Sadly a strong UK trade performance (for once) gets overlooked by the GDP release

Late on Friday the credit ratings agency Moodys offered its latest opinion on the state of play on the UK.

Leading ratings agency Moody’s has signalled it is poised to downgrade the credit rating on Britain’s government debt, warning that Brexit has triggered an “erosion in institutional strength” that threatens the UK’s financial credibility.

The ratings agency, which scores debt on the basis of how likely they are to default, changed the outlook on its Aa2 rating on the debt issued by the UK government from “stable” to “negative”.

That implies a cut to the actual rating could be coming imminently. ( Sky News)

Unfortunately for Sky News they went wrong with the first word in two respects. These days there is no such thing as a leading ratings agency and of course their operations are lagging and not leading. Also if it was going to be imminent they would have actually done it.

Indeed the crux of the matter was rather curious.

Moody’s said: “In the current political climate, Moody’s sees no meaningful pressure for debt-reducing fiscal policies.”

That was an odd statement because as I pointed out on social media the falls in bond yields have changed matters on this subject. The UK fifty-year Gilt yield closed the week at 1.23% whereas the Moodys report and some of the reporting seemed to be from an era where it was say 4% or 5% so if you like in one of the forecasts by the Office for Budget Responsibility or OBR.

Moody’s said Britain’s £1.8trn of public debt – more than 80% of annual economic output – risked rising again and the economy could be “more susceptible to shocks than previously assumed”.

Indeed Moodys seemed to be playing politics.

Moody’s said that “Brexit has been the catalyst for [an] erosion in institutional strength” which helped explain the change in outlook.

It said the main rationale for the change of view was firstly that “UK institutions have weakened as they have struggled to cope with the magnitude of policy challenges that they currently face, including those that relate to fiscal policy”.

What we do know is that fiscal policy is set to be looser like er France and well.

At Aa2, Britain is on the same level as France but below Germany’s AAA rating.

GDP Growth

The X-Factor in all of this is how the economy grows which is where today’s news comes in. It was hard not to have a wry smile at the Moodys report arriving just a say after the Bank of England had raised its growth estimate.

Bank staff’s estimate for GDP growth in 2019 Q3 as a whole had been revised up to 0.4%, from 0.2%
at the time of the Committee’s previous meeting. This was largely the result of an upward revision to estimates
of service sector output for June and July.

If we move to the actual numbers released this morning we were told this.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.3% in Quarter 3 (July to Sept) 2019. When compared with the same quarter a year ago, UK GDP increased by 1.0% in Quarter 3 2019; this is the slowest rate of quarter-on-year growth since Quarter 1 (Jan to Mar) 2010.

So some growth but the annual number has been pulled lower by the contraction in the second quarter. Overall we are very similar to the Euro area where annual growth is 1.1% and quarterly 0.2%. The breakdown was familiar for the UK as well.

The service and construction sectors provided positive contributions to GDP growth, while output in the production sector was flat in Quarter 3 2019.

We got more detail here.

Manufacturing was flat in Quarter 3 2019, as was production. Services output increased by 0.4% in Quarter 3 2019, following the weakest quarterly figure in three years in the previous quarter. Construction output experienced a pickup following a weak Quarter 2, increasing by 0.6%.

Regular readers will know that I have long argued that we have in fact had a “march of the services” rather than a “march of the makers” and that the services sector is probably above 80% of the economy now. On a quarterly basis we saw this.

Information and communication was the largest contributing sector to growth in the latest quarter. It increased by 0.8% and contributed 0.08 percentage points.

On an annual basis we saw this.

In the three months to September 2019, services output increased by 1.4% compared with the three months ending September 2018; public sector dominated industries accounted for one-third of this growth.

Maybe a flicker of Brexit preparations there in the annual numbers. Also if you see a Luvvie today please be nice to them/

Long-term strength within the computer programming and the motion pictures industries are the main reasons for the sectors strong performance from Quarter 1 2015.

On the other side of the coin it was always going to be a difficult spell for manufacturing.

The 0.4% monthly decrease in manufacturing output was widespread with falls in 8 of the 13 subsectors; the largest downward contribution came from a 5.1% fall in basic pharmaceutical products.

The September numbers above do at least have the caveat that pharmaceutical products do not run to a monthly cycle and have wide swings. In fact if you will indulge me for a hundredth of s decimal point the UK fall in industrial production in September was the pharmaceutical industry.

I am afraid that there is no other way of describing this than calling it a depression.

Manufacturing output in the UK remained 3.2% lower in Quarter 3 (July to Sept) 2019 than the pre-downturn peak for Quarter 1 (Jan to Mar) 2008.

Comment

In terms of the Goldilocks the UK GDP story is of lukewarm porridge. We have some growth but not much as we edge forwards. The pattern is erratic on a quarterly basis ( 0.6%,-0.2%,0.3%) providing yet more evidence that the introduction of monthly GDP numbers was a mistake. If we switch to Moodys well we continue to be able to inflate our debt away.

Nominal GDP increased by 0.5% in Quarter 3 2019, down from 0.7% in Quarter 2 (Apr to June) 2019.

But as ever there are caveats and here is one from an area that did really rather well.

In Quarter 3 2019, the UK trade deficit narrowed to 1.2% of nominal GDP……..The narrowing of the trade deficit largely reflects strong export volume growth of 5.2% in Quarter 3 2019. Trade in goods exports grew 5.0%, reflecting increases in machinery and transport equipment and chemicals, while trade in services exports grew 5.3%; this was a result of “other business services”.

But this does not count as it goes in the expenditure and not the output version of GDP so we need to cross our fingers that it will be picked up there. When the numbers are tallied the income and expenditure versions are usually aligned with the output one which kind of begs the question of why have them?

Also there is this.

education, 68.9% public sector and 31.1% market sector

human health activities, 85.4% public sector and 14.6% market sector

residential care activities, 51.1% public sector and 48.9% market sector

social work activities without accommodation, 49.6% public sector and 50.4% market sector

Best of luck with really knowing what has gone on in those areas as government collides with the private-sector. There are plenty of issues here.

Finally there was this highlighted by the Bank of England.

The Committee discussed the recent Blue Book revisions to estimates of the household saving ratio. The
level of the saving ratio since the start of 2017 had been revised up by 1.4 percentage points on average to
reach just under 7% in 2019 Q2, primarily reflecting new HMRC data on self-employment income.

The truth is that we need a touch of humility as we know a fair bit less than we often think we do.

Podcast

 

 

 

 

 

 

 

How will Italy cope if its economy shrinks again?

Over the past few says the Standard and Poors ratings agency has been running its slide rule over Italy and yesterday in his final press conference Mario Draghi of the ECB indulged in some trolling.

No, of course not. Things have changed completely and frankly, everybody now in Italy said and stated that the euro is irreversible. So while there may have been hypothetical doubts in one part of the governance of the country, there aren’t any more, so it’s been accepted.

I am not sure if that was a promise or a type of threat! The problem with this sort of rhetoric though had already been highlighted by Mario himself.

 Incoming economic data and survey information continue to point to moderate but positive growth in the second half of this year.

It was in the bit where he felt the need to point out that growth would be positive and was perhaps a response to this from Markit earlier that day.

The eurozone economy started the fourth quarter
mired close to stagnation, with the flash PMI
pointing to a quarterly GDP growth rate of just
under 0.1%………Optimism about future prospects deteriorated further in October to the lowest for over six years,

They had even dragged Mario into it.

The survey indicates that Mario Draghi’s tenure at
the helm of the ECB ends on a note of near-stalled
GDP, slower jobs growth, near-stagnant prices and
growing pessimism about the outlook.

As you can see they gave a different picture which was of marginal/no growth that looked set to deteriorate. Actually Mario was worried about that too if we look further down his speech.

The risks surrounding the euro area growth outlook remain on the downside. In particular, these risks pertain to the prolonged presence of uncertainties, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets.

Also whilst Markit did not give specific detail for Italy this was troubling.

The rest of the euro area saw a near-stalling of
growth, with output rising at the weakest pace since
the current upturn began in August 2013

What about Italy?

This reminds me of something from the French statistics office that I quoted on Wednesday.

Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).

If you are already not growing and things are getting worse that has a clear implication and it takes us back to our “Girfriend in a coma” theme for Italy. This is where it does not fully participate in economic upswings but sadly does in downswings.

If we look at the area that causes the most concern around the world right now the Italian statistics office told us this earlier this month.

In August 2019 the seasonally adjusted industrial production index increased by 0.3% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -0.3%.  The calendar adjusted industrial production index decreased by 1.8% compared with August 2018 (calendar working days being 21 versus 22 days in August 2018).

The manufacturing sector declined by 2.8% on a year ago and the manufacture of transport equipment fell by 6.9%.

So the pattern here was of recovery in 2015 followed by growth in 2016 and 17 but the growth slowed at the beginning of 2018 and has turned into declines. The underlying index is at 104.9 where 2015=100 so we see that the growth spurt is slip-sliding away.

The problem is that there is another catch.

The unadjusted industrial new orders index decreased by 10.0% with respect to the same month of the previous year (-4.0% in domestic market and -16.3% in non-domestic market).

This meant that the seasonal adjustment needed to do some quite heavy lifting to get us to this.

The seasonally adjusted industrial new orders index increased by 1.1% compared to July (+1.1% in domestic market and +1.0% in non-domestic market); the average of the last three months decreased by 1.6% compared to the previous three ones.

The Banks

If Italy is to change its economic path then it needs a reformed banking sector but as this from Reuters highlights we are back to the same old problems.

 Italy wants to shield Monte dei Paschi (BMPS.MI) from bad loan losses as it prepares the bailed-out bank for a sale, but faces resistance from European Union competition authorities, two sources close to the matter said.

Yep we are back to the world’s oldest bank which to link to the start of this story has operated much of this century under what are called the Draghi Laws. As ever the can is being kicked via a Special Purpose Vehicle or SPV.

Sources have told Reuters the Treasury wants to lower the impaired debt ratio to 5% by spinning off some 10 billion euros in problem loans that would be merged with the assets of Treasury-owned bad loan manager AMCO.

We find ourselves taking a trip into a type of fantasy land yet again.

Monte dei Paschi values debts unlikely to be repaid in full at just over half their nominal value and its worst performing loans at 38%.

That compares with an estimated average price of 27% of nominal value for soured loan transactions in Italy this year, a Banca IFIS report states.

How much? Well here is another way of putting it.

One of the sources said a sale would imply a 1.5 billion euro loss for Monte dei Paschi, hurting the bank’s minority shareholders but not the Treasury, which would benefit from the lower transfer price since its controls 100% of AMCO.

This is a situation that we have observed time and time again in the Italian banking crisis. This is where fantasy numbers are used to fudge the situation but sooner or later they end up facing reality. In this case it is minority shareholders in Monte Paschi who would take the punishment and remember they may well recall being told by Prime Minister Renzi that the bank was a good investment.

Fiscal Position

On Monday we got a reminder that it is not the fiscal deficits that are a problem for Italy.

The government deficit to GDP ratio decreased from 2.4% in 2017 to 2.2% in 2018. The primary surplus as a percentage of GDP was 1.5% in 2018, up by 0.2 percentage points with respect to 2017.

The government debt to GDP ratio was 134.8% at the end of 2018, up by 0.7 percentage points with respect to the end of 2017.

We have had a lot of political rhetoric about it borrowing more but overall Italy has not. The picture has been confused by Eurostat’s inability to produce seasonally adjusted numbers for Italy but the unadjusted ones are if anything lower than in 2018.

In the short-term it remains very cheap for Italy to borrow with its ten-year yield being a mere 1.01%. That is amazingly cheap in the circumstances and can only represent the expectation of being able to sell to the ECB at a higher price as there is a genuine danger of a downwards spiral in an economic slow down.

Comment

We find that the ongoing Italian economic weaknesses such as low growth in the good times and a banking sector full of zombies ready for Halloween leave it exposed to any economic downturns. It is a lovely country and on some viewings has economic strengths as the Bank of Italy reports.

Exports continued to increase in the second quarter, despite the contraction in international trade. The current account surplus rose further, to 2.8 per cent of GDP; foreign sales may have faltered in the following months.

But this leads to another fail for economics 101 as this should lead to economic dynamism except in Italy it never does.

Economic activity in Italy increased only slightly in the second quarter and, in the light of the available data, it could have remained almost stationary in the third……..There is still the risk that the unfavourable developments in industry will be transmitted to the other sectors of the economy.

Any further weakness in economic growth will put even more pressure on this.

The Government estimates net borrowing at 2.2 per cent of GDP this year, the same as in 2018. The debt-to-GDP ratio is expected to rise from 134.8 to 135.7 per cent of GDP.

So whilst I wish Mario Draghi a happy retirement it is also true that his tenure at the ECB has done little for his home country and via the way policy has been tilted towards an increasingly zombified banking sector may in fact have made things worse.

the next fact can be swung several ways.

Since 2015, the resident population has been decreasing, setting up a phase of demographic decline
for the first time in the last 90 years. At 31 December 2018 the population amounted to 60,359,546
residents, over 124 thousand less than the previous year (-0.2%) and over 400 thousand less than four
years earlier.

On the positive  side it helps GDP per person and fewer people must help the green agenda. On the negative side an ageing and shrinking population is less able to deal with the sizeable national debt.

 

 

 

 

 

 

 

Worrying signs for the economy of France as the manufacturing downturn bites

Today has opened with some troubling news for the economy of France and the area driving this will not be a surprise. The official confidence survey series has produced this headline.

In October 2019, the business climate has deteriorated in the manufacturing industry

This is a sign that the problems we see in so much of the world have been hitting France and there has been a particularly rapid deterioration this month.

According to the business managers surveyed in October 2019, the business climate in industry has deteriorated compared to September. The composite indicator has lost three points to 99, moving just below its long term average (100).

If we look back at this series we see that it peaked at 113,5 back in February 2018 and is now at 99.4 so quite a decline which has now moved it below its long-term average, This matters as it is a long-running series and of course 100 for manufacturing means relative decline.

If we look for specific areas of weakness we find these.

In the manufacture of equipment goods, the business climate has lost three points and moved below its long-term average (97). In the in the electrical equipment and in the machinery and equipment branches, the balances of opinion have get worse, more sharply than in September, to stand significantly below their average.

And also these.

The business climate has deteriorated in almost all subsectors, particularly in chemicals where the deterioration is the most significant. In this subsector, as in basic metals, the business climate indicator stands largely below its long-term average.

Maybe a little surprisingly this area seems to be hanging in there.

In the manufacture of transport equipment, the business climate indicator has lost two points in October, after a stability in the previous month, and stands slightly below its long-term average.

That is in spite of this.

The climate indicator has decreased again in the automotive industry and has practically returned to the low point of July. The balance of opinion on general production prospects contributes the most sharply to this deterioration.

They do not say it but the motor industry has fallen to 91.

On the other side of the coin the computing and optical sector seems to be improving.

If we bring it all together then there are concerns for other economic measures from this.

Considering employment, the balances opinion on their past variation and perspectives have declined slightly. Both indicators stand however largely above their long-term average.

That does not seem set to last and for what it is worth ( it is volatile) there is also this.

The turning-point indicator has moved down into the area indicating an uncertain economic outlook.

For context the official output series has been telling us this.

In August 2019, output diminished in the manufacturing industry (−0.8%, after +0.4%)……..Over the last three months, output declined in manufacturing industry (−1.2%)……Manufacturing output of the last three months got worse compared to the same three months of 2018 (−0.8%),

That was something of a troika as all three ways of measuring the situation showed falls.

Is it spreading to other sectors?

So far the services sector is not only ignoring this it is doing rather well.

According to business managers surveyed in October 2019, the business climate in services is stable. At 106, it stands well above its long-term average (100).

The only real flicker is here.

More business managers than in July have reported demand difficulties only.

Construction is apparently continuing the boom which began in 2015.

According to the business managers in the building construction industry surveyed in October 2019, the business climate is stable. The composite indicator stands at 112, its highest level since May 2008, largely above its long-term average (100).

This brings me to the official forecast for economic growth from the beginning of the month.

However, the macroeconomic scenario for France remains virtually unchanged since the June 2019 Conjoncture in France report (with projected growth of +0.3% each quarter through to the end of the year, and +1.3% as an annual average in 2019.

The problems you see are all the fault of whatever is French for Johnny Foreigner.

The international economic environment is deteriorating, due to a combination of several factors: protectionist pressures, uncertainties surrounding Brexit, doubts about the orientation of economic policies in certain countries, etc. Growth forecasts for most of France’s economic partners are therefore revised downwards.

Indeed their statisticians seem to abandon European unity and indulge in some trolling.

These international shocks have had a more negative impact on economic activity in Germany than in France. Indeed, growth in Germany stagnated in the spring (–0.1% after +0.4%), with the weakening of international trade and the slowdown in corporate investment hitting industry much harder than services.

If only German had a word for that. Meanwhile this bit just seems cruel.

Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).

Monetary Policy

Here we go.

the European Central Bank (ECB) extended its highly accommodating monetary policy in September, among other things by lowering the deposit rate and resuming its bond purchases as of November 2019 for a total of €20 billion per month.

I like the way they have cottoned onto my idea that markets mostly respond to QE before it happens and sometimes quite a bit before.

As a result, Eurozone sovereign yields entered negative territory (in the spring for the German ten-year yield and in the summer for the French yield).

Fiscal Policy

There is a clue above that there have been ch-ch-changes. That is represented by the ten-year yield in France being -0.1% as I type this. Borrowing is not a complete freebie as the thirty-year yield is 0.7% but ECB policy ( 420 billion Euros of French government bonds and about to rise) means France can borrow very cheaply.

France is taking more of an advantage of this than my country the UK because it borrowed at an annual rate of 3,5% of GDP in the first quarter of the year and 3.4% in the second. Contrary to much of the official rhetoric we see rises of the order of 1% of GDP here so we can see how domestic demand in the economy has been “resilient”. It is also presumably a response to the Gilet Jaunes issue.

France in debt terns is quite tight on a big figure change and Japan excepted the big figure change as the debt to GDP ratio was 99.6% at the end of June. It will be under pressure from the extra borrowing and thus very dependent on economic growth remaining to stay under 100%.

The number being like that explains why the Governor of the Bank of France diverted us somewhat when he was in New York a week ago.

The euro area has a lower level of public debt (85%) than in the United-States (104 %) or the UK (87%),

Actually the UK is in fact below 85% so it was not his finest hour.

Comment

Today’s journey brings us two main themes. The first is that the French economy has been boosted by some extra government spending. This is in stark contrast to Germany which is running a fiscal surplus. But the ~1% of GDP increase seems to have got a little lost in translation as economic growth has only been ~0.6% so far. However it is a case for counter cyclical fiscal policy as otherwise the French economy may have contracted.

Now we see signs of a downwards turn in the already weakened manufacturing sector which poses a problem with fiscal policy already pushing the boundaries of the Maastricht rules. Also if we look deeper I find this deeply troubling from the Governor of the Bank of France.

Despite this gloomy context, the French economy is resilient, with growth at 1.3% close to its potential.

This is a reference to what is the new central banking standard of annual GDP growth having something of a speed limiter at 1.5%. Let me give you two problems with it. Firstly they seem to get a free pass as to their role in this as one of the biggest changes has been their own actions. Secondly it ignores countries like Spain which may now be slower but have in recent times done much better than this.

 

 

 

 

The UK Services sector is the shining star of the economy and GDP

Today brings us a whole raft of data on the UK economy or what out official statisticians call a theme day. Actually we get too much in one burst with the trade data usually being ignored which may well be a Sir Humphrey Appleby style plan. But before we get to that we can look at the economy from the viewpoint of the Bank of England.

Turning to prices, the headline price balance sees a flat trend in house price inflation. However, there is once again a mixed picture across the UK with negative momentum in London and the South East, and solid gains in Northern Ireland, Scotland and the North West.

Looking ahead, price expectations for the coming three months stand at -16% pointing to a modest decline on a UK-wide basis. However, the twelve-month outlook points to a turnaround, with +18% more respondents expecting prices to rise (rather than fall) over the coming year.

That is from the Royal Institute of Chartered Surveyors or RICS. As you can see there are no “wealth effects” to be found presently unless they can somehow only draw Governor Carney’s attention to the North or Scotland and Northern Ireland.

A little innovation will be required to present this as good news.

 In keeping with this, newly agreed sales fell, with a net balance of -27% (from -11% previously), with activity reportedly slipping in virtually all parts of the UK. As far as the near-term outlook is concerned, sales expectations stand at -9%, suggesting sales will remain subdued in the coming three months………This will not only be a direct hit on the housing market itself but could have ramifications for the wider economy as the normal spend on furniture, fittings and appliances that typically accompanies a house move is also put on hold.

One possibility for the morning staffer presenting such information to an irascible Governor is to appeal to his plan to be a fearless climate change champion and say it is in line with this.

The TCFD provides the necessary foundation for the financial sector’s role in the transition to net zero that
our planet needs and our citizens demand.

He is indeed so enthusiastic about this that he has flown to Tokyo to point this out. This contrasts the highly important nature of his flights as to the extremely unimportant climate change causing flights of plebs like us.

This backs up what the Halifax told us on Monday and the emphasis is mine because the date is pretty much when the effect of the Funding for Lending Scheme arrived,

“Annual house price growth slowed somewhat in September, rising by just 1.1% over the last year. Whilst
this is lowest level of growth since April 2013, it remains in keeping with the predominantly flat trend we’ve
seen in recent months.”

UK GDP

This brought some welcome news.

UK GDP grew by 0.3% in the three months to August 2019.  Rolling three-month GDP growth increased for the second consecutive month after falling in Quarter 2 2019.

It is put in neutral terms but the UK moved away from recession in this period although in monthly terms it did so in a slightly odd fashion.

Monthly gross domestic product (GDP) growth was negative 0.1% in August 2019, following growth in both June and July 2019…….Overall, revisions to monthly GDP growth were small. However, both June and July 2019 have been revised up by 0.1 percentage points, giving extra strength to the most recent rolling three-month estimate.

As you can see we had a dip in August ( assuming that is not revised higher over time) but that was more than offset by upwards revisions in both June and July. For those of you wondering if the June figure affects the second quarter contraction of -0.2% the answer is not so far although it must have an impact if we move another decimal place.

The shift to Services

I have long argued that the services sector must now be over four-fifths of the UK economy and it seems the Office for National Statistics is picking this up.

The main contributor to gross domestic product (GDP) growth in the three months to August 2019 was the services sector, which grew by 0.4%. This was driven by widespread strength across the services industries in June and July, following a period of largely flat growth in the previous three months. Meanwhile, the production sector fell by 0.4% in the same period, while construction output grew by 0.1%.

For newer readers this has been the trend for years and indeed decades or as Talking Heads put it.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

This means somewhat ironically that the UK may well do relatively well in the manufacturing recession that we are seeing in much of the world. The irony is that we have often wanted to be more like Germany with its success in this area but for now out more services based model works better. This does not mean that the manufacturing sector we have is avoiding the chill winds blowing.

Rolling three-month growth in the production sector was negative 0.4% in August 2019, with growth in manufacturing at negative 1.1%.

There were widespread falls across manufacturing, offset partially by the manufacture of transport equipment, which is still seeing a bounce back from the weakness in April 2019 as a result of car production plants bringing forward their summer shutdowns.

There is another example of same as it ever was if we look at the detail of the services growth.

However, the sub-industry that had the largest contribution to gross domestic product (GDP) growth was motion pictures (including TV and music), which has been one of the best performing sectors over the last year, growing at a notably faster rate than services as a whole.

So if you pass a Luvvie today please be nice to them as they are doing a sterling job.

August

It looks as though there was something we have been noting for several years was behind the 0.1% GDP fall in August.

Within production, manufacturing fell by 0.7%. This was driven largely by a fall-back in the often volatile manufacture of pharmaceuticals, following strong growth in July.

It would seem that the production pattern is not monthly and thus is over recorded and  then under recorded. So that the  truth seems likely to be that we should take a bit off July and add it to August. More fundamentally it exposes one of the problems of producing a monthly GDP series.

Comment

As I look at the numbers I note that yet again we see to be reverting to the mean growth level of around ~0.3% per quarter that I suggested a couple of years ago. In the current circumstances that is pretty good although I note Torsten Bell of the Resolution Foundation calls it “Growth is really rubbish”. Mind you I note that he is retweeting something which describes the 0.3% rise in the quarterly or 3 monthly growth rate as a “small rebound” which speaks for itself.

The situation is that we should be grateful for our services sector which is keeping the UK out of a recession for now. So instead of the “march of the makers” promised by former Chancellor George Osborne we are seeing a “surge of the services”. This brings its own issues but at a time like this we should welcome any growth we can find. A particular success is the film and music industry and some of this is near to me as Battersea Park is regularly used these days. In a away this represents cycles as what has suited Germany (manufacturing) fades and we see something where the UK is strong (services) replacing it. How long that will last I do not know.

Meanwhile some of you may have followed my debate with former Bank of England policymaker Danny Blanchflower on social media. When I pointed out to him that today saw 2 more upwards revisions to UK GDP ( as opposed to his continual promises of downwards ones) he replied thus.

So what? Go and look at the supporting data

 

The Investing Channel

Portugal has house price growth of 10% but apparently negative inflation!

It is time to turn our telescope towards Portugal as we have not looked at it for a while and signals abound that the times they are a-changing. Let me give you an example of that from this morning.

“The eurozone economy ground to a halt in
September, the PMI surveys painting the darkest
picture since the current period of expansion began
in mid-2013. GDP looks set to rise by 0.1% at best
in the third quarter, with signs of further momentum
being lost as we head into the fourth quarter,
meaning the risk of recession is now very real.” ( IHS Markit )

Actually those surveys were already projecting growth at 0.1% so I am not sure how it stays there with the reading falling from 51.9 to 50.1. Perhaps it is a refreshing acknowledgement that the survey is much blunter than using decimal points. Also ther are some grim portents looking ahead.

Export trade remained a key source of new
business weakness as highlighted by another
monthly decline in overall new export orders.
According to the PMI figures, exports have been
falling throughout the past year and September’s
deterioration was the sharpest since composite
export data were first available just over five years
ago.

There is a nuance here in that the Euro area PMI survey is for the larger economies so not Portugal. But it does provide a background as well as likely trend. Also I have looked at the export trend in particular as this is an issue for Portugal on several fronts. If we look back in time we see that its regular visits to the International Monetary Fund or IMF for help and aid have been driven by trade deficits. Next if we move forwards to the Euro area crisis from around 2011/12 one of the policies applied was called “internal devaluation” which was to make the economy more competitive in trade terms. Oh and as an aside “internal devaluation”  essentially means lower real wages, it just sounds better.

This feeds into a current feature of the Portuguese economy which has been the growth of the motor sector which accounts for around 4% of economic output or GDP. This has been a trend in that against the stereotype car production in the Euro area has headed south into the Iberian peninsular. Portugal has benefited from this with the flagship being the large Volkswagen operation there. In January Caixa Bank did some research on the sector showing its significance.

 in the latter part of 2018, exports of the automotive industry reached 13.0% of the total exports of goods (the highest figure since the end of 2004) and 3.7% of GDP (an all-time high). In addition, as can be seen in the second chart, in October 2018 the sector’s exports registered a growth of 39.4% year-on-year (reaching 7.5 billion euros for the 12-month cumulative total).

This has been a good news story but we now look at it with not a little trepidation as it was only yesterday we looked at manufacturing problems which have been driven by the motor sector. The reputation of Volkswagen is not what it was either.

Trade Figures

If we look at the official data we see this.

In July 2019, exports and imports of goods recorded nominal year-on-year growth rates of +1.3% and +7.9%
respectively (-8.3% and -3.7% in the same order, in June 2019). The emphasis was on the increase of 27.9% in
imports of Transport equipment, mainly Other transport equipment (mostly Airplanes), contributing by +4.2 p.p. to the total year-on-year rate of change.

If we take out what was presumably an aircraft purchase by TAP we see that import growth was at 3.7% well above export growth and not only was there a deficit but it is growing.

The trade balance deficit amounted to EUR 1,751 million in July 2019, increasing by EUR 452 million when compared
to the same month of 2018.

So we see a troubling picture. But we can add to this as monthly figures are unreliable in this area and we are not allowing for a strength of Portugal which is tourism so let us widen our search.

The goods account deficit increased by €2,028 million and the services account surplus declined by €137 million year on year.

In the first seven months of the year, exports of goods and services grew by 3% (2.2% in goods and 4.6% in services) and imports rose by 7.4% (6.7% in goods and 10.8% in services). ( Bank of Portugal )

As you can see the general picture remains the same of a rising deficit although the nuance changes as the export picture gets better. It looks as though tourism has helped but has been swamped by imports of unspecified services.

Before I move on the motor industry has more than a few similarities with the UK.

Lastly, despite the buoyancy of exports in the automotive sector as a whole, in net terms the sector’s trade balance remains negative. However, this situation has improved considerably in the last year: in October 2018, the balance of the automotive sector stood at –1.3 billion euros, compared to –2.7 billion euros in October 2017.  ( Caixa Bank)

Production

On Monday we were updated but as you can see there is little detail.

Industrial Production year-on-year change rate was -4.8% in August (-2.4% in the previous month). Manufacturing
Industry year-on-year change rate was -1.7% (-0.4% in July).

According to Trading Economics we do have some car production data for the month before.

Car production in Portugal decreased 4.2 percent year-on-year to 20,969 units in July 2019.

We do have the official view on September though for manufacturing overall.

In Manufacturing Industry, the confidence indicator decreased in September, reversing the increase observed in
August. The evolution of the indicator reflected the negative contribution of the balances of the opinions on global
demand and on the evolution of stocks of finished products, while the opinions on the production perspectives
stabilized.

Comment

Before this new phase there was much to like about the economic performance of Portugal. The cold recessionary and indeed depressionary winds of the Euro area crisis had been replaced by some badly needed economic growth. This meant that the unemployment situation has improved considerably from the crisis highs.

The provisional unemployment rate estimate for August 2019 was 6.2% and decreased by 0.2 pp from the previous month.

Indeed the past was revised higher still last month.

Gross Domestic Product (GDP) grew 3.5% in real terms in 2017, where the high growth of Investment stands out
(11.9%). In 2018, GDP presented a growth rate of 2.4% in real terms, where Investment remained as the most
dynamic component (growth rate of 6.2%).

So the number I looked at back on the 9th of May will be better than this now.

In 2018 real GDP was 1.2% higher than in 2008…

So far the official data still looks good.

In comparison with the first quarter of 2019, GDP increased by 0.5% in real terms, maintaining the growth rate
recorded in the previous quarter.

The fear though is that the growth phase was driven higher by the Euro boom and ECB policy and to add to the trade fears above there is this.

The House Price Index (HPI) increased 10.1% in the 2nd quarter of 2019, when compared to the same period of 2018, 0.9 percentage point (pp) more than in the previous quarter………On a quarter-to-quarter basis, the HPI grew 3.2%.

This leaves me with two thoughts for you. Firstly Portuguese first time buyers must wonder how there can be no inflation?

The estimate of the Portuguese Harmonised Index of Consumer Prices (HICP) annual rate of change was -0.3% (-0.1% in August).

Next that it was overheating issues that have led to my long-running theme for Portugal that economic growth does not average more than 1% for long. Can anybody spot any signs of that?

The Investing Channel

Is this the manufacturing recession of 2019?

The year so far has seen increasing focus on a sector of the economy that has been shrinking in relative terms for quite some time. Actually in the credit crunch era it has in some places shrunk in absolute terms as this from my home country illustrates.

Production and manufacturing output have risen since then but remain 7.1% and 3.1% lower, respectively, for July 2019 than the pre-downturn peak in February 2008.

This means that it is now a little over 10% of total UK GDP and so it is completely dwarfed by the services sector which is marching on its way to 80%.Thus we have a context that the current concern about a recession is odd in the sense that we have in fact been in a depression as output more than a decade later is below the previous peak.Yet there is much less concern over that.

We learn more from the detail of the breakdown from the official analysis of the period 2008-18.

The recovery of the manufacturing sector from the 2008 recession has been heavily dependent upon four out of the 24 industries; manufacture of food, motor vehicles, other transport equipment and repair of machinery………..Without the positive impact of these four industries, the Index of Manufacturing in Quarter 4 (Oct to Dec) 2018 would still be below its lowest value during the 2008 recession.

There is always a danger in any analysis that excludes the things that went up but we do learn that there has been quite a shift. Also a lot of the sector has been in an even worse depression than the average. Then we have the situation where two of the fantastic four currently have problems to say the least.

However caution is required as I so often observe and today it is highlighted by this.

The pharmaceutical industry was a strong performer during the recession; at the industry’s highest point in April 2009 the industry had grown by 22% since Quarter 1 (Jan to Mar) 2008. However, the industry would steadily decline from this point over the decade and would finish in Quarter 4 (Oct to Dec) 2018 23% below its Quarter 1 2008 value, though some of this decline is due to business restructuring.

Something looks wrong with that and if I was in charge I would be looking further as to whether this is/was really like for like. For newer readers I looked because in recent times the pharmaceutical sector has been a strength in the data albeit with erratic swings.

The United States

If we now switch from an underlying issue of depression in some countries to the more recent one of recession well this from the Institute of Supply Management or ISM yesterday upped the ante.

Manufacturing contracted in September, as the PMI® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. This is the lowest reading since June 2009, the last month of the Great Recession, when the index registered 46.3 percent.

This seemed to catch out quite a few people and led to some extraordinary responses like this on CNBC.

“There is no end in sight to this slowdown, the recession risk is real,” Torsten Slok, chief economist at Deutsche Bank said in a note Tuesday after the report.

I agree on the recession risk but “no end in sight”? That applies more to the problems Deutsche Bank itself faces. If we switch to the detail there are some clear things to note which is that is showed a more severe contraction and that the “Great Recession” klaxon was triggered. Furthermore the trade war influence was impossible to avoid.

ISM®’s New Export Orders Index registered 41 percent in September, 2.3 percentage points lower compared to the August reading of 43.3 percent, indicating that new export orders contracted for the third month in a row. “The index had its lowest reading since March 2009 (39.4 percent).

The news reached the Donald and his response was to sing along with “It wasn’t me ” by Shaggy.

As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!

So far this has not reached the official output numbers. Here is the August announcement from the Federal Reserve.

Manufacturing production increased 0.5 percent, more than reversing its decrease in July. Factory output has increased 0.2 percent per month over the past four months after having decreased 0.5 percent per month during the first four months of the year.

Putting it another way the output level in August was 105.2 which was the same as March. So according to the official data the only impact it has picked up is an end to growth if we try to look through the monthly ebbs and flows.

The World

There is a survey conducted on behalf of JP Morgan which yesterday told us this.

National PMI data signalled deteriorations in overall business conditions in 15 of the countries covered. Among the larger industrial regions, growth was registered in both the US and China. In contrast, Japan saw further contraction while the downturn in the euro area deepened. The rate of decline in the eurozone was the fastest in almost seven years, mainly due to a sharp deterioration in the performance of Germany.

They showed a slight improvement to 49.7 but there is the issue of the US where JP Morgan thinks there has been growth whereas the ISM as we have just observed does not. Here is the Markit PMI view on a possible reason.

Divergence is possibly related to ISM membership skewed towards large multinationals. IHS Markit panel is representative mix of small, medium and large (and asks only about US operations, so excludes overseas facilities)

Financial markets hit the ISM road and were probably also influenced by this from Bloomberg.

Results were disastrous for leading Asian automakers such as Toyota Motor Corp. and Honda Motor Co., which each suffered double-digit declines that were worse than analysts expected. While a fuller picture will emerge Wednesday when General Motors Co (NYSE: GM). and Ford Motor (NYSE:F) Co. are due to report, the poor performance suggests that overall deliveries of cars and light trucks could come in worse than the 12% drop anticipated by analysts, based on six estimates.

Comment

There are various strands to this of which the first is the motor industry. In the credit crunch era it has seen a lot of support ranging from “cash for clunkers” style operations to much cheaper credit. In the UK it is often cheaper to buy via credit that to pay up front which is part of the theme that has seen this according to the Finance and Leasing Association.

 Over 91% of all private new car registrations in the UK were financed by FLA members.

That seems to be wearing off so we were due something of a dip and that has been exacerbated by the diesel crisis where buyers have understandably lost faith after the dieselgate scandal and the ongoing emissions issue.

Politicans are regularly on the case which was highlighted in the UK by the “march of the makers” claim of former Chancellor George Osbourne. Whilst there was some growth it was hardly a march and now we have President Trump pushing manufacturing as part of MAGA but more latterly giving it a downwards tug with his trade war.

Then there is the issue of green policies which have to lead to less manufacturing but get deflected onto talk of more solar panels and windmills and the like. On that road the depression theme returns.

 

What can we expect next from the economy of France?

During the Euro area slow down France has mostly been able to avoid the limelight. This is because it has at least managed some economic growth at a time when Germany not always has. It may not be stellar growth but at least there has been some.

In Q2 2019, GDP in volume terms grew at the same pace as in the previous quarter: +0.3% (revised by +0.1% from the first estimate).

However  there are questions going forwards which plugs into the general Euro area problem which got a further nudge on Monday.

The IHS Markit Eurozone Composite PMI® fell to
50.4 in September according to the ‘flash’ estimate,
down from 51.9 in August to signal the weakest
expansion of output across manufacturing and
services since June 2013………The survey data indicate that GDP looks set to rise by just 0.1% in the third quarter, with momentum weakening as the quarter closed.

As you can see growth is fading and may now have stopped if the PMI is any guide and this was reflected in the words of the Governor of the Bank of France in Paris yesterday.

For the past ten years, there is little doubt that ECB monetary policy under Mario Draghi’s Presidency has made a decisive contribution not only to safeguarding the euro in 2012, but also to the significant recovery of the euro area since 2013. Over this period, more than 10 million jobs have been created. Our unconventional measures are estimated to add almost 2 percentage points of growth and of inflation between 2016 and 2020.

It is revealing that no mention is made of growth right now as he concentrates on what he considers to be past glories. He has rounded the numbers up too as they are 1.5% and 1.9% respectively. Let me give him credit for one thing though which is this although I would like him to say this to the wider public as well.

Since I am talking to an audience of researchers I should of course emphasise that such numbers are subject to uncertainty.

Also raising inflation in the current environment of weak wage growth is likely to make people worse and not better off.

France

The situation here was better than the Euro area average but still slowed.

At 51.3 in September, the IHS Markit Flash France
Composite Output Index fell from 52.9 in August,
and pointed to the softest expansion in private sector
activity for four months.

Actually manufacturing is doing okay in grim times with readings of 49.7 and 50.3 suggesting flatlining. The real fear here was that the larger services sector is now being sucked lower by it.

However, with services firms registering their
slowest rise in activity since May, fears of negative
spill over effects from the manufacturing sector are
coming to fruition. Any intensification of such effects
would likely dampen economic growth going
forward.

This leaves me mulling the record of Markit in France as several years ago it was criticised for being too pessimistic by the French government and more recently seems to have swung the other way.

What about fiscal policy?

This did get a mention in the speech by the Governor of the Bank of France yesterday.

Failing that, a second answer is for fiscal policy to step in. Fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long-term growth.

The problem with that argument is that even the French run IMF could not avoid pointing out this in July.

France’s public debt has been consistently rising over the last four decades, increasing by 80 percent of GDP since the 1980s to reach close to 100 percent of GDP at end-2018. This reflects the inability of successive governments to take full advantage of good times to reverse the spending increases undertaken during downturns.

Actually some of the IMF suggestions look rather chilling and perhaps in Orwellian language.

rationalizing spending on medical products and hospital services; improving the allocation of resources in education

Also and somewhat typically the IMF has missed one change in the situation which is that at present France is being paid to borrow. It’s ten-year yield went negative at the beginning of July and has mostly been there since. As I type this it is -0.32%. It still has to pay a little for longer terms ( the thirty-year is 0.48%) but as you can see not much.

So the situation is that France does have quite a lot of relatively expensive debt from the past but could borrow now very cheaply if it chose to do so.

Banks

Whilst he s referring to macroprudential policy it is hard not to have a wry smile at this from the Governor of the Bank of France.

 To start with, as of today, our toolkit is very much bank-centric.

Especially when he add this.

We are making some progress to extend macroprudential policy beyond the banking sector.

Returning to the banks they are just like elsewhere.

PARIS (Reuters) – Societe Generale (SOGN.PA) plans to cut 530 jobs in France by 2023, CGT union said in a statement.

Of course BNP Paribas has been taking some brokerage business and employees from Deutsche Bank although it has not be a complete success according to financemagnate.com.

Deutsche’s clients will receive letters explaining how the transfer will work. However, some of them have already moved to competitors such as Barclays, which has won roughly $20 billion in prime brokerage balances.

In a way the French banks have used Deutsche Bank as a shield. But many of the same questions are in existence here. How are they going to make sustained profits in a world of not much economic growth and negative interest-rates?

Unemployment

This is the real achilles heel of the French economy. From Insee

The ILO unemployment rate decreased by 0.2 points on average in Q2 2019, after a 0.1 points fall in the first quarter. It stood at 8.5% of the labour force in France (excluding Mayotte), 0.6 points below its Q2 2018 level and its lowest level since early 2009.

Whilst the falls are welcome it is the level of unemployment and the fact it is only now approaching the pre credit crunch levels which are the issue as well as this.

Over the quarter, the employment rate among the youth diminished (−0.3 points),

Whilst the unemployment rate for youth fell by 0.6% to 18.6% it is still high and the falling employment rate is not the best portent for the future.

Comment

So far the economy of France has managed to bumble on and unlike the UK and Germany avoided any quarterly contractions in economic output. If you look at this morning’s official survey then apparently the only way is up baby.

In September 2019, households’ confidence in the economic situation has increased for the ninth consecutive month. At 104, the synthetic index remains above its long-term average (100), reaching its highest level since January 2018.

Perhaps the fall in unemployment has helped and a small rise in real wages. The latter are hard to interpret as a change at the opening of the year distorted the numbers.

firms might pay a special bonus for purchasing power (PEPA) in the first quarter of 2019, to employees earning less than 3 times the minimal wage.

According to the official survey published yesterday businesses are becoming more optimistic too.

In September 2019, the business climate has gained one point, compared to August. The composite indicator, compiled from the answers of business managers in the main sectors, stands at 106, above its long-term mean (100)

So there you have it everything except for the official surveys points downwards. In their defence the official surveys have been around for a long time. So let me leave you with some trolling by the Bank of France monthly review.

French economic growth has settled into a fairly stable pace since mid-2018 of between 1.2% and 1.4% year-on-year . France has thus demonstrated greater resilience than other euro area economies, particularly Germany, where year-on-year growth only amounted to 0.4% in mid-2019. This growth rate should continue over the coming quarters: based on Banque de France business surveys published on 9 September, we expect quarter-on-quarter GDP growth in the third quarter of 2019 of 0.3%.

Rethinking The Dollar

I did an interview for this website. Apologies if you have any issues with the sound as the technology failed us a little and we had to switch from my laptop to my tablet.