Portugal is feeling the economic effects of the pandemic

It has been too long since we took a look at the economic state of play in Portugal, which is a delightful country. For newer readers Portugal was in the bad boys/girls club at the time of the Euro area crisis symbolised by the way that its national debt to economic output ratio ( GDP) went over the 120% level set as a signal by the Euro area. That was a particular irony as that level was set to avoid embarrassing Portugal and indeed Italy. But after that phase Portugal went into favoured child status as its economy improved and it followed Euro area instructions.

But now things are really rather different as the Euro area boom of 2017/18 was in modern language like over before the Covid-19 pandemic arrived. There were even issues for the successful motor sector.

The auto sector – including car and component production – is a core sector of the Portuguese economy. It represents 4% of total GDP, is represented in 29 000 companies, is responsible for 124 000 direct jobs and a business volume of 23, 7 thousand millions of euros and 21,6 % of the total fiscal revenues in Portugal. The automobile sector is responsible for 11% of total exportations. Portuguese technical skills in this field, the highly competitive set up and running costs and our great logistic infrastructures have been a driving force in this sector. ( PortugalIN)

This is because some of the gains came at the expense of France and Spain and also because if you head south for cheaper production you might carry on doing so and end up in Algeria and Tunisia.

What about now?

Yesterday the Portuguese statistics office updated us on the services sector.

Services turnover index, in nominal terms and adjusted for calendar and seasonal effects, presented a year-on-year
change rate of -15.3% in November (-12.1% in October).
The year-on-year change rates of the indices of employment, wages and salaries and number of hours worked adjusted of calendar effects were -8.4%, -4.1% and -11.4%, respectively (-8.3%, -6.2% and -12.7% in October, by the same order).

There are two main contexts here. The first is the scale of the decline in output and next is the way that hours worked looks to be the best measure of the impact on employment. Also we get a hint of the scale of government aid and furlough as we note that wages/salaries are only 4.1% lower.

The peak for this series was the 121 of January last year ad the nadir was the 74 of April. Whereas the 100 of November means that all the gains since 2015 had faded away, hopefully temporarily.

This morning has brought a reminder of the industrial production data as Eurostat catches up. It shows an average across the Euro area of an annual fall of 0.6% so Portugal under performed here.

The Industrial Production Index (IPI) registered a year-on-year rate of change of -3.6% in November (0.4% in the previous month)……Of the Major Industrial Groupings, only Intermediate goods showed a positive year-on-year rate of change: 1.1%. Energy registered the most
negative rate of change (-10.3%), followed by Investment goods (-8.2%) and Consumer goods (-1.9%).

I guess few will be surprised about what has happened to tourism.

In November 2020, the tourist accommodation sector should have registered 416,000 guests and 950,000 overnight stays, corresponding to year-on-year
rates of change of -76.3% and -76.7% respectively (-59.7% and -63.3% in October, in the same order).

 

Prospects

Portugal does not feature regularly in the PMI business surveys but this from the statistics office on Monday offered some clues for prospects.

The perspectives of the exporting enterprises of goods point to a nominal increase of 4.9% in exports in 2021 vis-à-vis
the previous year. Although these figures represent an improvement compared to the perspectives indicated by
enterprises for 2020 according to the preceding forecast (-13.0% ), they still not allow a recovery to values close to
those recorded before the pandemic.
In fact, should these perspectives be confirmed, the exports of goods in 2021 will correspond to a level 12.8% lower
than the total exports of goods recorded in 2019.

This survey has proved reliable in the past. So we should take the idea of an improvement but still quite a decline on pre pandemic levels seriously. In the meantime there is the likelihood of at least a one month lockdown.

The transport sector I highlighted earlier has particular problems as it was one of the worst affected areas.

It stood out the categories Transport Equipment and parts and accessories thereof (with the highest decrease expected for 2020, corresponding to -20.3%).

But not much of an expected recovery this year.

Transport equipment and parts and accessories thereof (+4.7%), mainly for Intra-EU markets (+6.8%,
+5.7% and +5.1%, respectively).

Financial Markets and Finances

There is something of a ying and yang here. If we start with the currency then Portugal will have been affected by the stronger Euro which I note has got a mention from the ECB today.

ECB’s Villeroy: We Will Keep Favourable Monetary Conditions As Long As Necessary -We Are Closely Following The Negative Effects Of The Euro Exchange Rate ( @LiveSquawk)

Although I guess it does help with the international position in one area.

At the end of the third quarter of 2020, the Portuguese economy had a net financial position vis-à-vis the rest of the world of -101.9 per cent of GDP (Chart 2), compared to -101.3 per cent of GDP at the end of the same quarter of 2019. ( Bank of Portugal)

If we switch to debt metrics then the Portuguese government is in relative terms running a tight fiscal ship.

This result reflects the net borrowing of general government and non-financial corporations (4.0 and 2.3 per cent of GDP respectively)

The latest national debt figures are running to the same tune.

In November 2020 public debt stood at €267.1 billion , a €1.1 billion decrease from the end of October. This was mainly driven by a decrease in debt securities (€1.2 billion)

General government deposits decreased by €2.0 billion, with public debt net of deposits increasing by €0.9 billion from the previous month, to a total of €244.7 billion.

These days the public debt burden is less of a debated issue because of the way that Portugal can borrow so cheaply.In fact it can borrow for ten years for effectively nothing (0.01%). As this feeds in the Bank of Portugal projects this.

The implicit interest rate on public debt is expected to fall over the projection horizon, from 2.6% in 2019 to 1.8% in 2023, which reflects the assumption that interest rates on new issues will remain low.

Comment

There are two main themes here. The first is that the Euro area crisis seems now like it is from a place “far,far away.” Back then solvency fears sent the benchmark bond yield into the teens for a while and if I remember correctly briefly as high as 21% as opposed to the present 0%. Although there does seem to be a hangover from those days as Portugal is being relatively rather restrained in its use of fiscal policy.

The next theme is that the December projections of the Bank of Portugal look rather optimistic now.

Accordingly, an 8.1% decline in GDP is projected in 2020, followed by growth of 3.9% in 2021, 4.5% in
2022 and 2.4% in 2023 . Activity will return to pre-pandemic levels at the end of 2022.

The V-shapers have proved to be rather panglossian and even that only had Portugal back to pre pandemic levels at the end of 2022. One curiosity I find is that those concerned with “output gaps” and the like seem to have disappeared. Anyway the first half of 2021 will be grim again and will follow on from a decline at the end of last year.

Let me finish with a metric that will be announced to cheers from the Frankfurt towers of the ECB.

In the 3rd quarter of 2020, the House Price Index (HPI) grew by 7.1% when compared with the same period of 2019……On a quarter-to-quarter basis, the HPI increased by 0.5% (0.8% in the 2nd quarter of 2020). By category, the existing dwellings prices increased by 0.6%, above that observed for new dwellings (0.1%).

First-time buyers will need a process of re-education before they understand how good this is for them…….

 

 

 

Has the UK just lost £490 billion as claimed in the Daily Telegraph?

As someone who pours over the UK’s economic statistics this from Ambrose Evans-Pritchard in the Telegraph yesterday was always going to attract my attention.

Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ­assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.

It is presented as the sort of thing we in the UK should be in a panic about like being nuked by North Korea or back in the day Iraq. Although the global strategists cannot have been much good if they missed £490 billion can they? Anyway there is more.

A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.

Okay so we have a transformed outlook for the Pound £ and Gilt market so let us take a look.

GBP/USD +0.10% @ 1.33010 as UK’s May and Davis meet EU’s Juncker and Barnier in Brussels. . ( DailyFX)

I am not sure that this is what Ambrose meant! It gets even worse if we look at the exchange rate against the Euro which has risen to 1.128 or up 0.4%. I will let you decide whether it is worse for a journalist not to be read or to be read and ignored! The UK 10 year Gilt yield has risen from 1.37% to 1.38% but that is hardly being transformed and in fact simply follows the US Treasury Note of the same maturity as it so often does.

Before we move on there is more.

“Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America.

Okay so we have moved onto to comparing a stock (wealth) with an annual flow ( GDP) . I kind of like the idea of “gone missing” though should we start a search on the moors or perhaps take a look behind our sofas? If nothing else we might find some round £1 coins to take to the bank as they are no longer legal tender.

What has happened here?

If we move on from the click bait and scaremongering the end of September saw not only the usual annual revision of the UK national accounts but also the result of some “improvements”. The latter do not happen every year but they are becoming more frequent as it becomes apparent that much of our economic data is simply not fit for purpose. Part of the issue is simply that the credit crunch has put more demands on the data with which it cannot cope and part of it is that the data was never really good enough.

The data

Here is what was announced.

From 2009 onwards, the total revisions to the international investment position (IIP) are negative with the largest revision occurring in 2016.

So let us look at what it means.

In contrast, the IIP is the counterpart stock position of these financial flows. The IIP is a statement of:

  • the holdings of (gross) foreign assets by UK residents (UK assets)
  • the holdings of (gross) UK assets by foreign residents (UK liabilities)

The difference between the assets and liabilities shows the net position of the IIP and represents the level of UK claims on the rest of the world over the rest of the world’s claims on the UK. The IIP therefore provides us with the UK’s external financial balance sheet at a specific point in time. The net IIP is an important barometer of the financial condition and creditworthiness of a country.

Well it would be an important barometer if we could measure it! Some investments are clear such as Nissan in Sunderland but others will be much more secretive. This leads to problems as I recall back in the past the data for the open interest in the UK Gilt futures contract being completely wrong allowing the Prudential which was on the ball to clean up. Such things do not get much publicity as frankly who wants to admit they have been a “muppet”? There was an international example of this around 3 years ago when Belgian holdings of US Treasury Bonds apparently surged to US $381 billion before it was later realised that it was much more likely to be a Chinese change. If we look at the City of London such things can happen on an even larger scale in the way that overseas businesses in Ireland may be little more than a name plate. What does that tell us? That the scope for error is enormous.

Specific ch-ch-changes

Corporate bonds are one area.

improvements made to the corporate bonds interest, which has led to an increase in the amount of income earned on foreign investment in the UK (liabilities).

Which leads to this.

The largest negative revision occurs in 2016 (£27.3 billion) and includes improvements to corporate bond interest and late and revised survey data.

So as yields have collapsed all over the world as ELO might point out foreign investors have earned more in the UK from them? Also what about those who sold post August 2016 to the Bank of England? But that is a flow with only an implied stock impact so let us look at the main player on the pitch.

caused mainly by the share ownership benchmarking that has led to a greater allocation of investment in UK equities to the rest of the world. The largest downward revision is in 2016 (negative £489.8 billion) and includes these improvements, as well as the inclusion of revised data.

Share ownership benchmarking

Regular readers of my work in this area will be familiar with the concept that big changes sometimes come from a weak base and here it is.

The benchmarks were last updated in 2012, when the 2010 Share Ownership Survey was available. Since that time, we have run the 2012 and 2014 Share Ownership Surveys and reprocessed the 2010 survey.

So the numbers being used in 2016 are from 2014 at best and the quality and reliability of the numbers is such that the 2010 ones are still be reprocessed in 2017. On that basis the 2014 survey will still be open for change until at least 2021. Or to put it another way they simply do not know.

Comment

So in essence the main changes in the recent UK numbers for the stock and flow of our international position depend on assumptions about foreign holding of equities and corporate bonds respectively. There are a range of issues but let us start with the word assumption which means they do not know and could be very wrong. This is an area where a UK strength which is the City of London is an issue as the international flows in and out will be enormous and let us face the fact that a fair bit of it will be flows which are the equivalent of the “dark web”. So we have a specific problem in terms of scale compared to the size of our economy.

Before we even get to these sort of numbers we have a lot of issues with our trade data. You do not have to take my word for it as here is the official view from the UK Statistics Authority.

For earlier monthly releases of UK Trade Statistics that have also been affected by this error, the versions on the website should be amended to make clear to users that the errors led the Authority to suspend the National Statistics designation on 14 November 2014.

So this is balanced let me give you an example in the other direction from the same late September barrage of data.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

Or the way our savings data surged!

I do not mean to be critical of individual statisticians many of whom no doubt do their best and work hard. But sadly much of the output simply cannot be taken at face value.