Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.

Ireland

The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.

Spain

Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake

 

Comment

There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.

 

 

 

The A grade economy of Ireland reminds us of the Celtic Tiger 2.0

The weekend just gone provided a reminder of how far the economy of Ireland has come.The troubled days of the Euro area crisis where it called for 85 billion Euros of  help from its Euro area partners and the IMF (International Monetary Fund) were replaced by this from the Fitch ratings agency.

Fitch Ratings has upgraded Ireland’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘A’ from ‘A-‘. The Outlooks are Stable.

So a promotion and one that is particularly significant when we note that only a few short years ago the debt dynamics of Ireland looked dreadful as the poor taxpayer found him and herself burdened as a large slug of banking debt was socialised.

What is the public debt situation now?

The situation is now much improved according to the research.

Public debt dynamics continue to improve, reflecting a combination of strong growth and a return to a primary budget surplus in 2014. Fitch now estimates gross general government debt/GDP at 96.6% at end-2015, compared with 105% in our previous review and from a high of 120.2% in 2012.

As you can see that is quite an improvement or a type of mirror image of Portugal. Then we get some cheerleading for the future.

According to our baseline scenario (which does not include any positive stock-flow adjustments from the banking sector), public debt will continue to fall steadily to 70% by 2024, although this is still well above the ‘A’ median of 44.5%.

Okay, so we learn that Ireland is not getting its upgrade to A status because it is there but because of the rapid change it has seen. Some care is needed here as back in late 2010 when Fitch twice downgraded Ireland things were heading in the opposite direction. Also there is something rather odd in this declaration.

The revision is partly the result of a much higher than expected GDP deflator in 2015, with Ireland benefiting substantially from positive terms of trade.

Really? I thought there was no inflation?!

If we look we see that the GDP deflator has risen  from 98 to 104.4 which is a little awkward for the “deflation nutters”. Actually it is another off quirk of national accounts as the Irish debt ratios look better because the Irish can buy less abroad due to the fall in the Euro!

A positive growth story

Back on September 11th last year I welcomed the Celtic Tiger Mark 2.0 with some music from U2 to celebrate the change in fortune.

I’m at a place called Vertigo (dónde estás?)

Or put more soberly Fitch put it like this.

Ireland’s economy continues to expand at a brisk pace, with real GDP growth averaging 7% in the first three quarters of 2015, the highest figure among developed economies……Fitch expects the economy will expand by around 4% this year, compared with 2.4% in our previous review.

That leaves it a little behind the Central Bank of Ireland which is expecting a number close to 5% for economic growth this year.

Looking Forwards

The business surveys in essence repeat the up,up and away theme. The manufacturing PMI was at 54.3 in January and reported this.

A key highlight of today’s report is the New Orders component, which reveals a sharp and accelerated expansion, extending the current run of positive readings to 31 months

The only way to describe the services numbers is stellar.

in business activity at their companies compared to one month ago – rose to 64.0 in January from 61.8 in December. This signalled the sharpest expansion in services output since June 2006. Activity has now risen in each of the past 42 months.

This morning this has been backed up by the construction sector which recorded 63.6 according to Ulster Bank. So really good growth figures which in the past would have seen a central bank respond in the spirit provided below.

The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up   (William McChesney Martin US Federal Reserve 1955)

The European Central Bank (ECB)

By contrast the ECB has its pedal close to the metal and if we include its Open Mouth Operations maybe at it. We have an official interest-rate of -0.3% combined with hints and promised of a further reduction at the March policy meeting plus 60 billion a month of bond purchases where more more more is also promised.

So Ireland which has a surging economy has a negative interest-rate and has seen some 8.4 billion of its bonds bought by the ECB as of the end of January. That is an even more inappropriate policy than that of the Riksbank in Sweden especially if we add in that the ECB is keen to drive the value of the Euro lower too. Although the latter has reversed in 2016 so far with the 1.12 or so versus the US Dollar accompanied by the UK Pound £ dipping below 1.30.

Seeing as the Irish economy got itself into a pickle at least partly driven by interest-rates sets for another economy (Germany back then) then poses an obvious warning as we think of The Specials.

You’ve done too much,
Much too young

House prices

This is an obvious potential issue in an economy running hot so let us take a look.

In the year to December, residential property prices at a national level, increased by 6.6%. This compares with an increase of 6.5% in November and an increase of 16.3% recorded in the twelve months to December 2014.

As you can see the numbers pose their own problems as we note that the index at 86.8 compared to 2005 =100 makes it own statement. Against the previous peak we see this.

Overall, the national index is 33.5% lower than its highest level in 2007

Another way of looking at this is to see what is happening to rents. If we look at the consumer inflation report we see that whilst the overall view is that there is no inflation – current figure is 0.1% but in essence the report has been flat even before the current disinflationary phase elsewhere – we see this “higher rents”. If we look deeper we see that they have risen by 8.3% in 2015 and that as social rents fell then private-sector rents rose by 9.6%.

In other words the housing market is running pretty hot!

The banks

This is an obvious consideration as we note that so many banks elsewhere have found themselves having a rocky start to 2016, or to be more precise finding themselves forced to tell a little more of the truth. The IMF pointed out recently that in spite of the recent economic improvement the situation remains deeply troubled here.

As a result, the stock of mortgage accounts in deep arrears (over 720 days) continues to increase, reaching 55 percent of past-due loans (over 90 days) in mid-2015 from 49 percent at end-2014. About half of the CRE [Commercial Real Estate] loans are still nonperforming, despite promising trends in restructurings and write downs.

Comment

This is a good news story overall and let me present the best part.

The seasonally adjusted unemployment rate for January 2016 was 8.6%, down from 8.8% in December 2015 and down from 10.1% in January 2015

Still high but a vast improvement on where it was. Let me also note an elephant in the room which is that Ireland is perhaps the Euro area country which can hold a candle to the performance of Iceland and that too is welcome. At this point Irish eyes are smiling although of course Joe Stiglitz only recently pointed out that Ireland would have done even better if it had copied Iceland..

However on the other side of the coin we have the banking sector which remains troubled in spite of the house price rises. We also have monetary policy running at the speed of Usain Bolt in a boom which does echo the middle of the last decade. Also there is the Irish GDP/GNP problem.

The factor income outflows recorded in Q3 2015 were €2,063m higher compared with Q3 2014 resulting in the 7.0 per cent increase in GDP becoming a 3.2 per cent increase in GNP over the same period.

If we move to the low tax model and the economic consequences then that has been in the news today. Take a look at this from the Guardian.

Workers at Google Ireland, the search group’s European sales hub, earn less than half the £160,000 average wage of colleagues in London despite the British sales team only providing a supporting role to their Irish counterparts.

Now is that Ireland being competitive and winning or undercutting workers in the UK? Intriguing when you consider that UK employment gains have involved real wage falls. But let me throw something else into the mix because of course placing itself in Ireland helps Google to do this.

Google Ireland booked £5bn in sales from UK advertisers last year, but paid no tax in the UK. The group’s controversial corporate structure means the UK subsidiary provides marketing services to Google Ireland.

Mind you there is an element of a first world problem in the Guardian here.

Despite comparatively modest pay for staff and directors,

 

 

 

Is it time to welcome the Celtic Tiger mark two?

It has been a while since I ventured across the Irish Sea to take a look at the economy of the Emerald Isle so let me put that right today. After all they can be considered part of an economic tour of the Rugby World Cup after looking at the UK,France and New Zealand earlier this week! Also Irish rugby fans may be wondering exactly what zero inflation means as they try to book accommodation? From the Irish Independent.

“The hotel price increases in Cardiff are the most extreme we have ever reported for an event in the UK,” said Denise Bartlett from Trivago. “The average in Cardiff for all match nights is £574/€789, which is 140pc more expensive than a night in London during the Rugby World Cup.”..Rates in Cardiff have been similarly expensive for October 11, when France clash with Ireland in the city (£927/€1,275 on average)

Strangely enough there still seems to be plenty of rooms available…

Economic growth surges

This was so strong that we need to remind ourselves that the numbers below are not annualised and are for just one-quarter. From the Central Statistics Office.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.9 per cent for the second quarter of 2015.  Growth in GNP also increased by 1.9 per cent in this quarter.

If we look for a driver of these numbers it was a surge in investment.

Capital formation increased by 19.2 per cent compared to the previous quarter.

Also it showed that austerity and economic growth can be bedfellows.

while government expenditure decreased by 0.7 per cent over the same period.

The annual figures were also extraordinary although they also highlighted one of the key issues in the Irish economy.

The factor income outflows recorded in Q2 2015 were €1,026m higher compared with Q2 2014 resulting in the 6.7 per cent increase in GDP becoming a 5.3 per cent increase in GNP over the same period.

Again investment was to the fore and unlike quite a few countries production was strong..

On the expenditure side, Capital investment rose by 34.2 per cent…..The Industry sector (including building and construction) and other services both increased by 4.4 per cent.

Oh and perhaps an old stereotype has seen its day.

Agriculture, forestry and fishing decreased by 1.2 per cent compared with the same quarter of 2014,

So overall the picture for GDP was rather aptly described by U2.

It was a beautiful day
Don’t let it get away
Beautiful day

The outlook is good too

The services sector remains very strong as readings in the 60s for a Purchasing Managers Index are relatively rare beasts.

The headline PMI was little changed at 62.1 (versus 63.4 in July) while across the individual components of the survey we see clear indications that Irish services firms remain upbeat on the prospects for the sector.

The picture for manufacturing has slowed but we are not a lot wiser as it has been proved spectacularly wrong in the credit crunch era.

The headline PMI slowed to 53.6 from July’s 56.7, although the sequence of growth now extends to 27 months.

What about unemployment?

Like quite a few Euro area countries Ireland saw its unemployment rate elevate well into double-figures so let us see how this has been influenced by the growth spurt.

The seasonally adjusted unemployment rate for August 2015 was 9.5%, unchanged from the July 2015 rate and down from 11.1% in August 2014. The seasonally adjusted number of persons unemployed was 206,500 in August 2015, an increase of 400 when compared to the July 2015 figure or a decrease of 32,200 when compared to August 2014.

Wages?

The picture here is not one which will set Irish eyes smiling as on the surface it looks okay.

Preliminary estimates show that average weekly earnings were €697.52 in Q2 2015, a rise of 1.8% from €684.97 a year earlier.

But now take a look at this.

In the five years to Q2 2015 overall average hourly earnings decreased by 0.5% (€0.10) from €21.95 to €21.85.

This hides quite a shift as the IT sector saw a 15.9% rise but health and social work saw a 7% fall.

So a recovery but one that so far has lacked any wage growth for the employed group as a whole. Not quite a wage less recovery but one without wage growth.

Inflation

On the headline measure there isn’t any to be found.

Prices on average, as measured by the CPI, remained unchanged in August compared with August 2014.

Actually Ireland was way ahead of the disinflation theme that has been hitting the rest of the world as in essence there has been no inflation there for some time. I am exaggerating a little but it has totalled some 2.3% since 2011 and 6.8% since 2006 so below 1% per annum.

Thus real wages have fallen by a lower amount than in the UK where the Bank of England recklessly “looked through”  inflation pushing above 5% per annum in 2011 leading to sharp falls in real wages. Most commentators lauded this and are consequently silent about the consequences.

House Price Inflation

The picture here could have been included in my house price bubble analysis of yesterday.

In the month of July, residential property prices rose by 0.9% nationwide.  Residential property prices remained up 9.4% on an annual basis……In Dublin residential property prices rose by 0.7% in July.  Dublin residential property prices were 9.0% higher than in July 2014.

Before we start mimicking a Eurovision entry and singing “Boom,bang a boom” we need to remind ourselves of this.

At national level residential property prices were 36.9% lower than their peak level in 2007.  Dublin house prices were 36.3% lower than their peak, Dublin apartment prices were 40.6% lower than their peak and Dublin residential property prices overall were  37.9% lower than their highest level.

Now here’s a thing as we need an expert on relativity like Albert Einstein to tell us where we are! Let me illustrate from the house price series for Dublin which was set at 100 in January 2005 boomed to 133 as soon as 2007 and busted to 57.3 in July 2012 and as of July this year was 83.5.

Oh and the turnaround coincided exactly with the Bank of England’s Funding for (Mortgage) Lending Scheme. Did it? Could it? Maybe to some extent although of course there was also the trillion Euros of the ECB LTROs applied in early 2012.

What about the public finances?

The situation here saw perhaps the most extreme of all as the national debt to GDP ratio of less than 25% saw around 100% added to it as private banking debt was socialised and the Irish economy struggled. Now we see the benefit of economic growth coming through.

Ireland’s General Government Gross Debt (GG Debt) at face value stood at €203,624 million or 104.7% of annualised GDP at the end of Q1 2015,

However some care is needed as the deficit goes on.

Ireland’s General Government Deficit (GG Deficit) amounted to -€2,687 million in the first quarter of 2015 representing -5.4% of quarterly GDP.

So a different aspect of austerity to that noted earlier. If I was involved in setting examination questions for Masters degree economic I would ask if this is austerity or Keynesianism?

The ECB

This is of course buying Irish government bonds right now as part of its QE (Quantitative Easing) program. Some 4.4 billion Euros worth so far in an economy growing at over 6%. In examination terms I would simply say discuss?

It also means that Ireland can borrow extremely cheaply. From the NTMA yesterday.

10 September 2015 – The National Treasury Management Agency (NTMA) has today completed an auction of €1,000 million of the benchmark 15-year Irish Government bond, 2.4% Treasury Bond 2030, at a yield of 1.8157%.

Comment

Firstly let me welcome the advent of the Celtic Tiger 2.0 and the economic growth it has brought. The growth is so fast that I am reminded of another U2 song.

I’m at a place called Vertigo (dónde estás?)

I note another potential exam question posed yesterday by Roel_D

So is anyone going to revisit the Iceland vs Ireland discussion?

However we also need to note the fact that the housing market and the economy seem to be in tune again which if history is any guide would have the Starship Enterprise on yellow alert. Also the gap between GDP and GNP was 14.5% in the second quarter of this year which relates to the company equivalent of “residential non-doms” (Google for example) where there is some genuine economic activity but much larger transfers of money which leave Ireland as soon as they arrive. It affects the trade figures too.

Oh and whilst Ireland is in the Euro area and it threw off the shackles of UK rule a long tome ago now its economic pattern is very similar to ours.

Lower prices are providing quite an economic boost for the UK, Spain and Ireland

Today I wish to reinforce a theme I established a couple of months ago, back on the 29th of January to be precise. This goes against the economic orthodoxy which tells us that consumers when faced with lower prices then expect even lower prices and defer consumption. Frankly that always looked dubious to me in a country like ours as the UK these days seems to be to be something of an instant gratification nation unlikely to be able to wait long for anything. Also even before these times of economic difficulty we had seen falling prices for many electronic goods and we saw booming sales of mp3 players I-Pads and the like rather than falls. Back on the 29th of January I reinforced the case in this fashion.

The results were fueled by all-time record revenue from iPhone® and Mac® sales as well as record performance of the App Store℠. iPhone unit sales of 74.5 million also set a new record.

 

This led me to this conclusion.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

 

And a subset conclusion about the likely behaviour of a profession that is prone to stuck in the mud type thinking.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories.

 

UK Retail Sales

My theory and theme received considerable reinforcement from yesterday’s UK Retail Sales data which were very strong and provided another sign that it has been a solid first quarter for the UK economy.

Year-on-year estimates of the quantity bought in the retail industry continued to show growth in February 2015, increasing by 5.7% compared with February 2014. This was the 23rd consecutive month of year-on-year growth and the longest period of sustained growth since May 2008 when there were 31 periods of growth.

 

Quite a powerhouse performance when we consider that UK consumer inflation was on its way to disappearing in February. But we get an even more significant implication if we look at retail price behaviour over the past year and the emphasis is mine.

Average store prices (including petrol stations) fell for the eighth consecutive month, falling by 3.6% in February 2015 compared with February 2014. This is the largest year-on-year fall since consistent records began in 1997. Once again the largest contribution to the year-on-year fall came from petrol stations, which fell by 15.5%, the largest year-on-year fall in this store type on record.

 

So for the deflationistas we should be seeing large amounts of deferred consumption to take advantage of expected lower prices in the future. It is not so easy to square that with year on year growth of 5.7% in the retail sector is it?! Indeed we are seeing quite the reverse as around 60% of the increase in the volume of retail sales is due to the effect of lower prices enhancing volumes. Furthermore if we drill down to the latest three months which is the period where consumer inflation has lurched down to zero we see this.

The underlying pattern in the 3 month on 3 month movement in the quantity bought continued to show growth for the 24th consecutive month, increasing by 2.0%. This was the longest period of sustained growth since November 2007

 

The doom,doom,doom theories of conventional economics should instead be listening to the Outhere brothers.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

 

What is happening here?

We find ourselves examining a much longer-term theme of this blog which is that the above target consumer inflation in the UK which the Bank of England “looked through” contributed to a decline in real incomes and therefore had a contractionary impact as opposed to the promised expansionary one. However now we found ourselves in an environment where even the current level of weak wage growth -let us hope that this was a one-off- is higher than consumer inflation and is much higher than inflation in the retail sector. We do not have a like-for like comparison but even the 1.1% wage growth of January will make consumers and workers feel better off when it faces the 3.6% fall in prices in the retail sector in the year to February. Put this way we have quite considerable real wage growth here and accordingly no wonder we are seeing a boom.

An International Perspective

Y Viva Espana

Back on January 29th I also established the view that disinflation was providing an economic boost for Spain too. As you can see below prices are falling in Spain.

The Harmonised Index of Consumer Prices (HICP) annual change stands at –1.2%, thus it increases three tenths as compared with January.

 

Indeed prices have been falling in Spain since last July, so much more time for the deflationistas doom-doom cycle to kick in. Er well not quite at least not according to the Bank of Spain…

During 2015 Q1 the economy saw a continuation of the expansionary path of the previous year. On the information available, GDP is estimated to have grown at a quarter-on-quarter rate of 0.8% in Q1, which would take its year-on-year rate of change to 2.5%. This estimate marks a slight acceleration in activity on the final stretch of 2014.

 

Against this backdrop, estimated GDP growth for 2015 has been revised upwards to 2.8%. This 0.8% revision of the projection.

 

So rather than collapsing in on itself in the fashion of a black hole the Spanish economy is for now at least showing hints of escape velocity. The Bank of Spain launches itself on a rather wordy explanation of all this but does at one point approach something of a singularity in its explanation of what is causing at least part of the expansion.

the decline in prices

 

Of course it is taking its part in the ECB QE effort to end this boost to the Spanish economy, but I will leave that as a matter for them and the consciences.

Ireland

It would be remiss of me to not also examine the data of the third country from my original analysis which is the Emerald Isle which is currently basking in its Six Nations rugby triumph. How is the economy doing? Well it has falling prices.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), decreased by 0.4% compared with February 2014.

 

So the economy has collapsed? You no doubt have guessed the answer but I doubt that you guessed the scale of it.

The  volume of retail sales (i.e. excluding price effects) increased by 3.3% in January 2015 when compared with December 2014 and there was an increase of 8.8% in the annual figure.

 

The motor trade has surged over there. Whilst this is not quite like for like as Ireland is tardy with some of its data we see that it is certainly boom-boom rather than doom-doom.

Comment

So far the evidence is clear that disinflation is producing boom-boom rather than the doom-doom of conventional economic theory. Of course we have finite evidence and there are other factors impacting at the same time. These can offset the gains as we have seen in Greece. But we get a reinforcing note from the other side of the coin. You see Japan is the ying to this yang as it has forced consumer inflation higher via its consumption tax rise and Yen depreciation. How is that going? From Japan Today earlier.

Separate data from the ministry showed household spending dropped for the 11 months in a row since the tax hike, falling 2.9% on-year in February.

 

Now of course the higher tax rate had an impact but so in my view has the higher level of prices. Accordingly unlike the Bank of Japan I see the fact that its adjusted favourite measure of inflation has fallen to 0% as a benefit and not a loss.

Ben Broadbent speaks

We are in the season for Bank of England speeches and Mr.Broadbent has made a case for QE which must sound weak even to his own ears.

For one thing I think the evidence suggests that unconventional policy is effective: even if they don’t circumvent it entirely, asset purchases help soften
the constraint of the zero lower bound.

 

Oh and the zero lower bound is back to 0.5% Base Rates again in a version of the hokey-cokey as one speech puts it back and the next dismisses it.

Also after Mark Carney’s speech on the Euro you might think that attacks on other countries policy would be a no-no. I guess many will miss the implied criticism of Denmark, Switzerland, Bulgaria et al.

 if it’s not ruled out by an exchange rate peg

 

Still if they complain he could take a leaf out of the lyrics of Luther Vandross.

Out of my head to say the things I said
I didn’t mean a word

And I really didn’t mean it

 

 

 

The ECB and Quantitative Easing A debt monetisation experiment?

One of the features of these times is how apparently unrelated events can in fact be linked. This happened yesterday when the President of the European Central Bank (ECB) Mario Draghi gave a speech to welcome the new 20 Euro banknote. Amidst the glad handing and his signature I spotted this.

In total, there are now 17.5 billion euro banknotes in circulation; the total value of these banknotes reached €1,000 billion for the first time in December 2014.

This confession of actual money printing raised a wry smile as I read it! Of course there are many accusations of money printing these days but here is the genuine article. There was also not a little hype and indeed fantasy.

Euro banknotes touch the lives of every one of us. As such, they bring us all closer together. As you saw in the video highlighting the new security features, the inclusion of the mythological figure Europa, who gave her name to our continent, shows how Europe draws on its shared history.

What about Quantitative Easing?

There is also a link in the amounts here as we compare one trillion Euros of banknotes with a planned 1.14 trillion Euros of ECB Quantitative Easing or QE. These days such a difference feels like a mere bagatelle although of course it is a lot of money. Somewhere along our journey we have become desensitized to large numbers. However let us begin to look at the effect it is already having.

Financial Markets

Bond Yields

Today’s headlines are being made by Ireland and the cause is the fact that it was spotted that Tradeweb had its ten-year yield closing at 1.01% last night. From Bloomberg.

Ireland‘s 10 year yield under 1% for the first time. Now twelve European countries with sub 1% 10 year yields.

If we look at the situation of Ireland this is extraordinary for two main reasons. Firstly it was not so long ago that the same bond yield was over 12%. This poses a problem as if you use market prices to value things as I often do you sometimes have to face up to the fact that the 12%+ of 2011 and the less than 1% of 2015 cannot both be right! Yes Ireland’s circumstances have changed for the better but not on that scale. Indeed it is the economic improvement which does not go with such a bond yield as we would expect them to be rising and prices falling in response to higher economic growth. As of the latest data the Irish economy is expanding at an annual rate of 3.4% (GDP) or 2.5% (GNP). The outlook is also apparently bright.

The latest Investec Manufacturing PMI Ireland report shows that further growth was recorded in the Irish manufacturing sector at the start of 2015 as client demand continued to improve.

Now the #PMI numbers have been far from infallible in Ireland but we are in a Houston We Have A Problem moment for Irish bond yields. In another odd coincidence this is as about as likely as a batsman being bowled but the bails rising and then returning to their grooves on the stumps! Arise Ed Joyce for those who do not follow cricket.

The problem is the economic effect of this in the real economy. We are in danger of what Charles Goodhart warned about some time ago.

Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.

In plainer English this has been refined into this.

When a measure becomes a target, it ceases to be a good measure

If we look at the possible effect on the real economy of all this then there is of course a probable effect on the housing market via lower fixed-rate and maybe variable rate mortgage costs. A surge in Irish house prices! What could go wrong?

From the Central Statistics Office

In the year to December, residential property prices at a national level, increased by 16.3%.

Portugal and Italy

Let me open this part of the discussion by pointing out that I think that both of these countries face a likelihood of some form of default before this saga ends. actually that makes me wonder if QE is an implicit default but let us park that for now and move on. The fundamental issue is that neither of these countries have managed any sort of sustained growth in the Euro era and have rumbled on in the “good years” at about 1% per annum. Indeed on a per capita basis the Italian economy has shrunk in the Euro era. As of the latest Eurostat data (Q3 2014) both countries had a national debt to GDP ratio of above 131% and rising. The statistical improvements such as ESA 10 have been deployed.

Yet we find that Portugal has a record low ten-year yield of 2.08% this morning and Italy one of 1.45%. These compare to somewhere in the high teens and over 7% respectively before the “everything it takes (to save the Euro)” speech by Mario Draghi in the summer of 2012.

By comparison the UK Gilt ten-year yield is 1.7% this morning as prices rally after Janet Yellen backtracked somewhat on US interest-rate increases (no surprise here). But I note that a country likely to default has higher price bonds and maybe soon Portugal will too!

In the future will all Euro area bonds be just like German bunds?

Or convergence trades mark two. How does that combine with this (h/t @MineForNothing )

GERMANY AUCTIONS 5-YEAR NOTES AT NEGATIVE YIELD FOR FIRST TIME

Equity Markets

Whilst there are obvious individual issues such as the Greek equity market the overall picture was described this morning by the Financial Times.

in Europe the FTSE Eurofirst 300 is opening flat at its seven-year peak

Now that Europe has joined this particular party we are also seeing this.

All this leaves the FTSE All-World index, a worldwide gauge covering more than 3,000 large and mid-cap companies, up 0.2 per cent to 286.0 and on course to close the day at its best ever level.

The All-World has risen more than 150 per cent since its financial crisis low of March 2009.

So congratulations to everybody who is holding some equities as with some minor exceptions (I mean on a world scale not that they are themselves unimportant) you have been seeing a good run. Let me add in the fact that bond investors have done well too and we are verging on yesterday’s discussion about in equality are we not?!

Exchange Rates

In the financial world these are the main players in monetary policy in my opinion. Here the hints and promises of a “Bazooka” (surely that should be Panzerfaust?) of QE saw the effective exchange-rate drop from 100.6 in mid-December to just below 93 on the 23rd of January. Since then it has moved to around 94. This fits with my theory that the exchange rate effects of QE happen early and often precede it happening – so much for the cause and effect so beloved of the Frenchman in the film Matrix revolutions!- but of course we await the next move.

Comment

This turns on the impact of these moves on the real economy so let me address them in terms of likely size. The 7% fall in the Euro exchange-rate may give a boost but in an unfortunate accident of timing it occurred as the oil price and other commodity prices were falling as well and offset some of it. As the Fun Boy Three and Bananarama put it.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

If we move to the rising bond prices and falling yields they could easily fire up some of the Euro areas housing markets and in Ireland this is probably already in play. What could go wrong (Ireland and Spain..)?

Next we have the wealth effects from rising stock markets. At best they have been small when measured and let me now formally remind everybody about yesterday’s discussion about inequality in the UK. So now a relatively small group will benefit even more in the Euro area as we cue similar discussions there. Yet more central bank front running by an establishment with all the self-awareness of Malcolm Rifkind.

Oh and if you look at the Euro economy it probably was not necessary. For example Germany – the biggest QE beneficiary – saw economic growth of 0.7% in the last quarter of 2014. There have been plenty of times in history that this would have been considered a success not a chance to ease policy! Some countries need help. This used to be done by regional policy.

On the other hand it does help with public (and indeed some private) sector debt burdens which were being raised by negative annual inflation. That is in my view the true rationale as we move towards debt monetisation. Let me hand you over to the purple one.

Sign O the Times mess with your mind
Hurry before it’s 2 late

In France a skinny man
Died of a big disease with a little name
By chance his girlfriend came across a needle
And soon she did the same

Ireland’s economy is performing strongly but can it pay for her socialised bank debt?

This morning has opened with some good news for the Irish economy and it is fair to say that she has been in a relatively good run in economic life. In geographical terms Ireland is one of the farthest flung of the Euro area economies and perhaps that symbolically has helped a little. I doubt that her near neighbour the UK has helped much as it has struggled overall in 2012 but perhaps her many links with the United States have. When I have reviewed the state of the Irish economy before I have concluded that whilst she has strengths such that she has been the best performer of the peripheral Euro area countries she also has weaknesses. Let us examine the evidence for where she stands right now.

Her Service Sector

If we look at the latest Purchasing Manager Index we get the theme for it from this.

Strongest rise in activity since October 2007 as new business increases sharply

Irish readers can permit themselves a smile at this point as this is the best Euro area headline I can recall in 2012. If we look deeper into the detail we see that the index rose to 56.1 in October from 53.9 in September on a scale where numbers above 50 demonstrate expansion. We see also this.

A sharp rise in new export orders was also recorded, extending the current period of expansion to 15 months. Moreover, the latest increase was the fastest since June 2010.

And in addition Irish eyes may be particularly smiling at the section below.

Employment increased for the second month running, and at a solid pace.

In a country where the unemployment rate is 14.8% then any increase in employment which may help with this is welcome. The latest Live Register numbers had already shown a fall in unemployment of 10,260 over the past year,although this was accompanied by an increase in the unemployment rate of 0.3% to 14.8%. It made me wonder if net migration was a factor here and as it was -34,400 in the year to April 2012 it may well be but we can only suspect its full influence as the figures are some months behind. What we do know is that the labour force in Ireland has shrunk.

What About Manufacturing?

Last week we received the latest data in terms of the Purchasing Manger’s Index for Irish manufacturing and it too showed growth as her reading expanded from 51.8 in September to 52.1 in October. If we look at little deeper we see that the background is again optimistic.

A solid expansion of manufacturing output was recorded in October. Production rose for the sixth successive month, and the latest increase was the fastest since June. Respondents mainly linked higher output to rising new orders.

Also we see optimistic news on employment

An eighth successive rise in employment was recorded as firms responded to increased workloads and expectations of further growth of new orders in coming months.

So we can conclude that the most timely data that we receive shows the Irish economy to be in good shape. Indeed particularly good shape if we consider the position elsewhere in Europe.

Let Us Examine The Official Data

We need to go back in time for these but the numbers at the end of the second quarter told us this.

Preliminary estimates for the second quarter of 2012 show no change in volume in GDP (Gross Domestic Product) compared with the first quarter of the year while GNP (Gross National Product) registered a 4.3 per cent increase. Compared with the same quarter one year ago GDP decreased by 1.1 per cent while GNP increased by 2.9 per cent.

So if we look at her overall economy we see that it shrank on a year ago but it comes with the counterpoint that the part she can tax most easily which is GNP rose by 4.3% on the previous quarter and 2.9% on the year before. This matters particularly for Ireland because her low Corporation Tax rate and enthusiasm for companies like Google to open offices there means she has a low of what are in effect “non-domiciled” companies and corporations there. This is what the difference between GDP (39.7 billion Euros) and GNP (33 billion Euros) mostly measures and as you can see the gap is large. If we look back it was a feature of the so-called Celtic Tiger economy in the boom years as foreign companies flocked to Ireland. But the catch is simple, if a company comes to you because you have low tax rates and you raise the tax rates what do you expect it to do? Tucked in there is a problem for Ireland as she struggles with her fiscal deficit and national debt.

Government Bond Yields Have Fallen

The situation here has improved. Ireland’s stock exchange calculates an overall index for her government bond market and this has risen from 93.05 six months ago to 103.33 now. She does not actually have a ten-year bond but her longer-dated yields are of the order of 6.6 to 6.7%. So way too high still but considerably improved is the summary.

What About Her Banks?

There are ongoing problems in this area. There was an enormous bail-out of the Irish banking-sector and it took place on such a scale that the whole economy was in effect put in hock to finance it. However it would appear that they have ended up financing more than they bargained for. the 20.7 billion Euro bail-out of Allied-Irish Bank (AIB) was discovered to have this feature last week. From Nama Wine Lake.

The AIB pension fund was topped up with €1.1bn of funds that can be attributable to the taxpayer bailout.

It looks as though this may also be true at Bank of Ireland and Anglo-Irish Bank although these numbers have yet to be declared and quantified.  UK readers will see echoes of the situation of ex-Royal Bank of Scotland head Fred Goodwin in the numbers below.

The man who bankrupted Allied Irish Bank, Eugene Sheehy gets an annual pension of €529,000.

Regular readers will be aware that I have written many times that bondholders in Irish banks should have been made to fulfil their obligations rather than being repaid, and let me be clear that this would have meant the bonds being declared worthless. Now it seems that the institutionalised corruption at the heart of Ireland has another costly feature for the Irish taxpayer to carry.

Is It the Debt Stupid?

Ireland was a country with a low-level of national debt pre credit crunch. You could have looked at the numbers and concluded that she was very fiscally conservative as her level of national debt dipped to one-quarter of her annual economic output. However this was to ignore the rising level of private debt particularly in her housing market and her political classes willingness to socialise losses in her banking sector.

According to Eurostat she now has a national debt of 179.7 billion Euros.  It calculates this as being 111.5% of her GDP and that this ratio had risen by 3% in the second quarter of 2012 and by 10% compared with a year earlier. So relatively high and rising quickly. In 2011 she recorded a fiscal deficit of 13.4% of her GDP.

Now let us compare this another measure of her ability to pay which is her “taxable capacity” or GNP. If we use the latest ratios of GDP to GNP we now get her national debt being 134%. As you can see this is more of a problem. Whilst I am not saying that every non-domiciled company would leave immediately if she tried to raise tax rates it does represent quite a problem as some/many no doubt would.

Comment

We have seen today that there are grounds for optimism for the Irish economy in her latest data. In the prevailing economic climate she is putting in a good performance. However for her to reach escape velocity and exit the aid programmes she needs to find a way of dealing with the following. Her fiscal deficit is high and she plans to reduce it via euro area austerity. As she expects unchanged revenues all of the strain is going to be on reduced central government expenditure. The plan is for this to fall from 48.8 billion Euros in 2011, to 44.1billion in 2012, to 43.5 billion in 2013 then really be squeezed again to 40.8 billion in 2014 and 38.8 billion in 2015. We know the economic distress caused by that sort of action elsewhere. Also the squeeze is even harsher than it looks on the surface because expected debt interest is rising.

So we see that whilst she is doing well the gravity of austerity may yet make Ireland and her economy crash-land.