UK GDP is a case of The Good, The Bad and The Ugly

Today is an example of be careful what you wish for. No doubt the UK Office for National Statistics thought it would be clever to produce monthly GDP data. But now in addition to the usual problems they find them not only being scanned beyond their capabilities but for the unwary comparing them to the quarterly and annual ones creates quite a of confusion. Indeed we can go through them in Spaghetti Western style.

The Good

This comes from this part of the release where we how have had three months of economic growth in a row.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020 as lockdown measures continued to ease, following growth of 8.7% in June and 2.4% in May.

In terms of detail we are told this.

“Education grew strongly as some children returned to school, while pubs, campsites and hairdressers all saw notable improvements. Car sales exceeded pre-crisis levels for the first time with showrooms having a particularly busy time.

“All areas of manufacturing, particularly distillers and car makers, saw improvements, while housebuilding also continued to recover.”

The latter component will, of course,please the Bank of England. I have to confess a wry smile at the mention of distillers, have we been driven to drink? As to car sales this was reinforced elsewhere.

wholesale, retail and repair of motor vehicles subsector (in particular, the motor vehicles industry), which recovered to above its February 2020 level after seeing record low levels of output in April and May.

This is an area which was affected by the lockdown as when I took my car in for its MOT in August I was told that in April last year they had done 110 and this year 18. Another area which was similarly affected also boomed in July.

Monthly construction output increased by 17.6% in July 2020 compared with June 2020, rising to £11,922 million, because of growth in all construction sectors.

Then and slightly confusingly not directly linked to the GDP numbers ( which are output not expenditure ones) these will not be included.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £5.9 billion to £6.4 billion in the three months to July 2020, as imports fell by £8.5 billion and exports fell by a lesser £2.7 billion.

I point it out as it is rare for the UK to record a trade surplus which continues as we look for more perspective.

The total trade balance, excluding non-monetary gold and other precious metals, increased by £35.8 billion to a surplus of £3.7 billion in the 12 months to July 2020.

The Bad

Our perspective shifts as we switch to something approaching the more normal quarterly measure for GDP.

Gross domestic product (GDP) fell by 7.6% in the three months to July 2020 following two consecutive quarterly falls, as government restrictions on movement dramatically reduced economic activity.

In case you are wondering how we can grow for 3 individual months but shrink over the total it is because we are comparing the latter with the previous 3 months which include some pre pandemic data.

The Ugly

This comes if we directly compare with where we were or more strictly where we thought we were before the Covid-19 pandemic hit.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020, following growth of 8.7% in June 2020. Despite this, the level of output did not fully recover from the record falls seen across March and April 2020 and was still 11.7% below the levels seen in February 2020,

So we have picked up but the peak is still a fair way ahead. Or if you prefer.

July 2020 GDP is now 18.6% higher than its April 2020 low. However, it remains 11.7% below the levels seen in February 2020,

There is a sub-plot to this which is unusual for the UK.

In July 2020, the Index of Services is 12.6% below February 2020, the last month of “normal” trading conditions prior to measures introduced as a result of the coronavirus (COVID-19) pandemic…..There was a rise of 6.1% in the Index of Services between June 2020 and July 2020.

The area which is normally a strength and pulls the numbers higher has in fact under performed. One feature of this is hardly a surprise although we can expect a pick-up from the “eat out to help out” policy when we get the August numbers.

Total services output decreased by 8.1% for the three months to July 2020, compared with the months to April 2020; this was led by accommodation and food service activities, which fell by 62.7%.

On the other side of the coin production has been helping in relative terms.

In July 2020, the Index of Production (IoP) was 7.0% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic…..Production output rose by 5.2% between June and July 2020, with manufacturing providing the largest upward contribution, rising by 6.3%; there were also rises from electricity and gas (2.7%), water and waste (2.4%) and mining and quarrying (0.7%).

It was led by this.

The monthly increase of 6.3% in manufacturing output was led by transport equipment, which rose by 18.5%; all of the 13 subsectors displayed upward contributions.

However it had been in a weak spell anyway and then was hit hard so care is needed.

Comment

There are a lot of contexts and warnings required here many of which are driven by the unreliability of monthly GDP data. The unreliability will be worse right now due to the pandemic as we note something I was pretty much alone in reporting on August 12th.

This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

More was recorded as less which is a UK peculiarity and made our GDP numbers look worse by maybe 5% on the fall. But now we are seeing the other side of some of that as we note this from the July data.

The largest contribution to monthly growth is education, rising by 21.1%.

Now let me look at the mess which is health.

For example, the suspension of dental and ophthalmic activities (almost 6% of healthcare output), the cancellation and postponement of outpatient activities (13% of healthcare output), and elective procedures (19% of healthcare output) will likely weigh heavily on our activity figures.

If course for a spell Covid-19 treatment was booming well if we counted it.

 Further, our estimates may be affected by the suspension of some data collections by the NHS in England, which include patient volumes in critical care in England.

Oh and if you are struggling with quarterly numbers please run me by how you can get monthly GDP numbers?

For example, the quarterly activity estimates are only made available with a lag, necessitating a form of activity nowcasts.

That is a bit like the services monthly trade data which come mainly from a quarterly survey.

So we did not contract by as much as we thought and have not rebounded by quite as much either.

Looking ahead there are some further strengths for August as we have noted the potential rise in eating out and the Markit PMI reporting this.

A further surge in service sector business activity in August
adds to signs that the economy is enjoying a mini boom as
business re-opens after the lockdowns,

But the PMIs have been downgraded in importance quite a bit as time has passed. Looking further ahead there is this.

The UK has secured a free trade agreement with Japan, which is the UK’s first major trade deal as an independent trading nation, and will increase trade with Japan by an estimated £15.2 billion ( Sky News)

Oh and these things always promise more trade…..

Back to now whilst it was nice to have a bit of variety and be able to report a UK trade surplus it is also true it came from a bad route which is lower imports due to a weaker economy.

 

 

Has nobody else spotted 6% inflation being reported in UK GDP?

Today brings my home country the UK into focus as we get the first picture of how much economic damage the lockdown did in the second quarter of this year. So let us take a look.

UK gross domestic product (GDP) is estimated to have fallen by a record 20.4% in Quarter 2 (Apr to June) 2020, marking the second consecutive quarterly decline after it fell by 2.2% in Quarter 1 (Jan to Mar) 2020.

That was depending on who you looked at better than forecast, for example the CBI was suggesting a 25% drop yesterday with most suggesting 21-22%. I see the someone at the Financial Times will get first dibs on the best cake from the cake trolley today for presenting it like this.

Just in: The UK economy contracted 20.4% in the second quarter, a bigger slump than any other major European economy.

In itself the fall was no surprise as at a time like this we can certainly ignore the 0.4% as we wonder if it is even accurate to whole percentage points? Curiously for a number which is of the level of a depression and a great depression at that the media seem to be lost in a recession obsession.

BREAKING: UK is officially in #recession as the economy shrinks by a record 20.4% in the second quarter of the year. It’s the first time in 11 years that the UK has gone into recession. ( BBC)

Meanwhile back in the real world we were expecting a fall of the order of a fifth and we need to move on to see if and how we are recovering from the impact of the lockdown. After all we did close quite a bit of the economy.

There have been record quarterly falls in services, production and construction output in Quarter 2, which have been particularly prevalent in those industries that have been most exposed to government restrictions.

June

We see that there was indeed quite a bounce back as the economy slowly began to reopen.

Monthly gross domestic product (GDP) grew by 8.7% in June 2020, following growth of 2.4% in May 2020.

I am not sure whether we will ever fully pin it down as for example pubs and bars were allowed to reopen on July 4th but the ones I jogged past on the Battersea Power Station site had people sitting outside drinking some days before that. So officially after these numbers but unofficially?

Speaking of not being sure what was and what was not supposed to be happening the strongest growth came here.

Monthly construction output grew by a record 23.5% in June 2020, substantially higher than the previous record monthly growth of 7.6% in May 2020;

How much?

Monthly construction output increased by 23.5% in June 2020 compared with May 2020, rising to £10,140 million

Which areas?

The record 22.2% (£1,224 million) growth in new work in June 2020 was driven by increases in all new work sectors, with the largest contribution coming from a record 42.3% (£545 million) growth in private new housing.

The Bank of England will be happy to see the housing growth.

Next on the list was manufacturing.

Production output rose by 9.3% between May 2020 and June 2020, with manufacturing providing the largest upward contribution, rising by 11.0%, the largest increase since records began in January 1968.

Driven by.

The monthly increase of 11.0% in manufacturing output was led by transport equipment (52.6%) but this subsector remained 38.2% weaker compared to February 2020; of the 13 subsectors, 11 displayed upward contributions.

The issues with transport production began long before February of course.

Unusually for the UK its main sector was something of a laggard rather than being a leader in June.

There was a rise of 7.7% in the Index of Services between May 2020 and June 2020; of the 50 services industries, 47 grew between May and June 2020, though most remain substantially below their February 2020 level.

The detail provided reminds us that much of the debate about the decline of manufacturing ignores the reality that we have to some extent defined it away. As the repair of cars and bikes involves elements of manufacturing and services in my opinion.

The largest contribution to monthly growth was wholesale and retail trade and repair of motor vehicles and motorcycles, rising by 27.0%; of the 7.7% growth in services, 1.7 percentage points came from wholesale and retail trade and repair of motor vehicles and motorcycles.

We learn a little from looking at the best part of services and noting that even it has a way to go.

The rate of progress for each sector in returning to February 2020 levels can more easily be understood in Figure 8 where, for example, in June, wholesale and retail trade and repair of motor vehicles services was at 93.7% of the February 2020 level, rising from its lowest point between March and May of 65.2% of the February 2020 level.

Also I did say that the Bank of England would be happy and need to correct myself to say until it read the bit below.

In contrast, real estate activities have fallen for the fourth month because of real estate activities; and rentals and commercial property, excluding imputed rent.

For newer readers a fall in imputed rent is just too much for the establishment to cope with. So let’s leave them with their fantasy numbers and move on. Also I am not expecting a major bounce in the category below any time soon.

Head offices and management consultants have also fallen for the fourth consecutive month.

How much of a shift in economic life there will be remains uncertain but offices will be downsized overall and management structures will change.

We also get a reminder that we need to take care using percentages.

Wholesale, retail and repair of motor vehicles had the largest growth of 417.2% as car showrooms were open to the public in England from June 1 and elsewhere later in the month, replacing click and collect sales.

417% of not much is well I am sure you can all figure it out. Also I have emphasised the number that stands out below.

which reported that the average usage in June 2020 was 73% for all motor vehicles, 6% for National Rail and 75% for heavy goods vehicles.

As a child I recall the advertising campaign which told us “this is the age of the train”. well apparently not! This is an awkward conceptual issue as we have been told by the establishment that public transport is the way forwards and yet it has hit the buffers. Has anyone checked on how this would affect HS2?

On a personal level this is one of the reasons why I have been using the Boris Bike system over the past few years. The standard of hygiene in London public transport is, well I think it is best we leave it there.

Comment

So we hope to have experienced the fastest depression in economic history but we do not know that yet. For example we looked at the monthly recovery (June) in manufacturing above but it is still only 86.4173% of the 2016 benchmark and yes I am smiling at the claimed accuracy. As to the recovery more is reported for July.

However, of those businesses currently trading, over half (54%) reported a decrease in turnover during this period compared with what is normally expected for July.

But still well below the previous trend.

Also I said earlier that the numbers might be out by 1% and now I think it might be by 5% so let me explain.

Nominal GDP fell by 15.4% in Quarter 2 2020, its largest quarterly contraction on record.

Okay so a 5% gap on the headline. How? Well there is a bit of an issue with the story we keep being told about there being no inflation.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

Yep it is apparently now 6% and even 32.7% in one area.

I helped Pete Comley with his book on inflation a few years ago with some technical advice and proof reading. I recall him telling me that he had looked into the deflator for the government sector and had discovered they pretty much make it up. Today’s figures support that view.

Podcast on the flaws with GDP

If Lagarde expects disinflation then we should fear inflation….

Today brings the economy of the Euro area in to focus. Over the weekend we heard from the President of the European Central Bank or ECB.

(Bloomberg) — European Central Bank President Christine Lagarde said the euro zone faces about two years of downward pressure on prices, but could see a turnaround after that because the coronavirus crisis will accelerate the transformation of the economy.

There is an obvious issue in forecasting 2 years ahead when we struggle to know what will happen in two weeks. Even worse is Christine Lagarde’s record as according to her both Greece and Argentina were going to grow in such a timescale when in fact their economies collapsed. Her policies are also doing the best they can to slow the transformation of the economy via the support of zombie banks and companies.

The reality is that the forecast is to justify decisions that have already been taken.

In the meantime, the central bank will need to keep its monetary policy exceptionally loose, and financial instruments will need to be developed that allow the economic transformation to be funded, she said.

Also there is an opportunity to find a scapegoat for an effect of her policies.

Still, she warned that pandemics typically increase inequality, with economic and social consequences that the central bank will have to take into account.

You also might think that she would be too busy with the day job to take on other things but apparently not.

“I am determined to have the same debate with governors at the ECB to ensure that in all areas, climate risk and biodiversity is taken into account,” she said. “We won’t do it in one day, but we must question in every domain, stress test by stress test.”

Also on Friday the ECB released this.

They’re here! We’ve just received the first banknotes featuring President Lagarde’s signature. The €5 and €10 notes will be the first with the new signature to enter into circulation, starting next week. Those with the signature of former presidents will remain legal tender.

Sadly they have ignored my suggestion that some of the notes should have been orange to mark the occasion.

German Manufacturing

This is something of a bellweather for the Euro area economy and trade. So let’s start with the positive bit.

WIESBADEN – According to provisional results of the Federal Statistical Office (Destatis), real (price adjusted) new orders increased by a seasonally and calendar adjusted 10.4% in May 2020 compared with April 2020.

As I am sure you were expecting the annual comparison whilst better than April’s -36.9% remains grim.

 Compared with May 2019, the decrease in calendar adjusted new orders amounted to 29.3%

If we go to the underlying index then total orders are at 71.1% of the 2015 average. There is a clear geographic pattern to this.

Domestic orders increased by 12.3% and foreign orders rose by 8.8% in May 2020 on the previous month. New orders from the euro area went up 20.9%, and new orders from other countries increased by 2.0% compared with April 2020.

Also I did start with a mention of a bellweather.

New orders in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, new orders were still more than 47% lower than in February 2020.

We can also look at turnover.

According to provisional results, price-adjusted turnover in manufacturing in May 2020 went up a seasonally and calendar adjusted 10.6% on the previous month…….

Compared with February 2020, the month before restrictions were imposed due to the corona pandemic in Germany, turnover in May 2020 was 23.5% lower in seasonally and calendar adjusted terms.

Again the car industry has been heavily affected and of course 2019 was considered a ropey year at the time.

Turnover in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, it was still nearly 47% lower than in February 2020.

Construction

We have learned that the Purchasing Managers Indices have their issues but here is this morning’s update.

The IHS Markit Eurozone Construction Total Activity Index rose sharply from 39.5 in May to 48.3 in June, indicating the weakest decline in construction activity across the eurozone since February amid a relaxation of measures designed to control the coronavirus disease 2019 (COVID-19) pandemic. Survey data showed France and Italy recorded construction output growth, while Germany posted a further marked decline.

Let us move on noting that Germany seems to be struggling across a few areas.

Retail Sales

Having seen the sad news about Ennio Morricone let is look at first the good.

In May 2020, when Member States began easing the COVID-19 containment measures, the seasonally adjusted
volume of retail trade increased by 17.8% in the euro area and by 16.4% in the EU, compared with April 2020,
according to estimates from Eurostat.

The bad is that volume is only 102% of the average for 2015 so the Euro  boom has gone for now and also this.

In May 2020 compared with May 2019, the calendar adjusted retail sales index decreased by 5.1% in the euro
area and by 4.2% in the EU.

The ugly is Greece which saw retail sales collapse as to return to my opening theme Christine Lagarde predicted “Shock and Awe”. Just to show how big the move was if we stay with 2015 as our benchmark then April 2007 was 167% of it as opposed to the 74.7% of this April. That is how you define an ongoing depression which sadly has been pushed even deeper by the economic impact of the Covid-19 virus pandemic. Also after all the reform rhetoric of the IMF and Euro area authorities I note that Greece has not yet produced numbers for May in this area.

Zombie! Zombie! Zombie!

This morning has seen the release of a ECB working paper which has made me mull those famous song lyrics, why? Well we get an official denial.

As regards the distribution of the funds, in contrast to the common perception about take-up in
central bank operations in crisis times, we do not find strong evidence that TLTRO funds end up
importantly with financially weak banks. If anything, banks with a larger capital buffer take up more.

You may note the use of “strong evidence” “importantly” and “if anything”. To which we can add “dominant” below.

The TLTRO funds do not end up dominantly with financially weak banks.

Indeed is weak banks are no big deal it makes you wonder why they bothered with this?

In addition, applying different lending benchmark requirements to banks depending on their deleveraging pressure appears to have been important to have take-up also by deleveraging banks.

or this.

namely by reducing the TLTRO interest rate and expanding the amount and types of eligible collateral.

This has become even for these times a big deal.

This paper asks what characterises and incentivises individual banks to take this “funding for
lending” which peaked at EUR 762 billion and what role the parameters of the scheme play.

Comment

Today’s article has been topped and tailed by the ECB and its activities. In the middle we have noted the effect of the lockdowns and pandemic. But if we look ahead the issue switches to what type of future it wants? For all the rhetoric the Euro area was already struggling highlighted by the way that the end of QE lasted for about 9 months. Curious as according to Christine Lagarde things are well placed.

Europe is in an excellent position to join this transition, according to Lagarde. The continent has the world’s largest circular economy and ecological innovation sector while the euro is the first currency used for the issuing of green bonds, she noted. ( Brussels Times)

Perhaps going round in circles is not the best analogy. Still there is time to be a control freak because it has gone so well?

However, this would not be enough and an economic policy framework that allows the required financing to be mobilized will need to be put in place, according to Lagarde.

Podcast

 

UK monthly GDP is a poor guide to where the economy stands

Today has opened with the media having a bit of a party over the economic news from the UK and they have been in such a rush they have ignored points one and two and dashed to point 3.

Monthly gross domestic product (GDP) fell by 20.4% in April 2020, the biggest monthly fall since the series began in 1997. ( Office for National Statistics)

Actually our official statisticians seem to have got themselves in a spin here which is highlighted by this bit.

Record falls were also seen across all sectors:

    • services – largest monthly fall since series began in 1997
    • production – largest monthly fall since series began in 1968
    • manufacturing – largest monthly fall since series began in 1968
    • construction – largest monthly fall since series began in 2010

As you can see they have jumped into a quagmire as suddenly we have numbers back to 1968 rather than 1997! What they originally meant was the largest number since we began monthly GDP about 18 months ago. The rest is back calculated which did not go that well when they tried it with inflation. Oh and let me put you at rest if you are worried we did not measure construction before 2010 as we did. Actually we probably measured it better than we do now as frankly the new system has been rather poor as regular readers will be aware.

Now I can post my usual warning that the monthly GDP series in the UK has been very unreliable and at times misleading even in more normal scenarios. Or as it is put officially.

The monthly growth rate for GDP is volatile. It should therefore be used with caution and alongside other measures, such as the three-month growth rate, when looking for an indicator of the longer-term trend of the economy.

So let us move on noting that the reality with data in both March and April hard to collect due to the virus pandemic is more like -15% to -25%. The 0.4% in the headline is beyond even spurious accuracy and let me remind you that I have consistently argued that the production of monthly GDP is a mistake.

Mind you it did produce quite an eye-catching chart.

Context

As we switch to a more normal quarterly perspective we are told this.

>GDP fell by 10.4% in the three months to April, as government restrictions on movement dramatically reduced economic activity

This in itself was something of a story of two halves as we went from weakness to a plunge as restrictions on movement began on the 23rd of March. There is also something of a curiosity in the detail.

The services sector fell by 9.9%, production by 9.5% and construction by 18.2%.

The one sector that did carry on to some extent in my area was construction as work on the Royal School of Art and the Curzon cinema in the King’s Road in Chelsea continued. So let us delve deeper.

Services

If we look at the lockdown effect we can see that it crippled some industries.

The dominant negative driver to monthly growth, wholesale and retail trade and repair of motor vehicles and motorcycles, contributed negative 3.5 percentage points, though falls were large and widespread throughout the services industries; notable falls occurred in air transport, which fell 92.8%, and travel and tourism, which fell 89.2%.

The annual comparison is below.

Services output decreased by 9.1% between the three months to April 2019 and the three months to April 2020, the largest contraction in three months compared with the same three months of the previous year since records began in January 1997.

Actually we get very little extra data here.

Wholesale and retail trade and repair of motor vehicles and motorcycles was the main driver of three-monthly growth, contributing negative 1.95 percentage points.

This brings me to a theme I have been pursuing for some years now. That is the fact that our knowledge about the area which represents some four-fifths of our economy is basic and limited. I did make this point to the official review led by Sir Charles Bean. But all that seems to have done is boosted his already very large retirement income, based on his RPI linked pension from the Bank of England.

Production

We follow manufacturing production carefully and it is one area where the numbers should be pretty accurate as you either produce a car or not for example.

The monthly decrease of 24.3% in manufacturing output was led by transport equipment, which fell by a record 50.2%, with motor vehicles, trailers and semi-trailers falling by a record 90.3%; of the 13 subsectors, 12 displayed downward contributions.

The annual comparison is grim especially when we note that there were already problems for manufacturing due to the ongoing trade war.

For the three months to April 2020, production output decreased by 11.9%, compared with the three months to April 2019; this was led by a fall in manufacturing of 14.0% where 12 of the 13 subsectors displayed downward contributions.

Construction

According to the official series my local experience is not a good guide.

Construction output fell by 40.1% in the month-on-month all work series in April 2020; this was driven by a 41.2% decrease in new work and a 38.1% decrease in repair and maintenance; all of these decreases were the largest monthly falls on record since the monthly records began in January 2010.

This gives us an even more dramatic chart so for those who like that sort of thing here it is.

The problem is that this series has been especially troubled as we have noted over the years. For newer readers they tried to fix it bu switching a large business from services to construction but that mostly only raised questions about how they define the difference? There was also trouble with the measure of inflation.

Anyway here is a different perspective.

Construction output fell by record 18.2% in the three months to April 2020, compared with the previous three-month period; this was driven by a 19.4% fall in new work and a 15.8% fall in repair and maintenance.

Comment

As we break down the numbers we find that they are a lot more uncertain than the headlines proclaiming a 20.4% decline or if you prefer a £30 billion fall suggest. Let me add another factor which is the inflation measure or deflator which will not only be wrong but very wrong too. The issue of using annual fixed weights to calculate an impact will be wrong and in the case of say air transport for example it would be hard for it to be more wrong in April. On the other side of the coin production of hand sanitiser and face masks would be travelling in the opposite direction.

We can switch to trying to look ahead with measures like this.

There was an average of 319 daily ship visits during the period 1 June to 7 June 2020, a slight fall compared with the previous week.

The nadir for this series was 215 on the 13th of April so we have picked up but are still below the previous 400+. . There was also a pick-up using VAT returns in May but again well below what we had come to regard as normal.

 There has been a small increase in the number of new VAT reporters between April 2020 and May 2020 from 15,250 to 16,460.

But I think the Office for National Statistics deserves credit for looking to innovate and for trying new methods here.

Meanwhile I think the Bank of England may be trying some pre weekend humour.

 

What policy action can we expect from the Bank of England?

As to world faces up to the economic effects of the Corona Virus pandemic there is a lot to think about for the Bank of England. Yesterday it put out an emergency statement in an attempt to calm markets and today it will already have noted that other central banks have pulled the interest-rate trigger.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak. ( Reserve Bank of Australia).

There are various perspectives on this of which the first is that it has been quite some time since the official interest-rate that has been lower than in the UK. Next comes the fact that the RBA has been cutting interest-rates on something of a tear as there were 3 others last year. As we see so often, the attempt at a pause or delay did not last long, and we end up with yet another record low for interest-rates. Indeed the monetary policy pedal is being pressed ever closer to the metal.

Long-term government bond yields have fallen to record lows in many countries, including Australia. The Australian dollar has also depreciated further recently and is at its lowest level for many years.

Also in the queue was a neighbour of Australia.

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.75 percent and 2.25 percent, respectively.

So there were two interest-rate cuts overnight meaning that there have now been 744 in the credit crunch era and I have to add so far as we could see more later today. The problem of course is that in the current situation the words of Newt in the film Aliens come to mind.

It wont make any difference

It seems that those two central banks were unwilling to wait for the G7 statement later and frankly looking at it I can see why.

– G7 Now Drafting Statement On Coronavirus Response For Finance Leaders To Issue Tuesday Or Wednesday – Statement As Of Now Does Not Include Specific Language Calling For Fresh Fiscal Spending Or Coordinated Interest Rate Cuts By Central Banks – RTRS Citing G7 Source ( @LiveSquawk )

The truth is G7 are no doubt flying a cut to see how little they can get away with as monetary ammunition is low and fiscal policy takes quite some time to work. A point many seem to have forgotten in the melee.

The UK Economy

The irony of the present situation is that the UK economy was recovering before this phase.

Manufacturing output increased at the fastest pace since
April 2019, as growth strengthened in both the consumer
and intermediate goods sectors. In contrast, the downturn
at investment goods producers continued. The main factor
underlying output growth was improved intakes of new
work. Business optimism also strengthened, hitting a nine month high, reflecting planned new investment, product
launches, improved market conditions and a more settled
political outlook. ( IHS Markit )

This morning that was added to by this.

UK construction companies signalled a return to business
activity growth during February, following a nine-month
period of declining workloads. The latest survey also pointed to the sharpest rise in new orders since December 2015. Anecdotal evidence mainly linked the recovery to a postelection improvement in business confidence and pent-up demand for new projects. ( IHS Markit)

If there is a catch it is that we have seen the Markit PMI methodology hit trouble recently in the German manufacturing sector so the importance of these numbers needs to be downgraded again.

Monetary Conditions

As you can see the situation looks strong here too as this from the Bank of England yesterday shows.

Mortgage approvals for house purchase rose to 70,900, the highest since February 2016.

The annual growth rate of consumer credit remained at 6.1% in January, stabilising after the downward trend seen over past three years.

UK businesses made net repayments of £0.4 billion of finance in January, driven by net repayments of loans.

Please make note of that as I will return to it later. Now let us take a look starting with the central banking priority.

Mortgage approvals for house purchase (an indicator for future lending) rose to 70,900 in January, 4.4% higher than in December, and the highest since February 2016. This takes the series above the very narrow range seen over past few years.

Actual net mortgage lending at £4 billion is a lagging indicator so the Bank of England will be expecting this to pick up especially if we note current conditions. This is because the five-year Gilt yield has fallen to 0.3%. Now conditions are volatile right now but if it stays down here we can expect even lower mortgage rates providing yet another boost for the housing market.

Next we move to the fastest growing area of the economy.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

As you can see the slowing has stopped and been replaced by this.

These growth rates represent a £1.2 billion flow of consumer credit in January, in line with the £1.1 billion average seen since July 2018.

Broad money growth has been picking up too since later last spring and is now at 4.3%.

Total money holdings in January rose by £9.4 billion, primarily driven by a £4.2 billion increase in NIOFC’s money holding.

The amount of money held by households rose by £2.8 billion in January, compared to £3.3 billion in December. The amount of money held by PNFCs also rose by £2.3 billion.

Comment

The numbers above link with this new plan from the ECB.

Measures being considered by the ECB include a targeted longer-term refinancing operation directed at small and medium-sized firms, which could be hardest hit by a virus-related downturn, sources familiar with the discussion told Reuters. ( City-AM)

You see when the Bank of England did this back in 2012 with the Funding for Lending Scheme it boosted mortgage lending and house prices. Where business lending did this.

UK businesses repaid £4.1 billion of bank loans in January. This predominantly reflected higher repayments. These weaker flows resulted in a fall in the annual growth rate of bank lending to 0.8%, the weakest since July 2018. Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

I think that over 7 years is enough time to judge a policy and we can see that like elsewhere ( Japan) such schemes end up boosting the housing market.

It also true that the Bank of England has a Governor Mark Carney with a fortnight left. But he has been speaking in Parliament today.

BANK OF ENGLAND’S CARNEY SAYS SHOULD EXPECT A RESPONSE THAT HAS A MIX OF FISCAL AND CENTRAL BANK ELEMENTS

BANK OF ENGLAND’S CARNEY SAYS EXPECT POWERFUL AND TIMELY GLOBAL ECONOMIC RESPONSE TO CORONAVIRUS ( @PrispusIQ)

That sounds like a lot of hot air which of course is an irony as he moves onto the climate change issue. I would imagine that he cannot wait to get away and leave his successor to face the problems created by him and his central planning cohorts and colleagues.

His successor is no doubt hoping to reward those who appointed him with an interest-rate cut just like in Yes Prime Minister.

 

 

UK GDP growth is services driven these days as manufacturing is in a depression

Today brings the UK into focus as we find out how it’s economy performed at the end of 2019. A cloudy perspective has been provided by the Euro area which showed 0.1% in the final quarter but sadly since then the news for it has deteriorated as the various production figures have been released.

Germany

WIESBADEN – In December 2019, production in industry was down by 3.5% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

France

In December 2019, output decreased in the manufacturing industry (−2.6%, after −0.4%), as well as in the whole industry (−2.8%, after 0.0%).

Italy

In December 2019 the seasonally adjusted industrial production index decreased by 2.7% compared with the previous month. The change of the average of the last three months with respect to the previous three months was -1.4%.

Spain

The monthly variation of the Industrial Production Index stands at -1.4%, after adjusting for seasonal and calendar effects.

These were disappointing and were worse than the numbers likely to have gone into the GDP data. Most significant was Germany due both to the size of its production sector and also the size of the contraction. France caught people out as it had been doing better as had Spain. Italy sadly seems to be in quite a mire as its GDP was already 0.3% on the quarter. So the background is poor for the UK.

Today’s Data

With the background being not especially auspicious then this was okay in the circumstances.

UK gross domestic product (GDP) in volume terms was flat in Quarter 4 (Oct to Dec) 2019, following revised growth of 0.5% in Quarter 3 (July to Sept) 2019.

In fact if we switch to the annual numbers then they were better than the Euro area.

When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 4 2019; down from a revised 1.2% in the previous period.

Marginal numbers because it grew by 1% on the same basis but we do learn a several things. Firstly for all the hype and debate the performances are within the margin of error. Next that UK economic growth in the two halves of 2019 looks the same. Finally that as I have argued all along the monthly GDP numbers are not a good idea as they are too erratic and prone to revisions which change them substantially.

Monthly gross domestic product (GDP) increased by 0.3% in December 2019, driven by growth in services. This followed a fall of 0.3% in November 2019.

Does anybody really believe that sequence is useful? I may find support from some of the economics organisations I have been debating with on twitter as their forecasts for today were based on the November number and were thus wrong-footed. Although of course they may have to deal with some calls from their clients first.

If we look into the detail we see that in fact our economic performance over the past two years has in fact been much more consistent than we might otherwise think.

GDP was estimated to have increased by 1.4% between 2018 and 2019 slightly above the 1.3% growth seen between 2017 and 2018.

Growth, just not very much of it or if we note the Bank of England “speed-limit” then if we allow for margins of error we could call it flat-out.

Switch to Services

Our long-running theme which is the opposite of the “rebalancing” of the now Baron King of Lothbury and the “march of the makers” of former Chancellor Osborne was right yet again.

Growth in the service sector slowed to 0.1% in Quarter 4 2019, while production output fell 0.8%.

So whilst there was not much growth it still pulled away from a contracting production sector and if we look further we see that the UK joined the Euro area in having a poor 2019 for manufacturing and production.

Production output fell by 1.3% in the 12 months to December 2019, compared with the 12 months to December 2018; this is the largest annual fall since 2012 and was led by manufacturing output, which fell by 1.5%.

Meanwhile a part of the services sector we have consistently noted did well again.

The services sector grew by 0.3% in the month of December 2019 after contracting by 0.4% in November 2019. The information and communication sector was the biggest positive contributor on the month, driven by motion pictures, with a number of blockbuster films being released in December (PDF, 192.50KB).

That is something literally under my nose as Battersea Park is used regularly for this.

Balance of Payments

There is an irony here because if we look internationally they do not balance as there are examples of countries both thinking they have a surplus with each other.

The numbers such as they are had shown signs of improvement but like the GDP data actually had a case of groundhog day.

The total trade deficit narrowed by £0.5 billion to £29.3 billion in 2019, with a £9.7 billion narrowing of the trade in goods deficit, largely offset by a £9.2 billion narrowing of the trade in services surplus.

The latter bit reminds me that I wrote to the Bean Commission about the fact that our knowledge of services trade is really poor and today’s release confirms this is still the case.

The trade in services surplus narrowed £5.1 billion in Quarter 4 2019 largely because of the inclusion of GDP balancing adjustments.

Let me explain this as it is different to what people are taught at school and in universities where net exports are part of GDP. The output version of GDP counts it up and then drives the expenditure version which includes trade and if they differ it is the trade and in particular services numbers in this instance which get altered. If they had more confidence in them they would not do that. This way round they become not far off useless in my opinion.

 

Gold and UK GDP

In the UK statisticians have a problem due to this.

For many countries the effect of gold on their trade figures is small, but the prominence of the industry in London means it can have a sizeable impact on the UK’s trade figures.

Rather confusingly the international standard means it affects trade but not GDP.

Firstly, imports and exports of gold are GDP-neutral. Most exports add to GDP, but not gold. This is because the sale of gold is counted as negative investment, and vice versa for imports and the purchase of gold. So, the trade in gold creates further problems for measuring investment.

So as well as the usual trade figures they intend to produce ones ignoring its impact.

Because a relatively small numbers of firms are involved in the gold trade, publishing detailed figures could be disclosive. However, within those limitations, we are now able to show our headline import and export figures with gold excluded.

A good idea I think as the impact on the UK economy is the various fees received not the movement of the gold itself, especially it we did not own it in the first place.

Oh and my influence seems to have even reached the Deputy National Statistician.

Gold, in addition to being a hit song by Spandau Ballet, is widely used as a store of value.

Comment

For all the hot air and hype generated the UK economic performance has in the past two years been remarkably similar. Actually the same is pretty much true of comparing us with the Euro area.As it happens 2020 looks as though we are now doing better but that has ebbed and flowed before.

Looking beneath this shows we continue to switch towards services and as I note the downwards revisions to net services trade I am left wondering two things. What if the services surveys are right and the switch to it is even larger than we are being told? Also it displays a lack of confidence in the services surveys to revise the numbers down on this scale. We know less than sometimes we think we do.

Meanwhile on a much less optimistic theme manufacturing has been in a decade long depression.

Manufacturing output in the UK remained 4.5% lower in Quarter 4 (Oct to Dec) 2019 than the pre-downturn peak in Quarter 1 (Jan to Mar) 2008.

 

 

The manufacturing sector of Germany has turned lower yet again

We have got used to seeing the economy of Germany stuttering recently. Although we only discovered it via later revisions it began in early 2018 which at the time we thought was still part of the “Euro boom”. Then 2019 became a difficult year and this morning has brought news that at the end of the year the pressure seems to have got even worse for manufacturing.

WIESBADEN – Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing decreased by a seasonally and calendar adjusted 2.1% in December 2019 on the previous month.

If we look at the break-down we find out more.

Domestic orders increased by 1.4% and foreign orders fell by 4.5% in December 2019 on the previous month. New orders from the euro area were down 13.9%, and new orders from other countries increased by 2.1% compared with November 2019.

So we have at the beginning a by now conventional trade war theme but then we note something worrying for the Euro area as a whole as there seems to be some economic contagion here. This will concern the new holder of the Grand Prix de l’Économie 2019 from Les Echos which is the President of the ECB Christine Lagarde.

There is a sectoral break-down too but I caution reading too much into it. This is because in the early part of 2018 various analysts told us that the break-down meant things would soon around and we know what happened next.

In December 2019 the manufacturers of intermediate goods saw new orders increase by 1.4% compared with November 2019. The manufacturers of capital goods saw a fall of 3.9% on the previous month. Regarding consumer goods, new orders fell 3.8%.

Indeed if we stick to economists expectations they seem to have been at it again according to the Financial Times.

 Economists polled by Reuters had expected an increase of 0.6 per cent.

Only 2.7% out….

There is a small amount of relief in finding out that the December drop was exacerbated by November being revised higher.

 For November 2019, revision of the preliminary outcome resulted in a decrease of 0.8% compared with October 2019 (provisional: -1.3%, because major orders from machinery and equipment that were reported later were not yet included).

However even so we see that the annual comparison is simply dreadful.

-8.7% on the same month a year earlier (price and calendar adjusted)

That compares to November which was 6% lower than a year before.

We get some perspective from the overall index which on a seasonally adjusted basis was 98.7 so for the first time we have a reading below the 100 average of 2015. In terms of a trend we see that things have been slip-sliding away since the 113.1 of December 2017. So that is quite a fall over two years. There has been a flicker of hope from domestic orders in the last couple of months but this has been swamped by the fall in foreign orders.

Turnover and Volume

The size of the fall is lower but we see a similar trend.

According to provisional results, price-adjusted turnover in manufacturing in December 2019 was down a seasonally and calendar adjusted 1.3% on the previous month. In November 2019, the corrected figure showed a decrease of 0.4%, compared to October 2019 (provisional: -0.5%).

We also see that the situation got worse in December.

Again we can see the overall picture because what is effectively a volume index  peaked at 108.9 in November 2017. Whereas in December it was 100.7 so not quite yet back to the average for 2015. However looking at the orders data above suggests we may see a fall below it this year.

Looking Ahead

On Monday we got the latest Markit PMI business survey and they opened with a hopeful sign.

Slower fall in new orders lifts PMI to 11-month
high in January.

This was based on a different picture to the official data we have looked at earlier as that was based on an improvement in export orders.

Principal upward pressure on the PMI in January came from a slower rate of decline in new orders, which in turn partly reflected the near stabilisation of export sales.

If we switch to actual production though we see this.

Output fell at the slowest rate for five months in January.
That said, the pace of decline remained notably faster than
that of new orders, with all three main industrial groupings .(consumer, intermediate and capital goods) recording lower production.

Again there is some potential for improvement as the rate of decline has slowed. Even so the overall situation is impacting an area which has been a strength of the German economy.

Employment continued fall sharply at the start of the year.
The rate of job shedding seen in January was unchanged
from the month before and has been exceeded only once (in
October 2019) since January 2010.

The summary tried to be upbeat for 2020.

Germany’s manufacturing sector showed more signs
of being on the way to recovery in January, with the PMI
climbing further from last September’s nadir to its highest for 11 months.

There was however quite a catch.

However, the picture has change somewhat in the short space of time since the survey was conducted [13-24 January], with the disruption to business in China from the coronavirus found to have an impact on German manufacturers’ exports and sentiment in the coming months.

The catch arrives with even the more optimistic tone for January leaving us with a spot reading of 45.3 which us well below the benchmark of 50.

The Service Sector

The business survey here was much more upbeat.

Germany’s service sector made a strong start to 2020,
recording faster growth in business activity, inflows of new
work and employment, latest PMI® data from IHS Markit
showed. Expectations towards output over the next 12
months also improved

So the German economy is to borrow a football analogy a story of two halves or as the survey puts it.

The result reflected the combination of a stronger increase in service sector business activity and a slower rate of decline in manufacturing production.

According to Markit the combination has gone from stagnation to slow growth.

Climbing from December’s 50.2 to 51.2, the Germany Composite* Output Index signalled a slightly faster, albeit modest rate of expansion.

Comment

The story here was summed up by Avril Lavigne.

Why’d you have to go and make things so complicated?

Much of this is the way that we have regularly been promised a turnaround by the media and analysts when in fact the manufacturing sector has been heading south for a couple of years now. Today’s official data may be revised a little higher ( that seems to be a developing pattern ) but 2019 was a very poor year for German manufacturing. Now another reported improvement looks likely to have been knocked on the head by the impact of the Corona Virus in what is looking ever more like a perfect storm.

If we switch to the ECB we see that for once its monetary policy seems appropriate for Germany. It has slowed down and the ECB has cut its interest-rate and although if you read this from Bundesbank President Jens Weidmann on Tuesday it seems he does not think it will help much.

Recent years have demonstrated that traditional interest rate policy may reach its limits.

Also does this count as an emergency again?

Mr Weidmann continues to take a critical view of the large-scale purchases of government bonds in the euro area. “In my opinion, they should be used only in emergencies.”

The undercut is whether the easy monetary policy makes much difference to a manufacturing slow down driven by a trade war and now a viral outbreak? I do not.Also we need to remind ourselves that the exchange rate policy where the Euro is much lower than where a Deurschemark would be continues to benefit Germany.

So Germany is on a recession tightrope where services are pulling it up but manufacturing pulling it down. So just as the UK departs the European Union the Germans are behaving like us. Also spare a thought for Eurostat which produced a 0.1% GDP growth reading for the Euro area at the end off 2019 but did not known this about Germany.

The Investing Channel

 

China is being hit hard by its economic virus

Today brings an opportunity to take a fresh look at the economic story of 2020 which is the impact of the Corona Virus on the Chinese and world economies. We can reverse our normal order and look at the financial market impact but before we do so I think we should also note the suffering and deaths behind this.

Jittery investors erased almost $400 billion from Chinese stocks, with the Shanghai Composite index shedding up to 8% to hit a one-year low, according to Reuters calculations.

As you can see the Reuters journalists were unable to resist the temptation of writing a large number ( $400 billion ) in spite of the fact they are using a marginal price for some to value the total. Actually but for the price limits there would have been further falls.

Stocks tumbled across the board, with nearly 3000 stock closing at limit-down price. ( YuanTalks)

Although not every share fell and I guess you will not be suprised to see who did not.

Mask producers and some medical related companies outperformed.

The traditional response to this is for the bond market to rally and it did not disappoint.

#China’s 10-year #treasury futures closed 1.37% up at the highest level in more than 3 years as investors dump risky assets. ( YuanTalks )

This meant that the benchmark ten-year yield pushed below the 3% barrier to 2.86% at the close. So heading towards the levels seen by us Western Imperialist Capitalists.

The exchange rate has a more mixed picture. Whilst the Yuan fell by more than 1% versus the US Dollar this morning and pushed through the 7 Yuan threshold it is also true that we are where we were three months ago. In the circumstances we had seen a surprising stability as whilst there had been plenty of media rhetoric a move from 6.85 to 6.92 was not a lot. So it is over playing it to say it is the dog that did nor bark it has been quiet.

People’s Bank of China

This stepped up to the plate today according to the South China Morning Post.

In the face of the “epidemic situation”, the People’s Bank of China (PBOC) said on Sunday it would “inject 1.2 trillion yuan via reverse repo operations on February 3 to ensure sufficient liquidity supply.”
“The liquidity of the overall banking system will be 900 billion yuan more than the same period of last year,” the central bank added.It is the first time that the central bank has made such an announcement and also marks the largest single-day reverse repo operation it has ever conducted.

The issue was partly caused by the fact that there were previous operations which were maturing so we need to see the net effect.

According to Reuters calculations, 1.05 trillion yuan (US$151 billion) worth of reverse repos are set to mature on Monday, meaning that 150 billion yuan in net cash will be injected.

This also came with a small interest-rate cut.

SHANGHAI (Reuters) – China’s cut to its reverse repo rate should alleviate the shock to the real economy from a virus outbreak and is a good move to stabilize expectations and restore financial market confidence, a central bank adviser said on Monday.

Ma Jun’s comments followed an unexpected decision by the central bank for a cut of 10 basis points in the interest rate on reverse repurchase agreements.

Thus we have seen the traditional central banking response to an expected equity market decline as well as a reason for today’s fall in the Yuan.

Manufacturing

This is a rather hot topic in the circumstances as we note this morning’s release.

“The Caixin China General Manufacturing PMI stood at
51.1 in January, down from 51.5 in the previous month. The
manufacturing sector expanded at the slowest pace since August, despite growing for six consecutive months, indicating a mild economic recovery.”

It is hard what to know to make of that and even more so this.

That said, business confidence continued to improve, with the gauge for future output expectations on the rise and tending to recover after two years of depression, due chiefly to the phase one trade deal between China and the U.S

Looking at the dates this gives us a snapshot just before the virus hit and perhaps we should be expecting something more like this bit going forwards.

Production growth slowed, with the output subindex posting its lowest reading since last August. The employment subindex returned to negative territory.

Whilst it also covers other sectors of the economy the official industrial data for December was somewhat downbeat.

BEIJING (Reuters) – China’s industrial firms posted their first annual decline in profits in four years in 2019, as the slowest economic growth in almost 30 years and a bruising trade war with the United States hit the country’s factories.

Official data released on Monday showed industrial profits declining 3.3% on an annual basis to 6.1996 trillion yuan ($897.96 billion) in 2019, compared with the 2.1% dip in the January-November period, the National Bureau of Statistics (NBS) said on its website. It was first full-year decline since 2015 when profits fell 2.3%.

Hong Kong

This has a role as a type of offshore hybrid for the Chinese economy. Even before the Corona Virus it had been seeing economic problems due to the protests there.

According to the advance estimates, GDP decreased by 2.9% in real terms in the fourth quarter of 2019 from a year earlier, compared with the decrease of 2.8% in the third quarter of 2019. The decline of was mainly attributable to the weak performance in both domestic and external demand. For 2019 as a whole, GDP decreased by 1.2% in real terms from 2018. ( Hong Kong Statistics )

The situation is presently in flux with @fastFT announcinng this earlier.

Hong Kong closes border crossings with China

Comment

The issue here twists on the fact that the Corona Virus is new. After all a flu epidemic would be considered not that major on this scale, but it is the fear of the unknown driving this. But the quarantining response has hit the Chinese economy and is being felt around the world. For example the reduction in oil demand has led to this.

OPEC+ IS CONSIDERING FURTHER OIL OUTPUT CUT OF 500,000 BPD DUE TO VIRUS IMPACT ON DEMAND – TWO OPEC SOURCES MOST OPEC MEMBERS AGREE ON NEED TO CUT OIL OUTPUT FURTHER || OPEC+ NOW CONSIDERING MEETING ON FEB. 14-15 – OPEC SOURCE ( @FirstSquawk )

This is in reply to a price for a barrel of Brent Crude Oil which has fallen below US 57 Dollars today. Those who just follow the headlines will be a bit surprised as we have in recent times twice had headlines of it exceeding 70 US Dollars but the truth is that without something special to boost it the oil price has been slip-sliding away.

Switching to Dr. Copper then a futures price of US $2.53 suggests trouble ahead. As to Iron Ore the price falls are already impacting on the South China Territories. From Commodity News.

THE deadly coronavirus outbreak threatens to put a significant dent in Western Australia’s finances amid a plunge in the iron ore market.

Premier Mark McGowan says a 13 per cent decline in the iron ore price over the past fortnight to $US81 ($A121) per tonne is one of several concerns for a state economy heavily dependent on a lucrative trade partnership with China.

Construction has ground to a halt across China amid travel restrictions and port closures, prompting investors to dump iron ore shares.

Meanwhile if you want some positive news here is an example from planet ECB.

ECB’s De Guindos: Starting To See Signs Of Stabilisation On A Global Level. ( @LiveSquawk )

Podcast

Both China and the world economy are being impacted by the Corona Virus

The weekend just gone was one where an epidemic began to have more economic consequences. In a world where there appears to be a Trump Tweet for pretty much everything this one from Friday is not going so well.

China has been working very hard to contain the Coronavirus. The United States greatly appreciates their efforts and transparency. It will all work out well. In particular, on behalf of the American People, I want to thank President Xi!

The media has revved itself up about the Corona virus and is in some cases treating it like a television series I remember from my childhood called Survivors.

 It concerns the plight of a group of people who have survived an apocalyptic plague pandemic, which was accidentally released by a Chinese scientist and quickly spread across the world via air travel. Referred to as “The Death”, the plague kills approximately 4,999 out of every 5,000 human beings on the planet within a matter of weeks of being released. ( Wiki)

Fortunately we are a long way away from that situation although it must be awful for those affected. Let us switch our emphasis to the economic affects as we live up to the description of economics as the dismal science.

China

More and more cities are in lock down and this morning there has been this announcement.

SHANGHAI (Reuters) – The Shanghai government has said companies in the city are not allowed to resume operations before Feb. 9, an official at the municipality announced at a press conference on Monday.

The measure is applicable to government and private companies but is not applicable to utilities and some other firms such as medical equipment companies and pharmaceutical companies, the official said.

China’s cabinet has announced it will extend the Lunar New Year holidays to Feb. 2, to strengthen the prevention and control of the new coronavirus, state broadcaster CCTV reported early on Monday.

This will mean a lot of economic disruption as highlighted here by the Financial Times.

the manufacturing hub of Suzhou has postponed the return to work of millions of migrant labourers for up to a week. Suzhou is one of the world’s largest manufacturing hubs where companies such as iPhone contractor Foxconn, Johnson & Johnson and Samsung Electronics have factories.

One can see a situation where supply chains will be interrupted and presumably inventories will rise until there is not more room to store them. This may add to what has been something of a Perfect Storm for manufacturing over the past year or so.

According to the FT there is another area which has been hit hard.

Railway transport on Saturday, the first day of the lunar new year, fell about 42 per cent compared with the same day last year, according to the transportation ministry. Passenger flights were down by roughly 42 per cent and overall transportation across the country declined about 29 per cent.

If Chinese travel forms are anything like those of the western capitalist imperialists with their rather thin margins it may not be long before some are in trouble which may be why we have seen this being announced.

Companies would receive support “through measures such as encouraging appropriate lowering of loan interest rates, improving arrangements for loan renewal policies and increasing medium-term and credit loans”, the China Banking Regulatory Commission said.

We get an idea of the feared impact on the travel industry worldwide via the @RANSquawk update on share price moves today.

Air France (AF FP) -4.6%

Kering (KER FP) -4.6%

easyJet (EZJ LN) -4.0%

LVMH (MC FP) -3.5%

Ryanair (RYA LN) -3.0%

Airbus (AIR FP) -2.5%

So the initial impact is on manufacturing and consumption especially travel. That will be hitting a Chinese economy that was already slowing with reported economic growth falling to 6.1% at the end of last year.

The World

It may not be the best time for the FT to run with this.

Signs of a global recovery in manufacturing are starting to show

For example should the announcement below come to pass you would think it would have to affect trade between Germany and China.

GERMAN FOREIGN MINISTER MAAS SAYS WE ARE CONSIDERING EVACUATING GERMAN CITIZENS FROM CHINESE REGION AFFECTED BY CORONAVIRUS  ( @DeltaOne )

That is certainly the picture being picked up by the price of crude oil which has been falling the past few days.

The coronavirus could cut into demand by around 260,000 bpd and reduce oil prices by about $3 per barrel, according to a report from Goldman Sachs. However, in the days following the publication of that estimate, oil prices fell by even more than $3. ( OilPrice.com ).

In fact the price of a barrel of Brent Crude Oil has fallen to US $58 as I type this as it tries to factor in lower travel demand and manufacturing. It would be even lower if the disastrous intervention by the West in Libya had not meant its output was so unreliable. Also the medical diagnosis of Dr. Copper is clear as we see it at US $2.63 this morning as opposed to the US $2.87 of as recently as the 16th of this month.

Bond Markets

These have been given yet another leg up as lower growth prospects mean they are more attractive. Although of course that theme is troubled these days as for example in Germany you do not get any yield and instead have to pay! As its bond market rallies we see that its benchmark ten-year yield has fallen to -0.37%. In my home country the UK the situation is also complex as it looks as though we are setting for a Bank of England interest-rate cut later this week as the Gilt market rallies and the ten-year yield falls to 0.53%. But I think it is really following other markets and perhaps trying to price the prospect of lower inflation as oil and commodity prices fall.

Stock Markets

These attract media attention much more.

FTSE 100 ‘in panic mode’ as coronavirus fears push it into red ( City-AM )

Actually it is down a bit over 2% and for context is above 7400 as I type this. so it is an odd type of panic that leaves it not far from the highs. Of course, equity market falls are persona non grata in the era of QE so let us remind ourselves that with the Nikkei 225 index falling 2% in Japan the Tokyo Whale will have had its buying boots on. Thus the Bank of Japan will have edged ever nearer to owning 100% of the exchange traded fund indices it buys.

Comment

We see a form of domino theory here.There are clear impacts on the travel and manufacturing sectors of China in particular. This will reduce economic growth although there will be an offset from the medical sector which will be at a maximum. Those who rely on Chinese economic output will be the first affected and once we move beyond airlines it is hard not to think of the South China Territory otherwise known as Australia. Lower iron ore demand for instance.

World manufacturing supply chains will be affected and as we have already noted this is another problem for that sector. If we look at a specific example all sorts of things may or may not happen to the planned Tesla gigafactory in Shanghai. Meanwhile central banking Ivory Towers are being instructed to research whether QE and lower interest-rates can battle the Corona virus.

Podcast

Even better than expected UK GDP seems unlikely to stop the Bank of England cutting interest-rates

Today brings the UK back into focus as we have what is called a theme day with data across a wide range of economic influences such as production, manufacturing,services ,construction. trade and most of all GDP ( Gross Domestic Product). Yes it is too many in one go and monthly GDP has already demonstrated a track record of being erratic but that has not deterred our official statisticians. But before we get to that the Bank of England has continued its campaign to talk the UK Pound £ lower over the weekend. Here is the Financial Times from yesterday.

An influential member of the Bank of England’s monetary policy committee has said he would vote for a cut in interest rates later this month if key data do not show a bounce in the economy following the December general election.

Have you guessed who it is? I have to say I would be far from sure as my view is that the other 8 members of the monetary policy committee or MPC exist to say “I agree with Mark (Carney)”. Mind you the Financial Times does love to flatter the establishment as we note that my theme that the other 8 members serve little or no useful purpose these days gets another tick in the box. Anyway here it is.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

That does not rule out a move this month as the meeting is at the end of it with the announcement on the 30th although of course they vote on the evening before. For “live” meetings this so-called improvement by Governor Carney is a really bad idea which has been reinforced recently by the news that hedge funds were receiving an “early wire” during press conferences.

We then get more of an explanation.

“Personally I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other and the next few [MPC] meetings are absolutely live,” he told the Financial Times. “I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.”

You might think that after the post EU leave vote debacle when it mistakenly rushed to cut interest-rates because of the surveys  the Bank of England might steer clear of relying on them so much.

We will get a lot of information as soon as the end of January,” said Mr Vlieghe. ““We’ll get a lot of business and some household surveys that cleanly relate to the period after the election, so that will give us an initial read as to how people are responding.”

We do get a slightly odd section which suggests that someone at the Financial Times has actually believed all the Forward Guidance mumbo-jumbo.

Financial markets are not currently pricing any movement in rates above the current 0.75 per cent over the next five years.

If you look at the five and two year Gilt yields in a broad sweep they have been suggesting a cut for some months now as regular readers will be aware.

Of course the media keep fooling for this as they get their moment in the headlines as we recall this from Dharshini David of the BBC last May.

Today the Bank of England’s Governor admitted to me that rates are likely to rise faster than the markets expect. So when can we expect the first move? My analysis for 

She fell for the promises of the unreliable boyfriend hook line and sinker and in response has blocked me on Twitter.

Forward Guidance

It is hard not to have a wry smile at the Bank of England moves as the basic data has turned out better than expected. Let is open with today’s main number.

Rolling three-month growth was 0.1% in November 2019, down from an upwardly revised 0.2% in October.

Not much I admit but in the circumstances any growth is okay. Also that sentence is both true and misleading because October was originally reported as 0% but there have been ch-ch-changes since.

The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture.

We previously were told that both 3 monthly and monthly growth were 0% whereas now they are 0.2% and 0.1% respectively. So we are ahead of where we thought we were in spite of this.

Monthly gross domestic product (GDP) fell by 0.3% in November 2019, driven by falls in both services and production. This followed growth of 0.1% in both September and October 2019.

The monthly numbers are unreliable and are showing hints of a downwards bias as explained below.

However, both September and October 2019 have been revised up by 0.2 and 0.1 percentage points respectively, giving extra strength to the most recent rolling three-month estimate. The revisions to September were predominantly driven by new construction data, whereas October’s revisions were driven by new data in services and production.

It is good that the numbers are improved but the truth is that the variation is presently too high for them to be useful.

As to upwards surprises well the GDP number reinforces one from later on last week.

The latest survey of UK Chief Financial Officers shows an
unprecedented rise in business sentiment. The fourth quarter survey took place in the wake of the UK general election, between 13th December and 6th January. Confidence has seen the largest increase in the 11-year history of the survey taking it to its highest
ever level. ( Deloittes )

Manufacturing

If we look for the other side of the coin there is this from this morning.

The monthly decrease of 1.7% in manufacturing output was because of downward contributions from 10 of the 13 subsectors; led by notable falls from transport equipment (3.4%), chemicals and chemical products (4.7%) and food, beverages and tobacco (1.8%).

The November data meant that the last 3 months were poor too.

 compared with the three months to August 2019; this was led by manufacturing output, which fell by 0.8%.

If we look into the detail of the November data there is more than a little hope that it was driven lower by factors which we have got used to and in the latter case has been doing well overall.

the motor vehicles, trailers and semi-trailers industry (6.1%), which was impacted by factory shutdowns during November 2019…….widespread weakness from chemicals and chemical products (4.7%), following on from the impact of maintenance and shutdowns.

But the reason I have pointed this out is not only to show the other side of the coin but because this area is seeing quite a severe depression.

Manufacturing output in the UK remained 2.9% lower for the three months to November 2019 than the pre-downturn peak for the three months to March 2008.

It looked for a while that we might escape it but the impact of the trade war left our fingers grasping at air as we now face this.

Additionally, the current three-monthly rolling index level is the lowest since July 2017.

Comment

Regular readers will be aware that I thought the Bank of England was readying itself for an interest-rate cut last year. Now with its usual impeccable timing it seems to be forming up as a group just as the economic news shows a hint or two of being brighter. In addition to the data above this months Markit PMI showed an improvement as well albeit to somewhere around flatlining. The Deloittes survey was potentially especially revelant as it relates to business investment which has been weak and thus could have a spell of “catch up” now the political  and Brexit element looks clearer. As ironically Gerthan Vlieghe pointed out.

His main expectation was that the UK outlook would improve because there was a reduction in no-deal Brexit risks, plans for increased public spending and better news about a stabilised global economy.

But there is more to it than this as there is the fundamental issue of whether another 0.25% cut will make any difference. Having watched the latest prequel to the Alien(s) series of films over the weekend I am reminded of the words of the little girl Newt.

It won’t make any difference.

If we look at the weakest sector manufacturing all the interest-rate cuts we have seen have not turned things around and prevented a depression. Indeed if we look to Germany as we did only last week even an official interest-rate of -0.5% has not shielded its sector from the present trade war.

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