The 0% problem of Japan’s economy

Today I intend to look east to the land of the rising sun or Nihon where the ongoing economic struggles have been a forerunner to what is now happening to western economies. Also of course Japan is intimately tied up with the ongoing issue and indeed problem that is North Korea. And its navy or rather maritime self-defence force is being reinforced as this from Reuters only last month points out.

Japan’s second big helicopter carrier, the Kaga, entered service on Wednesday, giving the nation’s military greater ability to deploy beyond its shores………..Japan’s two biggest warships since World War Two are potent symbols of Prime Minister Shinzo Abe’s push to give the military a bigger international role. They are designated as helicopter destroyers to keep within the bounds of a war-renouncing constitution that forbids possession of offensive weapons.

We cannot be to critical of the name misrepresentation as of course the Royal Navy badged its previous aircraft carriers as through deck cruisers! There are of course issues though with Japan possessing such ships as the name alone indicates as the last one was involved in the attack on Pearl Habour before being sunk at Midway.

Demographics

This is a crucial issue as this from Bloomberg today indicates.

Japan Needs More People

The crux of the problem will be familiar to regular readers of my work.

Japanese companies already report they can’t find people to hire, and the future isn’t likely to get better — government researchers expect the country’s population to fall by nearly a third by 2065, at which point nearly 40 percent will be senior citizens. There’ll be 1.3 workers for every person over the age of 65, compared to 2.3 in 2015.

So the population is both ageing and shrinking which of course are interrelated issues. The solution proposed by Bloomberg is rather familiar.

It’s plain, however, that he needs to try harder still, especially when it comes to immigration……..Researchers say that to maintain the current population, Japan would have to let in more than half a million immigrants a year. (It took in 72,000 in 2015.)……..He now needs to persuade Japan that substantially higher immigration is a vital necessity.

There are various issues here as for example the Bloomberg theme that the policies of  Prime Minister Abe are working seems not to be applying to population. But as they admit below such a change is the equivalent of asking fans of Arsenal football club to support Tottenham Hotspur.

In a society as insular and homogeneous as Japan, any such increase would be a very tall order.

The question always begged in this is if the new immigrants boost the Japanese economy surely there must be a negative effect on the countries they leave?

The 0% Problem in Japan

I thought today I would look at the economy in different ways and partly as a reflection of the culture and partly due to the effect above a lot of economic and financial market indicators are near to 0%. This is something which upsets both establishments and central bankers.

Real Wages

Let me start with an issue I have been writing about for some years from Japan Macro Advisers.

The real wage growth, after offsetting the inflation in the consumer price, was 0% YoY in February.

The official real wage data has gone 0%,0%,0.1%, -0.1% and now 0% so in essence 0% and is appears on a road to nowhere. This is very different to what you may have read in places like Bloomberg and the Financial Times which have regularly trumpeted real wage growth in their headlines. There is a reason why this is even more significant than you might think because let me skip to a genuine example of economic success in Japan.

Given the prevalent labor shortage situation in Japan, there should be an economic force encouraging wages to rise. At 2.8%, the current unemployment rate is the lowest since 1993. (Japan Macro Advisers )

Actually in another rebuttal to Ivory Tower economics we see that unemployment is above what was “full employment”.

One could argue it is a matter of time, but it has already been 2.5 years since the unemployment rate reached 3.5%, the level economists considered as full-employment equivalent. (Japan Macro Advisers )

Inflation

The latest official data hammers out an increasingly familiar beat.

The consumer price index for Japan in February 2017 was 99.8 (2015=100), up 0.3% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

If you compare 99.8 now with 100 in 2015 you see that inflation has been in essence 0%. This is quite a reverse for the policy of Abenomics where the “Three Arrows” were supposed to lead to inflation rising at 2% per annum. An enormous amount of financial market Quantitative Easing has achieved what exactly? Here is an idea of the scale comparing Japan to the US and Euro area.

As we stand this has been a colossal failure in achieving its objective as for example inflation is effectively 0% and the Japanese Yen has been reinforcing this by strengthening recently into the 108s versus the US Dollar. it has however achieved something according to The Japan Times.

Tokyo’s skyline is set to welcome 45 new skyscrapers by the time the city hosts the Olympics in 2020, as a surge of buildings planned in the early years of Abenomics near completion.

Although in something of an irony this seems to cut inflation prospects.

“This could heat up competition for tenants in other areas of the city”

A cultural issue

From The Japan Times.

Naruhito Nogami, a 37-year-old systems engineer in Tokyo, drives to discount stores on weekends to buy cheap groceries in bulk, even though he earns enough to make ends meet and the prospects for Japan’s economic recovery are brighter.

“I do have money, but I’m frugal anyway. Everyone is like that. That’s just the way it is,” he says.

Jaoanese businesses have responded in a way that will be sending shudders through the office of Bank of Japan Governor Kuroda.

Top retailer Aeon Co. is cutting prices for over 250 grocery items this month to lure cost-savvy shoppers, and Seiyu, operated by Wal-Mart Stores, cut prices on more than 200 products in February.

More of the same?

It would seem that some doubling down is about to take place.

The Abe government on Tuesday nominated banker Hitoshi Suzuki and economist Goshi Kataoka to the Bank of Japan Policy Board to replace two members who have frequently dissented against the direction set by Gov. Haruhiko Kuroda. ( Bloomberg)

Also Japan seems ever more committed to a type of centrally planned economic culture.

Japanese government-backed fund eyes Toshiba’s chip unit (Financial Times )

With the Bank of Japan buying so many Japanese shares it has been named the Tokyo Whale there more questions than answers here.

Comment

There is much to consider here but let me propose something regularly ignored. Why does Japan simply not embrace its strengths of for example full employment and relatively good economic growth per capita figures and abandon the collective growth and inflation chasing? After all lower prices can provide better living-standards and as  wages seem unable to rise even with very low unemployment may be a road forwards.

The catch is the fact that Japan continues to not only have a high national debt to GDP (Gross Domestic Product) ratio of 231% according to Bank of Japan data but is borrowing ever more each year. It is in effect reflating but not getting inflation and on a collective level not getting much economic growth either. Let is hope that Japan follows the lead of many of its citizens and avoids what happened last time after a period of economic troubles.

For us however we are left to mull the words of the band The Vapors.

Turning Japanese
I think I’m turning Japanese
I really think so

Let me finish with one clear difference we in the UK have much more of an inflation culture than Japan.

UK Inflation is hitting the poorest hardest

As we advance on a raft of UK inflation data there has already been a reminder of one of the themes of this website which is that the UK is an “inflation nation” where the institutional bias is invariably one way. From the BBC.

Drivers saw their car insurance premiums rise by an average of £110 in the last year, a comparison site says.

More expensive repairs and recent government changes to injury payouts pushed up annual insurance costs by 16%, according to Confused.com.

It found drivers paid on average £781 on comparison sites for a comprehensive policy in the year to March 2017.

Average premiums are set to rise to a record high and could pass £1,000 next year, it added.

Up,up and away! I guess those pushing for driverless cars will be happy with this but few others. Some of this is that cars are more complex and thereby more expensive to repair but little or nothing was done about the rise in “whiplash” claims and there has been something of a stealth tax campaign.

IPT went up from 6% to 9.5% in 2015, to 10% in 2016, and will rise to 12% in June 2017. ( IPT = Insurance Premium Tax)

Inflation outlook

We get much of this from commodity prices and in particular the price of crude oil. If we start with crude oil it has returned to where it has mostly been for the last few months which is around US $55/6 for a barrel of Brent Crude Oil where the OPEC production cuts seem to be met by the shale oil producers. However today’s data will be based on March where the oil price was around US $5 lower so this is for next month.

Speaking of the price of oil and noting yesterday’s topic of a rigged price ( Libor) there was this on Twitter.

In 2 years oil price/bbl gyrated from $80->$147->$35->$80 while physical demand for consumption varied by less than 3%……..I recommended to Treasury Select Committee in July 2008 a transatlantic commission of inquiry into the completely manipulated Brent market…..I blew the whistle on LIBOR-type oil futures market manipulation in 2000 & lost everything I had. Treasury/FSA were complicit in a whitewash

I have speculated before about banks manipulating the oil price but how about the oil price rise exacerbating the initial credit crunch effect?

One area of interest to chocoholics in particular is cocoa prices as I pointed out last week. If we look at them in detail we see that London Cocoa has fallen from 2546 last July to 1579 with 2% of that fall coming this morning. How many chocolate producers have raised prices claiming increasing costs over the past few months? Even allowing for a lower UK Pound £ costs have plainly fallen here as we wait to see if Toblerone will give us a triangle back! Or will we discover that the road is rather one-way……

We get little of a signal from Dr. Copper who has been mostly stable but Iron Ore prices have moved downwards. From Bloomberg.

Iron ore dropped into bear-market territory, with Barclays analysts pinning the blame on lower demand from China……Ore with 62 percent content in Qingdao fell 1 percent to $74.71 a dry ton on Monday, according to Metal Bulletin Ltd., following a 6.8 percent drop on Friday.

So as we wait to see what the price of crude oil does next some of the other pressure for higher inflation has abated for now. This was picked up on the forward radar for the official UK data today.

Input prices for producers increased at a slower rate in the 12 months to March compared to the beginning of 2017………PPI input price increased by 17.9% in 12 months to March 2017, down from 19.4% in February, as prices remained fairly flat on the month and prices increased in the previous year.

There was also a slight fading of output price inflation.

Factory gate prices (output prices) rose 3.6% on the year to March 2017, from 3.7% in February 2017, which is the ninth consecutive period of annual price growth.

Our official statisticians point us to higher food prices which has been a broad trend.

In the 12 months to February 2017, vegetable prices in the EU 28 countries increased by 12.4% and in Germany they increased by 22.5%.

However whilst this was true this may well be fading a little as well. We had the issues with broccoli from Spain earlier this year but more recently I note there are cheaper prices for strawberries from er Spain. So whilst there was an impact from the lower Pound £ we wait to see the next move.

CPIH 

This is the new headline measure of inflation for the UK although those who remember the official attacks on the Retail Price Index for being “not a National Statistic” will wonder how a measure which isn’t one either got promoted?! Or why it was done with such a rush?

Some may wonder if this news was a factor? From the London Evening Standard a few days ago.

In London, where rents are by far the most expensive in the country, prospective tenants saw prices fall 4.2 per cent year on year………The average cost of renting a home in the UK remained almost the same as at the start of 2016, rising just 1.8 per cent, compared to the 3.9 per cent annual growth recorded a year ago, thanks to a significant increase in the number of properties available.

It does make you wonder if they thought the buy-to let rush of early 2016 might depress rents? Anyway even the official numbers published today are seeing a fading.

Private rental prices paid by tenants in Great Britain rose by 2.0% in the 12 months to March 2017; this is down from 2.1% in February 2017………London private rental prices grew by 1.6% in the 12 months to March 2017, which is 0.4 percentage points below the Great Britain 12-month growth rate.

If London leads like it usually does…

Oh and Scotland is seeing rent disinflation albeit only marginal.

Scotland saw rental prices decrease (negative 0.1%) in the 12 months to March 2017.

So we see that rents are currently a downwards pull on the annual inflation rate.

The all items CPIH annual rate is 2.3%, unchanged from last month.

Whereas if we look at house prices we see this.

Average house prices in the UK have increased by 5.8% in the year to February 2017 (up from 5.3% in the year to January 2017).

The weasel words here are “owner occupied housing costs” which give the impression that house prices will be used without actually saying it. For newer readers this inflation measure assumes the home is rented out when it isn’t and then estimates the rent and uses that.

Comment

Whilst the headline number is unchanged there is a lot going on under the surface. For example the apparent fading of rents means that the new promoted measure called CPIH seems likely to drop below its predecessor or CPI in 2017. However under the surface there are different effects in different groups. Take a look at this from Asda.

The strongest decrease in spending power has been felt by the poorest households, whose weekly discretionary income in February was 18% lower than in the same month before, falling from -£20 to -£23. This implies that the basket of essential products and services is even less affordable than previous year for the bottom income group.

The clue here is the term essential products and services which of course is pretty much what central bankers look away from as for them essential means non core. You could not make it up! But what we are seeing here is the impact of higher fuel and food prices on the poorest of our society. Those economists who call for higher inflation should be sent to explain to these people how it is benefiting them as we wonder if there will be another of these moments?

I cannot eat an I-Pad!

Meanwhile the UK establishment continues its project to obfuscate over housing costs. The whole area is an utter mess as I note that @resi_analyst ( Neal Hudson) has been pointing out inconsistencies in the official price series for new houses. Back months are being quietly revised sometimes substantially.

A challenge to our statisticians

With the modern GDP methodology we see that the explosion in Airbnb activity has had a consequence.

Colin (not his real name) contacted the BBC when he discovered the flat he rents out on Airbnb had been turned into a pop-up brothel.

You see the ladies concerned were no doubt determined to make sure the UK does not go into recession.

Looking at both their ads, some of the rates were about £1,300 a night. So if they were fully booked for the two nights that’s £2,600 each – £5,200 in total.

But as we mull the issue and wonder how our statisticians measure this? There is a link to today’s topic as the inflation numbers ignore this. Meanwhile if there was evidence of drug use as well would they be regarded as a modern version of Stakhanovite workers by the Bank of England? As Coldplay so aptly put it.

Confusion never stops

 

 

Are the currency wars still raging?

One of the features of the post credit crunch era is that economies are less able to take further economic stress. This leads us straight into today’s topic which is the movements in exchange rates and the economic effects from that. Apart from dramatic headlines which mostly concentrate on falls ( rises are less headline grabbing I guess…) the media tends to step back from this. However the central banks have been playing the game for some time as so many want the “cheap hit” of a lower currency which is an implicit reason for so much monetary easing. The ( President ) Donald was on the case a couple of months ago. From the Financial Times.

“Every other country lives on devaluation,” said Mr Trump after meeting with US motor industry executives. “You look at what China’s doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies.”

Actually the FT was on good form here as it pointed out that perhaps there were better examples elsewhere.

South Korea has a current account surplus of nearly 8 per cent of gross domestic product, according to the International Monetary Fund, compared with just 3 per cent for China and Japan. Taiwan, meanwhile, has a colossal surplus of 15 per cent of GDP while Singapore is even higher at 19 per cent.

Care is needed here as a balance of payments surplus on its own is not the only metric and we do know that both Japan and China have had policies to weaken their currencies in recent years. So the picture is complex but I note there seems to be a lot of it in the Far East.

Japan

Ironically in a way the Japanese yen has been strengthening again and has done so by 1% over the weekend as it as headed towards 110 versus the US Dollar. So the Abenomics push from 76 was initially successful as the Yen plunged but now it is back to where it was in September 2014. Also for perspective the Yen was so strong partly as a consequence of US monetary easing. Oh what a tangled web and that.

The Bank of Japan will be ruing the rise ( in Yen terms) from 115 in the middle of this month to 110.25 as I type this because it is already struggling with this from this morning’s minutes.

The year-on-year rate of change in the consumer price index (CPI) for all items less fresh food is around 0 percent, and is expected to gradually increase toward 2 percent, due in part to the upward pressure on general prices stemming from developments in commodity prices such as crude oil prices.

Even worse for the Bank of Japan and Abenomics – but not the Japanese worker and consumer – the price of crude oil has also been falling since these minutes were composed. Time for more of what is called “bold action”?

Germany

It is not that often on these lists because the currency manipulation move by Germany came via its membership of the Euro where it added itself to weaker currencies. But its record high trade surpluses provide a strong hint and the European Central Bank has provided both negative interest-rates and a massive expansion of its balance sheet as it has tried to weaken the Euro. So we see that an exchange-rate that strengthened as the the credit crunch hit to 1.56 versus the US Dollar is now at 1.086.

So the recent bounce may annoy both the ECB and Germany but it is quite small compared to what happened before this. Putting it another way if we compare to Japan then a Euro bought 148 year in November 2014 but only 120 now.

The UK

In different circumstances the UK might recently have been labelled a currency manipulator as the Pound £ fell. As ever Baron King of Lothbury seems keen on the idea as he hopes that one day his “rebalancing” mighty actually happen outside his own personal Ivory Tower. There is food for thought for our valiant Knight of the Garter in the fact that we were at US $2.08 when her bailed out Northern Rock and correct me if I am wrong but we have indeed rebalanced since, even more towards our services sector.

However it too has seen a bounce against the US Dollar in the last fortnight or so and at US £1.256 as I type this there are various consequences from this. Firstly the edge is taken off the inflationary burst should this continue especially of we allow for the lower oil price ( down 11.2% so far this quarter according to Amanda Cooper of Reuters). That is indeed welcome or rather will be if these conditions persist. A small hint of this came at the weekend. From the BBC.

Motorists will see an acceleration in fuel price cuts over the weekend as supermarkets take up to 2p off a litre of petrol and diesel.

Not everybody welcomes this as I note my sparring partner on BBC 4’s MoneyBox Tony Yates is again calling for higher inflation (targets). He will then “rescue” you from the lower living-standards he has just created….

The overall picture for the UK remains a lower currency post EU vote and it is equivalent to a 2.5% reduction in Bank Rate for those considering the economic effect. Meanwhile if I allow for today’s rise it is pretty much unchanged in 2017 in effective or trade-weighted terms. Not something in line with the media analysis is it?

South Africa

This has featured in the currency falling zone for a while now, if you recall I looked at how cheap property had become in foreign currencies. There had been a bounce but if we bring things right up to date there has been a hiccup this morning. From the FT.

The rand plunged almost 2 per cent in less than half an hour on Monday morning after the latest row between president Jacob Zuma and his finance minister Pravin Gordhan, only moments after it had risen to its highest level since July 2015.

Perhaps the air got a bit thin up there.

The rand has been the best-performing currency in the world over the last 12 months, strengthening more than 23 per cent against the dollar, but it has suffered a number of knock backs prompted by the president and finance minister’s battles.

Back to where it was in the late summer of 2015.

Bitcoin

If we look at the crypto-currency then there has been a lot of instability of late. At the start of this month it pushed towards US $1300 but this morning it fell to below US $940 and is US $991 as I type this. Not for widows and orphans…

Comment

There is much to consider here as we wonder if the US Dollar is merely catching its breath or whether it is perhaps a case of “buy the rumour and sell the fact”. Or perhaps facts as you can choose the election of the Donald and or a promised acceleration in the tightening of monetary policy by the US Federal Reserve. But we see an amelioration in world inflation should this persist which of course combines as it happens with a lower oil price.

So workers and consumers in many countries will welcome this new phase but the Bank of Japan will not. Maybe both Euro area workers and consumers and the ECB can as the former benefit whilst the latter can extend its monetary easing in 2017 and, ahem, over the elections. Whilst few currencies are stable these days the crypto one seems out of control right now.

Headline UK Inflation or CPIH is an example of official “Alternative News”

Today is inflation data day in the UK and the National Statistician is about to make a major change. Firstly there is a confession to a current omission in the CPI or Consumer Prices Index ( one which is especially important in the UK economy) and then the detail. The emphasis is mine.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property.

The new headline measure called CPIH is claimed to include owner occupied housing costs but in fact uses the same methodology as used for Imputed Rents. As the renting does not actually happen they have to estimate which as I will come to later has gone badly. The alternative is to measure real costs and prices such as mortgage costs and house prices which not only exist but are understood by most people. So as a critique we start with the simple issue of why use a made up or Imputed concept when you have real prices available?

Sadly the UK Office for National Statistics has become an organisation which does not want debate and instead publishes propaganda or “fake news”. Here is an example.

(CPIH is…) the most comprehensive measure of inflation

As I have explained earlier it omits house prices and mortgage costs which are for many people substantial expenses and whilst I welcome Council Tax being introduced other housing costs are still missed out.

At the Public Meeting to discuss this the statistician John Wood made a powerful case against the change which was to point out why housing was being singled out to be imputed? Here are his words from the Royal Statistical Society online forum.

The CPI is based on acquisition costs, which is not the same as consumption costs for products (such as cars, furniture, electrical goods, jewellery) that are consumed over many years. I asked John Pullinger at the meeting whether ONS was going to apply the rental equivalence principle to such products and the answer was no. He accepted that they should be so treated in principle but ONS was not going to do so for “practical convenience”. So the only product in CPIH that will conform to the consumption principle will be owner occupied housing.

The problem of measurement

I argued when this saga began back in 2012 that the rental series being used was unreliable but was told our official statisticians knew better. What happened next?

ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.

There was an announcement that CPIH had been some 0.2% too low but the principle that the football chant “You don’t know what you are doing” applies as that series was abandoned and a new one introduced. Let me switch to the regulator’s view from last month.

This matter was considered at the UK Statistics Authority’s Regulation Committee at its meeting on 16 February 2017.

At that meeting, the Regulation Committee decided not to confer the National Statistics status of CPIH at this point in time. This is because although considerable progress has been made, ONS has not yet fully addressed some of the Requirements in the Assessment Report, particularly related to comparisons with other sources, explanations of the methods of quality assurance and description of the weights used in the calculation of CPIH.

I was contacted and gave evidence arguing for such a decision and just to give you a flavour I pointed out that there had just been announced a £9 billion revision to the Imputed Rental numbers which added to so many others that the series is now in my opinion a complete mess.

Also how is CPIH now the headline inflation measure when it is “not a national statistic”? Demotion was grounds for removing the RPI so why does this not apply to CPIH?

Smoothing

There is a further problem which is that the UK monthly rental series is erratic and would send out very different messages from month to month. Accordingly each month we do not get that month’s data but a stream from the past to “improve” the data. The first issue is that it is not that month’s data as claimed but this has another problem which is that it takes a long time for changes in the economy to show up ( around 3 years). This is two-fold and the opening effort is that rents take time to respond to economic changes in a way that house prices do not. Next the data is smoothed so it takes even longer to pick it up. What could go wrong here?

Today’s numbers

If we look at the numbers released this morning we would expect our “comprehensive” measure of inflation which now has housing costs or CPIH to push above CPI.

Average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013.

So CPI was?

The Consumer Prices Index (CPI) 12-month rate was  2.3% in February 2017, compared with 1.8% in January.

Should we be nervous before looking at CPIH? Er no…

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.3% in February 2017, up from 1.9% in January.

So owner occupied housing costs make no difference at all? Not only is that embarrassing it comes under the banner of Fake News in my opinion. Actually Torsten Bell of the Resolution Foundation made a good point earlier.

https://twitter.com/TorstenBell/status/843760157494595584

So what is the point of the switch other than to claim you are representing something which you are not?! If we think of the period since the early 1990s the argument that there has been little or no inflation from the housing sector is a very bad joke.

Retail Price Index

This has been dropped from the Statistical Bulletin which is very poor from the UK’s statistical bodies as after all being “not a national statistic” has been no barrier to the advancement of CPIH. Here are the numbers.

The all items RPI annual rate is 3.2%, up from 2.6% last month. • The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.5%, up from 2.9% last month.

For all the barrage of abuse it has received if you look at UK house prices it continues in my opinion to provide a better snapshot of the UK situation than CPI or CPIH.

Let me also mention the “improved” version or RPIJ which was pushed for a couple of years by our statisticians as it is now RIP for it. More than a few were led up a garden path which now is on its way to be redacted from history.

Comment

Regular readers will be aware that I have been predicting a rise in UK inflation for some time even during the phase when the “deflation nutters” were in full panic mode. Once the oil price stopped falling we were always coming back to this sort of situation and of course there has been the fall in the value of the UK Pound which in my opinion will lead to higher inflation of the order of 1.5%. If we look at today’s producer price numbers with output price rising at an annual rate of 3.7% more of that is on its way, sadly as we now face the fact that real wage growth has ended and will soon be negative even on the official inflation numbers.

Meanwhile as I have given a lot of detail today on the inflation changes let me end with something very prescient from Yes Minister.

Sir Humphrey Appleby: “If local authorities don’t send us the statistics that we ask for, than government figures will be a nonsense.”
James Hacker: “Why?”
Sir Humphrey Appleby: “They will be incomplete.”
James Hacker: “But government figures are a nonsense anyway.”
Bernard Woolley: “I think Sir Humphrey wants to ensure they are a complete nonsense.”

Update 2:45 pm

Someone has a suggestion about why there was such an official rush to include Rental Equivalence in the UK inflation numbers.

What are the prospects for UK house prices?

One of the features of the UK economy is the way that its performance is so often tied to house prices. This is mostly because in response to any slow down in the economy the Bank of England eases monetary policy which reduces mortgage rates and encourages people to buy. Buying a house does have tax advantages too as the first house is free of capital gains tax and buy to let investors are able to set the cost of the mortgage interest against their rental income, although last year that was restricted to only basic rate income tax. Next comes the view that as Yazz put it “The only way is up” for house prices which in most memories seems true as lets face it even in response to the credit crunch they did not fall far overall. That does not mean that some areas did not see heavy falls as Northern Ireland did but in general there was a dip but the bank subsidy called the Funding for Lending Scheme soon got things moving again in the summer of 2013. As so often we see an economic divergence where London and the South East boomed and other areas did less well and some saw falls.

This has led to a rather troubled situation in my opinion.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. ( Financial Times)

A clear danger is calling this value when we have relatively few transactions compared to the total stock and of course much fewer than before the credit crunch. We could hardly sell the lot at once! The same issues arise with this below.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016. ( Financial Times )

Next is the issue of divergence or some groups and areas doing better than others.

A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group. ( Financial Times).

“Store of wealth”? Again there is a problem as how could it be realised in total? Of course some do but the majority will not.

Ignored in all that is the issue of first-time buyers and those wanting to trade up who face properties which particularly in the South East are very expensive and in London are unaffordable even for high-flyers. Back on the 8th of December I offered this view.

With real wages coming under pressure from higher inflation and therefore likely to fall in 2017 we should see national house price growth slow and maybe even a fall or two. That’s the best piece of new first time buyers have seen for quite some time.

I do not wish for people to lose money but prices cannot just rise like a hot air balloon without hurting others.

Halifax data

This morning’s data release tells us this.

House prices in the three months to February were 1.7% higher than in the previous quarter; down from 2.3% in January. The annual rate of growth fell to 5.1% from January’s 5.7%, the lowest since July 2013.

So we see a fading of both quarterly and annual growth in house prices recorded by the Halifax. Here is some more perspective on that.

(This) was the lowest annual rate since July 2013 (4.6%). The annual rate is nearly half the 10.0% peak reached in March 2016.

It will be interesting to observe next month because house prices on this measure rose by 2% last March as I recall the dash to buy ahead of the changes in taxation for buy to let properties. If you want some real perspective on UK house prices over time then if 1983=100 they were 711.9 last month.

What about London?

This is an issue wider than the simple fact that I live there ( Battersea) but because it is usually the forerunner of what happens next elsewhere in the UK as effects from central London feed out to outer London and then the South-East and sometimes wider still. This caught my eye yesterday. From City AM.

Here’s an unusual move by a housebuilder: Barratt Homes has bundled together 172 flats at various developments across London and sold them off as rental homes.

The housebuilder said it had sold the units to Henderson Park for £140.5m. The portfolio includes 29 units at Aldgate Place, a joint venture with British Land, 25 in Fulham Riverside and all 118 at its Nine Elms Point tower in Vauxhall, a joint venture with L&Q.

Now if they were selling them at a regular rate they would  be unlikely to be doing such a thing so there is an ominous hint for house prices here. Also that is a lot of flats to rent out which will presumably put pressure on rents received. It would be an irony would it not if the new Rental Equivalence measure of owner occupied housing costs in CPIH registered a fall?! Oh and speaking of sales there was this in City AM in January.

The housebuilder completed on 367 homes in London in the six months to the end of December, down from 842 in the same period the year before. Barratt said it was lowering prices and offering bulk deals to shift homes in the capital.

Meanwhile there is this from Savills blog.

However, despite much higher levels of outstanding debt in London, the equity held by those with a mortgage is also greater than in any other region, reflecting the capital’s high house price growth over the past decade. Just five years ago the average outstanding loan to value for a property subject to mortgage stood at 49 per cent in the capital. It now stands at 42 per cent, the lowest of any region.

What could go wrong?

Regional Issues

Meanwhile elsewhere there are a very different set of problems. From the Savills blog.

This lack of equity is a very real constraint in some markets that have seen very weak house price growth over the past 10 years. For example, in markets such as Blackpool, Blackburn, Burnley and Middlesbrough outstanding loan to values exceed 70 per cent, making it difficult for those looking to move to take on more debt on competitive terms.

Here affordability is better but loan to values limit improvements to mortgage terms as we again wonder about the phrase some being more equal than others.

Comment

The basic trends seem locked in place. UK economic growth has been amazingly steady but the issue will come in the latter half of the year when we are hit by higher inflation levels. These days what was previously regarded as relatively low inflation ( 3%+ on CPI and 4%+ on RPI) has a larger impact because so far on the credit crunch wage growth has not risen with it so we saw a sharp fall in real wages around 2011 for example. It is not impossible that the Bank of England could cut Bank Rate again or produce other house price and bank friendly measures but even they may balk at that with inflation above target. Thus house price growth looks set to fade and the price falls will spread out from Central London. How far across the country they will go depends on the mix between economic growth that 2017 and 18 deliver to us.

Charlotte Hogg

It is a welcome development that a woman has been promoted to the higher echelons of the Bank of England. However this particular one has not had a good start as Deputy Governor due to her apparent amnesia about her brother’s job at Barclays.

Regrettably, my oversight means that my oral evidence to the Committee in this respect was not accurate. I write now to correct that evidence at the earliest opportunity and to place on record my sincere apologies to the Committee.

Here is a link to her full apology.

http://www.parliament.uk/documents/commons-committees/treasury/Correspondence/Charlotte-Hogg-to-Treasury-Committee-Chair-02-03-17.pdf

 

 

 

 

Would the Bundesbank of Germany raise interest-rates if it could?

At the heart of the Euro area economy is Germany but as we have discussed before it has something of an irregular heartbeat in the way it affects its Euro area partners. For example as I pointed out on the 9th of January it is a deflationary influence on them via its balance of payments surplus.

In November 2016, Germany exported goods to the value of 63.2 billion euros to the Member States of the European Union (EU), while it imported goods to the value of 56.9 billion euros from those countries.

One does not wish to be critical of it for its relative economic success but there are clear side-effects as well as benefits from it. One is the trade position above another is that fact that its membership of the Euro makes its exchange-rate higher.. For all the talk and indeed promises of economic convergence the fact is that many Euro area countries have economies with little in common with Germany. For example later this year Italy seems likely to move into economic growth territory for its membership of the Euro which is very different to the German situation. Let us investigate the German economy.

Inflation

On Wednesday this was released by the Federal Statistics Office.

The inflation rate in Germany as measured by the consumer price index is expected to be 2.2% in February 2017. Such a high rate of inflation was last measured in August 2012. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that the consumer prices are expected to increase by 0.6% on January 2017.

The Euro area standard measure was also 2.2% although it rose by 0.7% on the month. We have a complete switch on the disinflationary period just passed which showed low and at times falling inflation for goods prices as they rose by 3.2%. These were led by energy at 7.2% and food at 4.4%.

This was reinforced only yesterday by this.

the index of import prices increased by 6.0% in January 2017 compared with the corresponding month of the preceding year. This was the highest increase of a yearly rate of change since May 2011 (+6.3%). In December and in November 2016 the annual rates of change were +3.5% and +0.3%, respectively. From December 2016 to January 2017 the index rose by 0.9%.

As you can see there are inflationary pressures in the system and it looks as though imported raw materials will impact the system especially the price of oil which was approximately half the rise. If German economic policy was set by the Bundesbank then there is no way it would have a negative interest-rate in the face of such pressure.

Consumption

This has traditionally been a weaker link in the German economy and that seems to be continuing as the numbers below have an extra day in them compared to last year.

According to provisional data turnover in retail trade in January 2017 was in real terms 2.3% and in nominal terms 4.5% larger than that in January 2016.

We do get a like for like update on a monthly basis.

Calendar and seasonally adjusted (Census X-12-ARIMA), sales in January 2017 were 0.8% lower than in December 2016 and 0.2% lower in nominal terms.

If we look back to 2010 and mark it at 100 we see that January 2017 was at 106.1 which shows the German economy is not powered by retail sales.

Economic output

This has been a better phase for Germany as this official data shows.

The economic situation in Germany in 2016 thus was characterised by solid and steady growth (+0.7% in the first quarter, +0.5% in the second quarter and +0.1% in the third quarter). For the whole year of 2016, this was an increase of 1.9% (calendar-adjusted: +1.8%).

I am not sure that 0.7%,0.5%, 0.1% and then 0.4% is steady but it was solid! To be fair it was more consistent in annual terms although if we look further at the year it had a feature you might not expect.

government final consumption expenditure was up by as much as 3.2%.

Also Germany did shift a little in terms of one of the world economic issues which is the balance of payments surplus.

exports of goods and services rose by 3.3% compared with the previous year. There was however a larger increase in imports (+4.5%) in the same period. Consequently, the balance of exports and imports had a downward effect, in arithmetical terms, of –0.2 percentage points on GDP growth compared with the previous year.

There was also another sign of a German economic strength ticked away there.

the economic performance in the fourth quarter of 2016 was achieved by 43.7 million persons in employment, which was an increase of 267,000, or 0.6%, on a year earlier.

This performance allowed the headline writers some click bait. From the Guardian.

Germany overtook the UK as the fastest growing among the G7 states during 2016. Europe’s largest economy expanded at the fastest rate in five years, showing growth of 1.9% last year.

Of course the numbers are not precise to 0.1% after all if they were then this adjustment from 2014 as matters such as military expenditure and Research and Development saw new rules would not be necessary.

The conceptual changes have led to an increase in the level of the German GDP, amounting to roughly 3%

Public Finances

These were very strong in spite of the rise in spending.

A strong economic backdrop has helped Germany post a record budget surplus of €23.7bn in 2017 ( they mean 2016), fuelled by higher tax revenues, rising employment and low debt costs. It was the highest budget surplus since reunification in 1990 and the third successive year the government has had a budget surplus.

The old argument is of course that it would help the European and world economy if Germany loosened the public purse strings. This would also presumably reduce the balance of payments surplus in a beneficial double-whammy. The catch in terms of Euro area rules is that the national debt to GDP ratio is at 69.4% above the (supposed) 60% limit although of course rather good compared to the vast majority of its peers.

Looking ahead

The immediate future certainly looks bright for German manufacturing.

The PMI rose from 56.4 in January to 56.8 in February, the highest since May 2011. The increase in the headline figure reflected the output, new orders and suppliers’ delivery times components, while employment and stocks of purchases also made positive overall contributions. The current 27-month sequence of improving manufacturing conditions is the longest observed in over eight-and-a-half years. (Markit)

This led to an improvement also in forecasts for the year as a whole.

The survey results suggest that manufacturing will contribute to a strengthening in overall economic growth in the first quarter. IHS Markit currently expects q/q growth of at least 0.6% in Q1, up from 0.4% in Q4 last year, and is forecasting a 1.9% rise in GDP over 2017 as a whole.”

This has been reinforced by the service sector survey which has just been released.

the rate of expansion in total business activity accelerated and was slightly stronger than the trend shown over 2016 as a whole. Moreover, new business rose at the fastest rate since February 2016 and employment growth was the strongest since June 2011.

Comment

Let me leave you all with a question. The US Federal Reserve is hinting ever more strongly at an interest-rate rise this month although of course we await th words of Janet Yellen later. But in 2016 the German economy grew more quickly than the US one and may well do so this year. It also has inflation above target. Where would German interest-rates be if the Bundesbank was back in charge?

If you want a real mind game then imagine where a new German Mark would be and the implications from that?!

 

 

 

 

What sort of a future awaits UK living-standards?

One of the features of the credit crunch era has been the feeling that we as individuals have not done as well as the aggregate official statistics tell us. One way of looking into that is to note that GDP per capita or person has underperformed the GDP figures during this time.

GDP per head is now 1.8% above the pre-downturn peak in Quarter 1 (Jan to Mar) 2008, having surpassed it in Quarter 4 2015…..

This contrasts with 8.6% above on the overall GDP numbers and it surpassed its previous peak in Quarter 4 2013. That was a change because as we ran into the credit crunch the per person number was doing better that the total.

Another way of looking at this is to examine the pattern of real wages. Even according to the official data ( which uses the CPI measure of inflation that ignores owner-occupied housing) real wages went negative in the middle of 2008 and did not return to positive territory until near the end of 2014. Whilst the improvement was welcome the worrying part was that it was much more to do with a lower level of recorded consumer inflation than any improvement in wage growth. This of course is concerning at a time when we are expecting higher inflation this year the theme of which was reinforced by the fact that inflation in Germany has reached 2.2% and even worse for living standards it was driven by rises in prices for two absolute essentials which are energy and food. But looking back real wages posted negative year on year changes for 25 quarters which contrasts with a general increase of 2% per annum before the credit crunch era. The UK statisticians have done a specific calculation for 2002-07 and it in fact averaged 1.9%.

Living-Standards

The Institute for Fiscal Studies has looked into these and suggested this today.

As is now well documented, incomes in the UK fell sharply in the immediate wake of the Great Recession, and have recovered only slowly since. The latest available data show real median income in 2014–15 just 2.2% above its 2007–08 level. This poor performance is largely due to wages (and ultimately productivity) – the large falls in real wages that characterised the recent recession and the weakness of real pay growth since.

In fact the numbers are boosted by pensioner’s incomes which we know have been boosted by the triple lock on the basic state pension for example. The picture deteriorates if we exclude that.

among the rest of the population, average incomes were essentially the same in 2014–15 as back in 2007–08.

They use 2014-15 because the official data has only reached there but they use other data to tell us where we are now and here it is.

The Labour Force Survey (LFS) indicates employment growth of around 1.6% in both 2015–16 and 2016–17. LFS earnings data suggest a 2.4% real rise in average earnings in 2015–16, but available LFS data for 2016–17 combined with the OBR forecast suggest that real earnings growth has slowed to 0.6% in 2016–17, thanks to both weaker nominal earnings growth and higher inflation. Taking these together, we project growth of 3.4% in real median income between 2014–15 and 2016–17.

So since the credit crunch hit real median incomes have risen by 1%, please do not spend it all at once! As we look forwards the picture is for more of the same.

The net effect of all these changes in earnings, employment and benefits is that in our central scenario, real median income is essentially unchanged for two years between 2016–17 and 2018–19.

So we remain on what is in essence a road to nowhere. I will go further and say that the experience has depended much more on what inflation has done than wage growth. When inflation falls we get real wage growth and when it rises we do not and if it is goes further we get falls. By contrast wage growth has not responded much to either the rise in employment or fall in unemployment meaning that the output gap style theories so clung to by the Ivory Towers and the Bank of England have yet another problem with reality.

Looking forwards to 2021

There is an obvious click bait element in projecting  this to 2021 but there is a large catch which is that the work uses the forecasts of the OBR or Office of Budget Responsibility. Regular readers will be aware that the first rule of OBR club is that it is always wrong. So please take more than a pinch of salt with this and maybe the whole cellar.

Beyond that, the steady rise in real earnings growth forecast by the OBR, and the (assumed) ending of the working-age benefit freeze in 2020–21, push up real median income growth for the last three years of the projection to an annual average of 1.2%. Taking the seven years from 2014–15 to 2021–22 as a whole, real median income grows by an average of 1.0% per year in our central projection – a cumulative increase of 7.4%.

Something else is then added which is to assume that the credit crunch had not happened and project the trend before it forwards. This has the problem it ignores the fact that it was an unsustainable boom but even so a little light is shed.

The falls in median income after the recessions of the early 1980s and early 1990s took it 8% and 9% respectively below its long-run trend up to that point. In our central projection, as outlined above, median income in 2021–22 is 18% below its long-run trend.

Pensioners

Some of you may be wondering about the number below?

Median income among pensioners, however, was 11% higher in 2014–15 than in 2007–08.

Actually there is a core existing group of pensioners who have not done so well but they have been joined by something of a golden generation who seem to have done rather well. The obvious examples that spring to mind are Baron King of Lothbury with his ~£8 million pension pot and Professor Sir Charlie Bean with his ~£3.5 million one ( although as ChrisL points out in the comments below they would affect an average measure more than a median one). Plus of course they have been handed post retirement jobs.

Housing Costs

There is some fascinating analysis of this which departs from the official claims in two ways as shown below.

However, in this report, we follow the HBAI methodology in deflating BHC and AHC incomes using different (appropriate) variants of the CPI. BHC incomes are deflated using a variant that includes mortgage interest payments (MIPs), dwellings insurance and ground rent, while AHC incomes are deflated using a variant of CPI that excludes rent. ( BHC = Before Housing Costs and AHC = After Housing Costs).

CPI does not have mortgage interest payments although in my opinion it should have both them and house prices. So maybe my influence has reached the IFS! Even more so when they exclude the rent which of course we are told will be used to measure owner-occupied housing costs as part of CPIH in a week and a bit.

Comment

As ever we find that once we look below the headline data the situation deteriorates for the ordinary person. The “lost decade” principle appears as we note that there must be more than a few people who have real incomes less than ten years ago although most have gained a little if not much. As we break the groups down we see that those who have been retiring recently have been something of a golden generation which looks unlikely to be repeated.

So small gains which sets the tempo for now although there are dangers of a dip as inflation rises. If we are lucky we will arrive in the next decade having gained a little bit more but with the rider that economic life regarding wages and incomes is far from what it was.