weather gets some blame.

energy supply partially offset the increase in total production, decreasing by 4.6% due largely to warmer temperatures.

If we look at other data sources we can say this does not really fit with the Markit PMI business surveys which have shown more manufacturing growth. It may be that they have been sent offside by the fact that the slowing has mostly been in one sector ( vehicles). If the CBI is any guide then the main summer months should be stronger.

Manufacturing firms reported that both their total and export order books had strengthened to multi-decade highs in June, according to the CBI’s latest Industrial Trends Survey.

The overall perspective is that the picture of something of a lost decade has been in play.

Since then, both production and manufacturing output have risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (January to March) 2008, by 7.8% and 4.4% respectively in the 3 months to June 2017.

Trade

One of the apparent certainties of life is that the UK will post an overall trade deficit and the beat remains the same.

Between Quarter 1 (Jan to Mar) 2017 and Quarter 2 (Apr to June) 2017, the total trade deficit (goods and services) widened by £0.1 billion to £8.9 billion as increases in imports were closely matched by increases in exports.

So essentially the same as there is no way those numbers are accurate to £100 million. Even the UK establishment implicitly accept this.

The UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.

If the problems were minor this would not be ongoing more than 2 years later would it? But if we go with what we have we see that as we stand the lower level for the UK Pound post the EU Leave vote has not made any significant impact.

In comparison with Quarter 1 and Quarter 2 of 2016, the total trade deficit over Quarter 1 and 2 of 2017 has been relatively stable.

This gets more fascinating when we note that prices and indeed inflation have certainly been on the move.

Sterling was 8.7% lower than a year ago, with UK goods export and import prices rising by 8.2% and 7.8% respectively over the period Quarter 2 2016 to Quarter 2 2017.

Construction

This is sadly yet another area where the numbers are “not a National Statistic” and I have written before that I lack confidence in them but for what it is worth they were disappointing.

Construction output fell both month-on-month and 3 month on 3 month, by 0.1% and 1.3% respectively.

This differs from the Markit PMI business survey which has shown growth.

Comment

We are finding that the summer of 2017 is rather a thin period for the UK economy. I do not mean the weaker trajectory for house prices because I feel that it is much more an example of inflation rather than the official view that it is economic growth. Yes existing owners do gain ( but mostly only if they sell) but first time buyers and those “trading up” lose.

Meanwhile our production sector is not far off static. So far the hoped for gains from a lower exchange rate have not arrived as we mull again J-Curve economics. Looking forwards there is some hope from the CBI survey for manufacturing in particular and maybe one day we can get it back to previous peaks. But we find ourselves yet again looking to a sector which appears to be on an inexorable march in terms of importance for the services sector dominates everything now and for the foreseeable future.

Meanwhile there is plainly trouble at the UK Office for National Statistics as the rhetoric of data campuses meets a reality of two of today’s main data sets considered to be sub standard.

Me on Core Finance TV

http://www.corelondon.tv/bank-england-mpc-confusion/

http://www.corelondon.tv/bitcoin-will-5000-next-level/

http://www.corelondon.tv/ecb-hardcore-operators-inflation-targets/

 

 

 

 

 

The UK sees falling house prices and production data

Today is one of the data days for the UK economy so let us get straight to one of the priorities of the Bank of England. From the Halifax.

House prices have flattened over the past three months. Overall, prices in the three months to June were marginally lower than in the preceding three months. The annual rate of growth has fallen, to 2.6%; the lowest rate since May 2013.

The timing is significant as the Funding for (Mortgage) Lending Scheme of the Bank of England began in the summer of 2013. This kicked off the rises in UK house prices we have seen. However Governor Carney’s morning espresso will have a taste analogous to corked wine as he notes these numbers and looks at the £75.5 billion of cheap funding he has given the banks since last August via the Term Funding Scheme. Can’t a central banker even bribe the banks to do things anymore?

There was in the report some grist to my mill if you recall that I warned that house prices looked like they would slip slide away in 2017.

House prices fell by 1.0% between May and June. This was the first monthly decline since January (1.1%)……House prices in the last three months (April-June) were 0.1% lower than in the previous three months (January March). This was the third successive quarterly fall; the first time this has happened since November 2012.

As you can see we are now looking back nearly five years to a different time when we had just emerged from worrying about a possible “triple dip” in the UK economy. However if we look for perspective the overall picture is as shown below.

Nationally, house prices in June 2017 were 9% above their August 2007 peak. The average house price of £218,390 is £63,727 (41%) higher than its low point of £154,663 in April 2009.

Of course this hides a large amount of regional variations as some places have struggled whilst London has soared. Also tucked away there was something rather unexpected unless the bank of mum and dad is at play.

The number of first-time buyers (FTBs) reached an estimated 162,704 in the first half of 2017, only 15% below the peak in 2006 (190,900), according to the latest Halifax First Time Buyer Review. The number of new buyers is up from 154,200 in the same period in 2016 and more than double the market low in the first half of 2009 (72,700).

The Real Economy

This morning has not been a good day for the underlying UK economy as we note the production figures.

In the 3 months to May 2017 compared with the 3 months to February 2017, the Index of Production was estimated to have decreased by 1.2%, due mainly to falls of 1.1% in manufacturing and 3.5% in energy supply.

As we have a wry smile one more time about the ( good in this instance) poor old weather taking the blame we see some poor figures. If we look at the month in isolation we continue to be disappointed.

In May 2017, total production was estimated to have decreased by 0.1% compared with April 2017, due to falls of 0.2% in manufacturing and 0.8% in energy supply; transport equipment provided the largest contribution to the manufacturing decrease, followed by food products, beverages and tobacco.

The bit that stands out there is the reference to transport equipment as that is consistent with other data showing a slowing in this area. Whilst engine production was up car production was down. Also these numbers fit very badly with the Markit PMI reading of 56.3 for May which indicated a good rate of growth as opposed to the fall reported by the official data.

Looking deeper I see that the wild and erratic ride of the pharmaceutical sector continues.

The decrease in manufacturing is due mainly to the highly volatile pharmaceutical industry, which fell by 7.8%, following a decrease of 12.0% in the 3 months to April 2017.

It rose by 1.1% in May and if we look at its pattern it should do better and help out in July so fingers crossed.

Trade

Here the news was much more normal although in this area that means bad.

Between April and May 2017, the total trade (goods and services) deficit widened to £3.1 billion, reflecting an increase in imports on the month (2.7%). The main contributor to this was an increase in imports of trade in goods….. There was a larger increase in goods imported from non-EU countries, mainly due to increases in mechanical machinery, followed by material manufactures (non-ferrous metals and silver) and oil.

If we look for some more perspective the same general pattern is to be seen.

Between the 3 months to February 2017 and the 3 months to May 2017, the total UK trade (goods and services) deficit widened from £6.9 billion to £8.9 billion.

A driver of this again appears to be a weaker phase for the UK automotive industry.

driven predominantly by increased imports of goods from non-EU countries; transport equipment (cars, aircraft and ships), oil and electrical machinery were the main contributors to this increase.

These numbers are of course just more in a decades long series of deficits. Also I note that the figures have yet to regain “national statistics” status so they are more unreliable than usual.

Some better news came on the inflation front as we had another data set which indicated that the inflationary pressure is easing.

Between April 2017 and May 2017, goods export and import prices decreased by 1% and 0.8% respectively……. the sterling price of crude oil decreasing by 6.2% in the 3 months to May 2017

Construction

The same beat was hammered out by these numbers today.

Construction output fell in May 2017 by 1.2%, in both the month-on-month and 3 month on 3 month time series…….The 3 month on 3 month decrease represents the largest 3 month on 3 month fall in output since September 2012, driven by falls in both repair and maintenance, and all new work.

This was particularly unexpected because for a start the warm weather which took some of the blame for the industrial production fall is usually a boost to construction. Also all the talk of higher infrastructure spending seems to have met a somewhat different reality.

most notably from infrastructure, which fell 4.0% following strong growth in April 2017.

Oh and yet again we have rather a mis-match with the business survey from Markit.

Comment

There were two bits of good economic news today. These were that the inflationary burst looks like it is fading and that house prices have stopped rising and may be falling. Of course the Bank of England will no doubt consider this as bad news. On the other side of the coin we are now in the phase where post the EU Leave vote the economic water was always likely to be colder and more choppy. We are in a phase where production and manufacturing are struggling with little sign that trade is providing much of a boost. Care is needed with the numbers as ever ( especially construction and trade) but our economy is now only grinding ahead and won’t be helped by this news from yesterday and the emphasis is mine.

Despite improvements in both GDP per head and NNDI per head, real household disposable income (RHDI) per head declined by 2.0% in Quarter 1 2017 compared with the same quarter a year ago

Please spare a thought for Bank of England Chief Economist Andy Haldane at this difficult time. For newer readers this “sage” pushed for a “Sledgehammer” expansion of policy when the economy was doing okay and has now switched to talking about rate rises as it slows fulfilling the policy making nightmare of being pro cyclical.

Some Friday Humour

I bring you this from the Wall Street Journal last night.

Japan shows Europe how to dial back stimulus without spooking investors

Only a few hours later Business Insider was reporting this.

the Bank of Japan (BoJ) went all-in earlier today, pledging to buy an unlimited amount of 10-year bonds at a yield

Up is the new down yet again.

British and Irish Lions

I hope that our Kiwi contingent will not be too offended if I wish the Lions all the best for their historic opportunity tomorrow. Victories in New Zealand are rarer than Hen’s teeth can they manage 2 in a row? Here’s wishing and hoping…….