Negative Interest-Rates cannot stop negative household credit growth in the UK

This morning has opened with something which feels like it is becoming a regular feature. This is the advent of negative bond yields in the UK as we become one of those countries where many said it could not happen here and well I am sure you have guessed it! The two-year bond or Gilt yield is -0.07% and the five-year is -0.03%. As well as the general significance there are particular ones. For example I use the five-year bond yield as a signal for the direction of travel for mortgage rates especially fixed-rate ones. If we look at Moneyfacts we see this.

Lloyds Bank had the lowest rate in the five year remortgage chart for those looking for a 60% LTV. Its deal offers 1.35% (2.8% APRC) fixed until 31 August 2025, which then reverts to 3.59% variable. It charges £999 in product fees and comes with the incentives of free valuation, no legal fees and £200 cashback.

A 1.35% mortgage rate for five-years is extraordinarily low for the UK and reminds me I was assured they would not go below 2%. I am sure some of you are more expert than me in deciding whether what is effectively a £799 fee is good value for free legal fees and valuation?
If we switch to the two-year yield it is particularly significant as it is an implicit effect of all the Bank of England bond or Gilt buying because it does not buy bonds which have less than three years to go. So it is a knock-on effect rather than a direct result.

QE

The total of conventional QE undertaken by the Bank of England is £616.3 billion as of the end of last week. The rate of purchases was £13.5 billion which is relevant for the May money supply numbers we will be looking at today. Looking ahead to June there has been a reduction in weekly purchases to £6.9 billion so a near halving. So as you can see there has been quite a push provided to the money supply figures. It is now slower but would previously have been considered strong itself.

Also the buying of corporate bonds which now is just below £16 billion has added to the money supply and I have something to add to this element.

NEW: The Fed has posted the 794 companies whose bonds it began purchasing earlier this month as part of its “broad market index” Six companies were 10% of the index: Toyota, Volkswagen, Daimler, AT&T, Apple and Verizon  ( @NickTimiraos )

You may recall that the Bank of England is also buying Apple corporate bonds and I pointed out it will be competing with the US Federal Reserve to support what is on some counts the richest company in the world. Make of that what you will……

Engage Reverse Gear

This morning we have been updated on how much the UK plans to borrow.

To facilitate the government’s financing needs in the period until the end of August 2020, the UK Debt Management Office (DMO) is announcing that it is planning to raise a
minimum of £275 billion overall in the period April to August 2020.

Each sale reduces the money supply and I can recall a time when this was explicit policy and it was called Overfunding. Right now it would be a sub category of QT or Quantitative Tightening, should that ever happen.

Money Supply

We see that in a similar pattern to what we noted in the Euro area on Friday there is plenty being produced.

The amount of additional money deposited in banks and building societies by private sector companies and households rose strongly again in May (Chart 1). These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £52.0 billion in May. This followed large increases in March and April, of £67.3 billion and £37.8 billion respectively. The increase was driven by households and PNFCs, and continued to be strong relative to recent history: in the six months to February 2020, the average monthly increase was £9.3 billion.

The use of PNFCs is to try to take out the impact of money flows within the financial sector. Returning to the numbers we are seeing the consequences of the interest-rate cuts and the flip side ( the bonds are bought with newly produced money/liquidity) of the Bank of England QE I looked at earlier.

Last time around I pointed out we had seen 5% growth in short order and the pedal has continued to be pressed to the metal with a growth rate of 6.7% over the past three months. Or monthly growth rates which are higher than the annual one in May last year. All this has produced an annual growth rate of 11.3%.

Household Credit

This cratered again or to be more specific consumer credit.

Households repaid more loans from banks than they took out. A £4.6 billion net repayment of consumer credit more than offset a small increase in mortgage borrowing. Approvals for mortgages for house purchase fell further in May to 9,300.

I would not want to be the official at the Bank of England morning meeting who presented those numbers to the Governor. A period in a cake trolley free basement awaits. Indeed they may be grateful it does not have any salt mines when they got to this bit.

The extremely weak net flows of consumer credit meant that the annual growth rate was -3.0%, the weakest since the series began in 1994. Within this, the annual growth rate of credit card lending was negative for the third month running, falling to -10.7%, compared with 3.5% in February. Growth in other loans and advances remained positive, at 0.7%. But this was also weak relative to the recent past: in February, the growth rate was 6.8%.

Regular readers will recall when the Bank of England called an annual growth rate of 8.2% “weak” so I guess they will be echoing Ariane Grande.

I have no words

It seems like the air of desperation has impacted the banks too.

Effective rates on new personal loans to individuals fell 34 basis points to 5.10% in May. This was the lowest since the series began in 2016, and compares to a rate of around 7% at the start of 2020.

Mortgages

A small flicker.

On net, households borrowed an additional £1.2 billion secured on their homes. This was slightly higher than the £0.0 billion in April but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected more new borrowing by households, rather than lower repayments.

Looking ahead the picture was even worse.

The number of mortgage approvals for house purchase fell to a new series low in May, of 9,300 (Chart 5). This was, almost 90% below the February level (Chart 5) and around a third of their trough during the financial crisis in 2008.

We wait to see if the advent of lower mortgage rates and the re-opening of the economy will help here.

Comment

I am sure that many reading about the UK money supply surge will be singing along with The Beatles.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Some will go further.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go
Any jobber got the sack
Monday morning, turning back
Yellow lorry slow, nowhere to go

Do I spot a QE reference?

But oh, that magic feeling, nowhere to go
Oh, that magic feeling
Nowhere to go, nowhere to go

There will have been some sunshine at the Bank of England morning meeting.

Small and medium sized businesses drew down an extra £18.2 billion in loans from banks, on net, as their new borrowing increased sharply. Before May, the largest amount of net borrowing by SMEs was £589 million, in September 2016. The strong flow in May led to a sharp increase in the annual growth rate, to 11.8%.

Of course it was nothing to do with them but that seldom bothers a central bankers these days. This next bit might need hiding in the smallest print they can find though.

Podcast

 

The ECB is creating Euros even faster than Wirecard can lose them

The focus shifts today to the Euro area as there has been action on a number of fronts. Firstly the world’s second most notable orange person has been speaking at the online Northern Lights Summit. The Orangina Christine Lagarde seems to have upset the folk at ForexLive already.

Lagarde reaffirms that government debt will eventually have to be repaid

No. Just no. Governments will never run surpluses just with a snap of a finger and what is happening to the world and their debt levels now is basically what we have seen with Japan over the past two decades.

Actually before the pandemic Germany was running surpluses but the majority were not. We also got some classic Christine Lagarde as she waffled.

FRANKFURT (Reuters) – The euro zone is “probably past” the worst of the economic crisis caused by the coronavirus pandemic, European Central Bank President Christine Lagarde said on Friday, while urging authorities to prepare for a possible second wave.

“We probably are past the lowest point and I say that with some trepidation because of course there could be a severe second wave,” Lagarde told an online event.

At least she is not declaring success as Greeks and Argentinians have learnt to be terrified of what happens next after painful experience.

Also there has been this.

FRANKFURT (Reuters) – It is better for the European Central Bank to be safe than sorry when it decides whether to withdraw aggressive stimulus measures deployed to combat the fallout from the coronavirus pandemic, ECB policymaker Olli Rehn said on Friday.

“It’s better to be safe than sorry,” Rehn said. “Recall the premature rate hikes of 2011 during the euro crisis.”

This is a classic strategy where a policymaker suggests things may be reduced (yesterday) and today we have the good cop part of this simple Good Cop,Bad Cop pantomime.

Money Supply

Back on the 29th of May I pointed out that the blue touch paper had been lit on the  money supply boom of 2020. Well the rocket is lifting off.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 12.5% in May from 11.9% in April.

That compares with the recent nadir of an annual rate of 6.2% in January of 2019. Another comparison is that the rate of annual growth was around 8% before the latest phase of monetary action such as the extra Quantitative Easing of the PEPP. The weekly reporting does not exactly match a month but we saw an extra 116 billion Euros in May from it.

You will not be surprised to learn that the surge above pushed broad money growth higher as well.

Annual growth rate of broad monetary aggregate M3, increased to 8.9% in May 2020 from 8.2% in April (revised from 8.3%).

Indeed it is mostly a narrow money thing.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 8.4 percentage points (up from 8.0 percentage points in April), short-term deposits other than overnight deposits (M2-M1) contributed 0.2 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.3 percentage point (as in the previous month).

The pattern here is not quite the same as whilst the January 2019 reading at 3.8% was low the nadir is 3.5% in August of 2018. That provides some food for thought because if you apply the expected response to this the Euro area economy should have been slowing further about now. Of course the pandemic has created such a fog we cannot see one way or another about whether that held true.

There is another way of analysing this and here is a balance sheet style view.

credit to the private sector contributed 5.3 percentage points (up from 4.8 percentage points in April), credit to general government contributed 3.6 percentage points (up from 2.3 percentage points), net external assets contributed 1.0 percentage point (down from 1.4 percentage points), longer-term financial liabilities contributed 0.0 percentage point (as in the previous month), and the remaining counterparts of M3 contributed -0.9 percentage point (down from -0.3 percentage point).

I counsel caution about reading too much into this as back in the day such analysis when spectacularly wrong in the UK. Accounting identities are all very well but they miss the human component as well as some of the actual numbers. But we see growth from the government sector and the private-sector here. Also the external component has faded a bit in relative terms which provides a counterpoint to another piece of news.

Grandstanding?

From yesterday when all our troubles apparently not so far away.

Eurosystem repo facility for central banks (EUREP) introduced as precautionary backstop to address pandemic-related euro liquidity needs outside euro area….EUREP to allow broad set of central banks to borrow euro against euro-denominated debt issued by euro area central governments and supranational institutions….New facility to be available until June 2021.

These things are invariably badged as temporary but last time I checked the “temporary” income tax in the UK to pay for the Napoleonic War is still here. But as to what good it might do in a world where nobody seems to actually want Euros in this manner I am not sure. Perhaps it is a protection against another outbreak of the “Carry Trade” as this bit hints.

The provision of euro liquidity to non-euro area central banks aims at alleviating euro liquidity needs in the respective countries in a stressed market environment. The
potential beneficiaries are banks that need euro funding and are not able to obtain such funding in the market or get it only at prohibitive prices.

Although there is no real link at all to this.

Overall, these arrangements aim to facilitate a smooth transmission of monetary policy in the euro
area to the benefit of all euro area citizens

Let me help out bu suggesting replacing “all euro area citizens” with “The Precious! The Precious!”.

Here is what is presumably the official view from former ECB Vice-President Vitor Constancio. You may recall that Vitor’s job was to respond with technical questions at the ECB presser with a long involved answer that would send everyone to sleep. But at least he had a role unlike his replacement.

The ECB, reflecting awareness about the international role of the euro, just announced a new repo facility for other central banks to get euros against collateral.The FED dit it recently ..In general, the EU is finally aware of its geo-political interests.

The Fed saw demand of over US $400 billion at the peak whereas I suspect the Euro interest may be more like 0. Maybe someone will request a million or two as a test?

Comment

The relevance of the money supply changes is as follows. Narrow money supply impacts in the next 6 months and broad money in around two years. So assuming there is no Covid-19 second wave the push will impact as economies are picking up anyway. That is awkward as there is a clear inflation danger from this. There are signs of it already as we see the oil price pick up which even the neutered official inflation numbers will record. They of course miss the bit described by Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world

Although we do see evidence of a type of money destruction.

Germany’s Wirecard collapsed on Thursday owing creditors almost $4 billion. ( Reuters )

The regulators are now on the case but.

All the money’s gone, nowhere to go ( The Beatles )

Where will all the extra US Money Supply end up?

Today brings both the US economy and monetary policy centre stage. The OECD has already weighed in on the subject this morning.

The COVID-19 outbreak has brought the longest economic expansion on record to a juddering halt. GDP
contracted by 5% in the first quarter at an annualised rate, and the unemployment rate has risen
precipitously. If there is another virus outbreak later in the year, GDP is expected to fall by over 8% in 2020
(the double-hit scenario). If, on the other hand, the virus outbreak subsides by the summer and further
lockdowns are avoided (the single-hit scenario), the impact on annual growth is estimated to be a percentage
point less.

Actually that is less than its view of many other countries. But of course we need to remind ourselves that the OECD is not a particularly good forecaster. Also we find that the official data has its quirks.

Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent, the U.S. Bureau of Labor Statistics reported today……In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment
in government continued to decline sharply……….The unemployment rate declined by 1.4 percentage points to 13.3 percent in May, and the number of unemployed persons fell by 2.1 million to 21.0 million.

Those figures not only completely wrong footed the forecasters they nutmegged them as well in one of the most spectacular examples of this genre I have seen. I forget now if they were expecting a rise in unemployment of eight or nine million but either way you get the gist. We do not know where we are let alone where we are going although the Bureau of Labor Statistics did try to add some clarity.

If the workers who were recorded as employed but absent from work due to “other  reasons” (over and above the number absent for other reasons in a typical May) had
been classified as unemployed on temporary layoff, the overall unemployment rate  would have been about 3 percentage points higher than reported (on a not seasonally  adjusted basis).

We learn more about the state of play from the New York Federal Reserve.

The New York Fed Staff Nowcast stands at -25.5% for 2020:Q2 and -12.0% for 2020:Q3. News from this week’s data releases increased the nowcast for 2020:Q2 by 10 percentage points and increased the nowcast for 2020:Q3 by 24.5 percentage points. Positive surprises from labor, survey, and international trade data drove most of the increase.

As you can see the labo(u)r market data blew their forecasts like a gale and leave us essentially with the view that there has been a large contraction but also a wide possible and indeed probable error range.

The Inflation Problem

We get the latest inflation data later after I publish this piece. But there is a problem with the mantra we are being told which is that there is no inflation. Something similar to the April reading of 0.3% is expected. So if we switch to the measure used by the US Federal Reserve which is based on Personal Consumption Expenditures the annual rate if we use our rule of thumb would in fact be slightly negative right now. On this basis Chair Powell and much of the media can say that all the monetary easing is justified.

But there are more than a few catches which change the picture. Let me start with the issues I raised concerning the Euro area yesterday where the numbers will be pushed downwards by a combination of the weights being (very) wrong, many prices being unavailable and the switch to online prices. It would seem that the ordinary person has been figuring this out for themselves.

The May 2020 Survey of Consumer Expectations shows small signs of improvement in households’ expectations compared to April. Median inflation expectations increased by 0.4 percentage point at the one-year horizon to 3.0 percent, and were unchanged at the three-year horizon at 2.6 percent. ( NY Fed Research from Monday)

It is revealing that they describe an increase in inflation that is already above target as an “improvement” is it not? But we see a complete shift as we leave the Ivory Towers and media palaces as the ordinary person surveyed expects a very different picture. Still the Ivory Towers can take some solace from the fact that inflation is in what they consider to be non-core areas.

Expected year-ahead changes in both food and gasoline prices displayed sharp increases for the second consecutive month and recorded series’ highs in May at 8.7% and 7.8%, respectively, in May.

Just for the avoidance of doubt I have turned my Irony meter beyond even the “turn up to 11” of the film Spinal Tap.

Central bankers will derive some cheer from the apparent improvement in perceptions about the housing market.

Median home price change expectations recovered slightly from its series’ low of 0% reached in April to 0.6% in May. The slight increase was driven by respondents who live in the West and Northeast Census regions.

Credit

More food for thought is provided in this area. If we switch to US Federal Reserve policy Chair Jerome Powell will tell us later that the taps are open and credit is flowing. But those surveyed have different ideas it would seem.

Perceptions of credit access compared to a year ago deteriorated for the third consecutive month, with 49.6% of respondents reporting credit to be harder to get today than a year ago (versus 32.1% in March and 48.0% in April). Expectations for year-ahead credit availability also worsened, with fewer respondents expecting credit will become easier to obtain.

Comment

I now want to shift to a subject which is not getting the attention it deserves. This is the growth in the money supply where the three monthly average for the narrow measure M1 has increased in annualised terms by 67.2% in the three months to the 25th of May. Putting that another way it has gone from a bit over US $4 trillion to over US $5 trillion over the past 3 months. That gives the monetary system quite a short-term shove the size of which we can put into context with this.

In April 2008, M1 was approximately $1.4 trillion, more than half of which consisted of currency.  ( NY Fed)

Contrary to what we keep being told about the decline of cash it has grown quite a bit over this period as there is presently a bit over US $1.8 trillion in circulation.

Moving to the wider measure M2 we see a similar picture where the most recent three months measured grew by 40.6% compared to its predecessor in annualised terms. Or if you prefer it has risen from US $15.6 billion to US $18.1 billion. Again here is the historical perspective from April 2008.

 M2 was approximately $7.7 trillion and largely consisted of savings deposits.

So here is a question for readers, where do you think all this money will go? Whilst you do so you might like to note this from the 2008 report I have quoted.

While as much as two-thirds of U.S. currency in circulation may be held outside the United States….

The Investing Channel

 

The blue touch paper has been lit on the Money Supply boom of 2020

Today as I shall explain later is a case of back to the future especially for me. It brings an opportunity to examine one of the economic features of the current Covid-19 pandemic. This is a surge in money supply growth which has been quite something such that I think we will look back and consider it to be unprecedented. I expect that to be true in absolute terms in many places and it is already being true in relative terms in many.

The Euro Area

This morning has brought another signal of this so let us go straight to the ECB data.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March.

Previously we had eight months of growth of ~8% so as you can see going to 10.4% and then 11.9% shows that the accelerator has been pressed hard and maybe the pedal has been pushed to the metal. If we switch to the cause of this which is mostly the rate of QE purchases by the ECB well you can see below. Apologies for the alphabeti spaghetti.

ECB PSPP (EUR): +9.545B To 2.216T (prev +10.936B To 2.207T) –

CSPP: +1.181B To 213.147B (prev +2.324B To 211.966B) – CBPP: +1.028B To 280.778B (prev +1.030B To 279.750B) – ABSPP: -377M To 30.738B (prev +161M To 31.115B) –

PEPP: +30.072B To 211.858B (prev +28.878B To 181.786B) ( @LiveSquawk) ( B= Billion and T=Trillion )

These are the weekly increases and if we stick to the money supply we see that in one week alone some 42 billion Euros of QE took place which means that on the other side of the ledger the narrow money supply has been increased by the same amount. Some of this was previously taking place and the more recent boost is called PEPP and is of the order of 30 billion Euros a week.

What this means is that the total amount of narrow money has gone from just under 9 trillion Euros in January to just over 9.5 trillion in April and will be going past 10 trillion fairly soon ( at the current pace in July).

Tucked away in the detail is that people have been wanting cash as well. The amount in circulation rose by 25.6 billion Euros in March and by 15.1 billion in April. Only a couple of months but that represents a clear shift of gear as we note April was the same as the whole of the third quarter last year and 2020 so far has already exceeded 2019.

Broad Money

This is a case of the same old song.

Annual growth rate of broad >monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March.

The pick-up in annual growth is of the order of 3% and this is the highest growth rate for nearly 12 years, well until next month anyway! Switching to totals it is now 13.6 trillion Euros.

The breakdown is rather revealing I think.

The annual growth rate of the broad monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March, averaging 7.1% in the three months up to April. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to -0.3% in April from 0.0% in March, while the annual growth rate of marketable instruments (M3-M2) decreased to 6.7% in April from 10.1% in March.

This tells us a couple of things. The opener is that the expansion is a narrow money thing and in fact narrow money over explains it. That means that in terms of wider bank intermediation there was a credit contraction here as we shift from M1 to M3 via M2.

Also at first it looks like the rate of deposits from businesses has picked up but then we see it seems to be insurance companies and pension funds. Or if you prefer the ECB has just bought a load of bonds off them and they have deposited the cash for now.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 6.7% in April from 6.0% in March, while the annual growth rate of deposits placed by non-financial corporations increased to 13.7% in April from 9.7% in March. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 12.3% in April from 16.9% in March.

Although that might seem obvious we have seen stages where it has not appeared to be true.

Credit

The credit punch bowl has been out too.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 4.9% in April 2020 from 3.6% in the previous month. The annual growth rate of credit to general government increased to 6.2% in April from 1.6% in March, while the annual growth rate of credit to the private sector increased to 4.4% in April from 4.2% in March.

The main thing of note here is the surge in credit given to governments which links to the increases in public expenditure we have seen. There has been quite a swing here as it was negative ( -2%) as recently as February and had been negative for 9 months. So the Stability and Growth Pact was applied and then abandoned.

Looking at the breakdown the fall in loans to households is presumably a decline in mortgage lending and I think you can all figure out why companies were borrowing more.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) stood at 4.9% in April, compared with 5.0% in March. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.0% in April from 3.4% in March, while the annual growth rate of adjusted loans to non-financial corporations increased to 6.6% in April from 5.5% in March.

@fwred of Bank Pictet has got his microscope out.

Wow, another massive increase in bank loans / credit lines to euro area corporates, up €73bn in April following €121bn in March (both the largest on record by a huge margin)…….Finally, the surge in bank loans in March-April was broad-based across countries. No one left behind.

His Euro area glass is always full so let me point out that there are times when companies are borrowing to invest (good) and times they are borrowing because they are in trouble.

Also he has been kind enough to illustrate one of my main themes so thank you Fred and the emphasis is mine

Euro area corporates are drawing on their credit lines and taking new bank loans like there *is* tomorrow.

Side-effect: most banks will easily qualify for the lowest TLTRO-III rate from June (-1%).

What a coincidence!

Comment

This is an example in a way of the circle of life as back in the day I got a job because as a graduate monetary economist City firms wanted people to look at the money supply. Although there was a difference in that the central banks and governments were trying to bring it down as opposed to pumping it up. Rather ominously it did not work as planned and sometimes did not work at all.

How should it work? In essence the extra money balances (narrow money) should be spent relatively quickly and thereby give the economy a boost. That is why I look at narrow money and as an indicator it has worked pretty well. The catch or “rub” as Shakespeare would put it is velocity or how quickly the money circulates and there we have a problem as it is hard to measure especially right now. We know that for a while it will have been extremely low because in many areas you simply cannot spend money at the moment.

As we look internationally we see many examples of this. I have gone through the Euro area data today but if we switch to the US the numbers are even higher. The annual rate of M1 growth is 27.5% there so the pedal may even have been pushed through the metal. Care is needed as definitions vary but even using a more Euro area one it looks as though it would be over 20%.

As well as some hoped for economic growth there is a clear and present danger which is inflation. We seem likely to be singing along with BB King.

Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent

I got the blues
Got those inflation blues

UK Money Supply surges as Unsecured Credit Collapses

Today brings the UK monetary situation into focus and to say it is fast moving is an understatement. Let me illustrate in terms of QE or Quantitative Easing where the current rate of purchases is £13.5 billion a week and the total by my maths is now £507 billion. This means we have seen an extra £72 billion in this Covid-19 pandemic phase. Looking at it from a money supply point of view means that in theory an extra £72 billion has been added. We have seen before that in practice QE does not always flow into the money supply data as the theory tells us but I also note that the ECB figures we looked at earlier this week were responding to its QE actions.

Next comes the other programmes where again the heat is on. The Covid Corporate Financing Facility has bought some £15.9 billion of Commercial Paper and in return supplied liquidity. Next comes the Corporate Bond programme which has bought around £2 billion so far. They do not provide much detail on the Corporate Bond purchases to avoid me pointing out that for example they are buying Apple and Maersk. Last on the list is the new version of the Term Funding Scheme supplying liquidity to banks at 0.1% and it claims to have supported £8.2 billion of new loans.

So we awash with liquidity if not actual cash. Now let us look at the impact until the end of March as we look at this morning’s data.

Money Supply

I think we can say we see an impact here! The emphasis is mine.

The amount of money deposited with, and borrowed from, banks and building societies by private sector companies and households overall rose very strongly in March. Sterling money holdings by households, non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs), known as M4ex, rose by £57.4 billion in March, a series high and far above its previous six-month average of £9.0 billion. Sterling borrowing from banks (M4Lex) rose by £55.3 billion, also a series high and up from its previous six-month average of £5.1 billion.

Or as DJ Jazzy Jeff and the Fresh Prince would say.

Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Tic-tic-tic-tic Boom!
Well yo are why’all ready for me yet
(pump it up prince)

Or more prosaically,

The strength in money was broad based across sectors, with the largest increases since these series began for households (first published in 1963), PNFCs (1963) and NIOFCs (1998). (  non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs))

If we switch to the money supply implications then the 2.4% rise in March was as much as not so long ago we were seeing in a year. The annual growth rate of 7.4% is the highest we have seen for some time and next month we will break the numbers posted by the Sledgehammer QE effect in the autumn of 2016 and the spring of 2017. Actually I think we will break the all-time record for M4 anyway ( yes for my sins I still recall the £M3 days) but that is for another day.

Consumer Credit

There are some numbers here which in the previous regime would be too much for the morning espresso of Governor Carney and would have him summoning a flunkey from the Bank of England bar to fetch him his favourite Martini as he would be both shaken and stirred,

The weak net flows of consumer credit meant that the annual growth rate fell to 3.7% in March, lowest since June 2013. Within this, the annual growth rate of credit card lending fell to -0.3%, the first negative annual growth since the series began. The annual growth rate of other loans and advances fell to 5.6%.

The first Governor of the Bank of England to preside over negative annual credit card growth. I guess he and the new Governor Andrew Bailey will be playing a game of pass the parcel with that one!

This is a similar effect to what we saw in the credit crunch with households battening down the hatches by repaying credit with this time around settling your credit card in the van.

Households repaid £3.8 billion of consumer credit, on net, in March, the largest net repayment since the series began . Within this, credit cards accounted for £2.4 billion of net repayments and other loans and advances accounted for £1.5 billion.

Indeed the net figures may not do the gross data full justice.

This very weak net lending reflected a larger fall in new borrowing that was partially offset by slightly lower repayments. Gross lending was £5.4 billion weaker than February, while repayments were £1.3 billion lower.

Business Lending

This is something of a bugbear of mine as back in the summer of 2012 we were promised the the Funding for Lending Scheme would boost it, especially for smaller businesses. How is that going?

Within this, the growth rate of borrowing by large businesses increased sharply, to 11.8%, and growth by SMEs rose to 1.2%, from 0.9% in February.

Looking at the numbers for smaller businesses we are seeing two failures here. First the initial failure to get cash to them and second the conceptual failure over the past 8 years as the schemes to help them have recorded very little growth at best and sometimes none at all. In fact the situation has been so bad that the word counterfactual has been deployed which has two effects. For those that do not understand what it means it sounds impressive whilst leaving those that do mulling how giving £107 billion to the banks in the TFS had so little effect. Almost as if it was designed to do that.

Of course it is much easier to lend to larger businesses.

UK businesses’ deposits rose by £34.0 billion in March. Changes in deposits and loans were closely correlated across industries.

That bit is awkward. Did those that got it, not need it?

Mortgages

We open with a bit of all our yesterdays.

Mortgage borrowing picked up a little in March, with a net increase of £4.8 billion. The annual growth rate also rose a little, to 3.6%. Mortgage borrowing tends to lag approvals, however, so this strength is likely to reflect strength in approvals in previous months.

Then we get a bit more with the current reality.

In the mortgage market, evidence of a decline in housing market activity started to become apparent in March mortgage approval statistics, which fell by just over 20% (Chart 4). This was a broad based fall across reasons for applying for a mortgage. Approvals for house purchase fell by 24% to 56,200, their lowest level since March 2013; and approvals for remortgage fell 20% to 42,600, the fewest since August 2016. ‘Other’ approvals, which includes for withdrawing equity, fell back 17%, to 12,000.

Looking ahead with Gilt yields here we are likely to see more people look at a remortgage as my indicator for fixed-rate mortgage trends the five-year Gilt yield is a mere 0.1%. Of course there is also the issue of the market essentially being frozen.

Comment

Let me remind you that the broad money numbers are supposed to be a predictor of nominal GDP growth ( economic output) around two years ahead. So if we say we will be lucky to be back to where we were at the start of 2020 in two years time we would expect inflation of the order of 7% or so. Care is needed because the impulse these days is often seen in asset markets and is in my opinion a driver behind the stock market rally we have seen. That factor is why I argue to put house prices in consumer inflation measures in spite of the fact that for them “down, down” by Status Quo is more likely than Yazz’s “The only way is up” for this year. Although some seem to have spotted an alternative universe.

Nationwide said on Friday its measure of house prices rose by 0.7% in April from March and was 3.7% higher than a year earlier, stronger than forecasts in a Reuters poll of economists in both cases. ( Reuters)

Really?

Now let me look at another alternative universe or if this was a Riddick film the Underverse. You may need reminding that the official Bank of England Bank Rate is 0.1% as you read the numbers below.

Effective rates on interest bearing credit cards fell 14 basis points to 18.4%, whilst effective rates on personal loans fell 7 basis points to 6.8%.

Also the debacle at the Financial Conduct Authority which saw many overdraft rates double to around 40% is slowly being picked up in the data. Someone at the Bank of England must be torturing the series to keep the rate as low as 24% and please Governor Bailey who of course presided over the FCA at the time.

Euro area money supply is booming again

In ordinary times the 25 members of the Governing Council of the European Central Bank would be getting ready to go to Frankfurt. This time though, they may well be making sure their version of Zoom works properly.I do hope they are not using Zoom itself as it is not secure meaning that the hedge funds will be listening in again. As to there being 25 members it has an Executive Board of 6 as well as a representative of each country. Rather confusingly not all vote as there are too many to sit around the ECB table and around 4 drop out with the most significant being the Netherlands this time around. But as the main decisions have already been made and only perhaps some fine tuning in the offing that is a moot point this week.

Money Supply

This morning has brought news on past decisions however. In the melee it is easy to forget that before the pandemic the ECB had restarted QE and then fired something of a peashooter on the 12th of March.

A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes

So strong in fact that only 6 days later they announced this.

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

These will have fed into the March data because the PEPP began on the 26th and the original much more minor “strong contribution” will have been in play for around half of the month. So what impact did they have?

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 10.3% in March from 8.1% in February.

Putting it another way M1 increased by 273 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder. As an aside cash rose by 26 billion in March which backs up to some extent my argument of yesterday about it. A clear rise but of course only one month.

Broad Money

As you can see this soared as well.

Annual growth rate of broad monetary aggregate M3, increased to 7.5% in March 2020 from 5.5% in February.

If we take the advice of Kylie ( I’m breaking it down) we see this.

Looking at the components’ contributions to the annual growth rate of M3,, the narrower aggregate M1 contributed 7.0 percentage points (up from 5.5 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed 0.0 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.5 percentage point (up from 0.1 percentage point).

So we see that the QE push is such that this time around broad money is effectively narrow money. We can ignore M2 which is doing almost nothing but then we see marketable instruments are in the game as well albeit more minor at 34 billion Euros. Indeed this is almost entirely debt-securities with a maturity of up to two years. I am picking them out because their total is only 60 billion so they have seen more than a doubling in one month.

Counterparts

We can do this almost MMT style and do indeed learn a thing or two.

the annual growth rate of M3 in March 2020 can be broken down as follows: credit to the private sector contributed 4.5 percentage points (up from 3.7 percentage points in February), net external assets contributed 2.1 percentage points (down from 2.7 percentage points), credit to general government contributed 0.6 percentage point (up from -0.7 percentage point), longer-term financial liabilities contributed -0.2 percentage point (up from -0.5 percentage point), and the remaining counterparts of M3 contributed 0.4 percentage point (up from 0.3 percentage point).

Care is needed as this sort of application of mathematics to economics is invariably presented as a type of Holy Grail followed by the sound of silence when it then goes wrong. But we do see that the credit impulse is now much more domestic as the foreign flows decline in absolute percentage terms and then have a second effect of being compared to a larger number.

What about credit flows?

The initial impact is a swing towards the public sector as we see credit there taking quite a move.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 3.5% in March 2020 from 2.0% in the previous month. The annual growth rate of credit to general government increased to 1.6% in March from -2.0% in February, while the annual growth rate of credit to the private sector increased to 4.2% in March from 3.4% in February.

The growth rate had been negative since last June and I expect quite a surge now because it was 15.7% at its peak in the credit crunch and we see so much fiscal policy being enacted.

Switching to the private-sector we lack the detail to really take a look.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) increased to 5.0% in March from 3.7% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.4% in March from 3.7% in February, while the annual growth rate of adjusted loans to non-financial corporations increased to 5.4% in March from 3.0% in February.

We learn a couple of things. There will be a lag before we pick up the fall in mortgage lending and new business lending was a record.

New bank loans to euro area non-financial corporates in March: +€118bn. Previous record was €66bn in December 2007………French banks were the largest contributors (€38bn in new corporate loans out of €118bn total) but the rise was fairly broad-based: Germany €22bn; Italy €17bn; Spain €16bn. ( @fwred)

This goes as follows. Good as banks are lending to companies but then Bad as we think why they want it and can they pay it back?!

Comment

These numbers matter because they give us a good idea of what is coming around the economic corner. For example narrow money growth impacts the domestic economy in somewhere between a few months and six months ahead. We have not seen double-digit-growth for a while and when we last did we got the Euro boom of 2017/18. Except these are about as far from ordinary times as we have seen and we are seeing the carburetor being flooded with petrol and the economy stalling. Putting it back into monetary terms velocity seems set to collapse again.

Another perspective is provided by the “pure” broad money growth which is the monetary equivalent of incestuous. Why? Well those short-term securities look as if they might be designed to be bought by the PEPP programme.

To expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.

(3) To ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, we will expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector.

More recently there has been this.

ECB to grandfather until September 2021 eligibility of marketable assets used as collateral in Eurosystem credit operations falling below current minimum credit quality requirements

In case you are wondering why? I am thinking Italy and Renault but I am sure there are others.

Moving on let me highlight a catch in this Such programmes will help big business but what about the smaller ones? We are back to the zombie culture and perhaps zombie money supply growth.

 

How many US Dollars are enough?

The issue of what you might call King Dollar is not one which gets the coverage it deserves. Instead the media coverage tends to highlight claims that its period of rule is on the way out with China demanding more use of the Yuan or Russia the rouble and so on. Or we get the various proclamations that we need some sort of world currency which to my mind are more like pie in the sky thinking than blue sky thinking. When we looked at the IMF on the I noted the suggestions that its SDRs ( Special Drawing Rights) could become the world currency but there are all sorts of flaws there.

So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

If we look at the issues of the Euro can anybody even imagine trying to apply a fixed exchange-rate to the whole world? We would have all sorts of individual booms and busts before we even get to the idea of a joint interest-rate. That is before we get to the track record of the IMF after all can you imagine trying to get its currency accepted in Argentina and Greece.

Supply of US Dollars

It is not as if the taps have been turned off.

The numbers: The Federal Reserve’s balance sheet expanded to a record $6.6 trillion in the week ended April 22, an increase of $205 billion from the prior week, the central bank said Thursday.

What happened: Holdings of U.S. Treasurys rose by $120.5 billion to $3.9 trillion. The central bank has been purchasing Treasurys at a rapid pace in a bid to restore functioning to this key U.S. financial market. The central bank’s holdings of mortgage-backed securities rose $54 billion to $1.6 trillion. ( MarketWatch)

As you can see the balance sheet is expanding at a rapid rate and let me just add that if you really think the US Federal Reserve is buying US Treasury Bonds to “restore functioning to this key U.S. financial market.” I have a London bridge to sell you. The truth is that it is implicitly financing the US Budget Deficit as we note that the ten-year yield is a mere 0.58% and the long bond is a mere 1.17% in spite of surging expenditure.

We can now switch to the money supply for further insight because we have noted in the past that QE does not go straight into the numbers as one might assume. Looking at the ECB data has shown that what should be clear cut narrow money creation seems to sometimes go missing in action. However we are seeing quite a surge in the money supply as we note that the narrow money measure ( M1) only went through US $4 trillion as March began but by the 13th of April was already US $4.73 trillion.

I’ll be back in the high life again
All the doors I closed one time will open up again
I’ll be back in the high life again
All the eyes that watched me once will smile and take me in ( Steve Winwood )

Putting that another way the annual rate of increase is 11.6% the annualised six-monthly one is 15.7% and the quarterly one is 23.4%. You can see which way that is going and I would point out that only a month or so ago 11.6% would be considered very high.

Peering into the detail we see that the surge in narrow money is mostly deposits, There has been a rise in cold hard cash, dirty money as Stevie V would say but deposits have risen by around US $700 billion over the past couple of months.

Sending Dollars To Friends Abroad

This a subject I have covered throughout the credit crunch and NPR seem to have caught up with.

As the global economy shuts down, the U.S. Federal Reserve has begun sending billions of dollars to central banks all over the world. Last month, it opened up 14 “swap lines” to nations such as Australia, Japan, Mexico, and Norway. A “swap line” is like an emergency pipeline of dollars to countries that need them. The dollars are “swapped,” i.e., traded for the other country’s currency.

The numbers here have ballooned and are the missing link so to speak in the balance sheet data above. As of last night some US $432.3 billion have been supplied to foreign central banks. I will let that sink in and then point out that it means banks in those countries or regions either cannot get US Dollars at all or can only get them at an interest-rate which challenges their solvency.

As to the demand then we always expected it to be mainly from the following too although not always in this order. Bank of Japan US $215 billion and the ECB $142 billion. Particularly troubling from the Japanese point of view is that as well as being the leader of the pack they are needing ever more. When we note that the Bank of England has only asked for US $27.3 billion which is low when you look at the size of the UK’s banks we see the Bank of Japan needed another US $19 billion overnight.

One factor of note is that the Norges Bank requested some US $3.6 billion for 84 days yesterday. So the heat is on for at least one Norwegian bank.

Also the extension of the swaps to Emerging Markets as requested by @trinhonomics has been used. The Bank of Korea has taken US $16.6 billion, the Bank of Mexico some US $6.6 billion and the Monetary Authority of Singapore some US $5.9 billion.

Exchange Rate

In spite of the balance sheet rises and the effort to become in effect the world’s central bank by supplying US Dollars the exchange rate remains firm. We can look at it in terms of the broad index being 123.2 as opposed to the 114.7 it ended 2019 or simply that it was set at 100 in 2006.

Comment

There are plenty of influences here but one thing we can be sure of is that the US Dollar is in demand. Let me give you some examples.

Kenya shilling hits a new all-time low of 107.6500 against the US dollar according to data from @business

 

Rupee falls to all-time low of 76.87 against US dollar in early trade ( Press Trust of India from Wednesday)

 

At the start of the year, $1 bought you 4.00 Brazilian reals. It now buys you 5.53 reais. That’s a 38% rise for the dollar (27% fall for the real) in less than four months. ( @ReutersJamie )

We have looked at India before and back then going through 70 seemed significant. As to Kenya an interest-rate of 7.25% is not helping much is it? Then we have Brazil showing how the Dollar has impacted South America.

So economics 101 is having another bad phase because a massively increased supply is not pushing the price down. In come respects it may even be creating more demand because if you know there is a ready supply then you may then use it more. Ouch! After all the much lower oil price should be reducing the demand for US Dollars and indeed the negative price such as it applied should be depth-charging it.

Once I built a tower up to the sun
Brick and rivet and lime
Once I built a tower, now it’s done
Brother, can you spare a dime? ( Bing Crosby )

 

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.

 

 

The ECB is now resorting to echoing Humpty Dumpty

Focus has shifted to the Euro area this week as we see that something of an economic storm is building. For a while now we have seen the impact of the trade war which has reduced the Germany economy to a crawl with economic growth a mere 0.4% over the past year. Then both Italy (0.3%) and France ( 0.1%) saw contractions in the final quarter of 2019. Now in an example of being kicked when you are down one of the worst outbreaks of Corona Virus outside of China is being seen in Italy. Indeed the idea of Austria stopping a train with people from Italy suspected of having the virus posed a question for one of the main tenets of the Euro area as well as reminding of the film The Cassandra Crossing.

Tourism

This is a big deal for Italy as The Local explained last summer.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product.

The food and wine tourism sector continued to be the most profitable of all.

The study’s authors found that “the daily per capita expenditure for a food and wine holiday is in fact in our country is about 117 euros. Meanwhile it was 107 for trips to the mountains and 91 on the coast.”

The numbers were for 2017 and were showing growth but sadly if we look lower on the page we come to a sentence that now rather stands out.

Visitor numbers are only expected to keep growing. Many in the tourism industry predict 2019 will busier than ever in Italy, partly thanks to a growing Chinese tourism market.

Maybe so, but what about 2020? There have to be questions now and Italy is not the only country which does well from tourism.

Tourism plays a major role in the French economy. The accommodation and food  services sector, representing the largest part of the tourism sector, accounts for between
2.5% and 3% of GDP while the knock-on effects of tourism are also felt in other sectors, such as transport and leisure. Consequently, the total amount of internal tourism
consumption, which combines tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents). ( OECD)

Spain

The Gross Domestic Product (GDP) contribution associated with tourism, measured through the total tourist demand, reached 137,020 million euros in 2017. This figure represented 11.7% of GDP, 0.4% more than in 2016. ( INE )

Last summer Kathimerini pointed out that tourism was not only a big part of the Greek economy but was a factor in its recent improvement.

Tourism generates over a quarter of Greece’s gross domestic product, according to data presented on Wednesday by the Institute of the Greek Tourism Confederation (INSETE). The data highlight the industry’s importance to the national economy and employment, as well as tourism’s quasi-monopolistic status in the country’s growth.

According to the latest figures available, at least one percentage point out of the 1.9 points of economic expansion last year came from tourism.

It wondered whether Greece relied on it too much which I suspect many more are worried about today, although fortunately Greece has only had one case of Corona Virus so far. It not only badly needs some good news but deserves it. After all another big sector for it will be affected by wider virus problems.

That also illustrates the country’s great dependence on tourism, as Greece has not developed any other important sector, with the possible exception of shipping, which accounts for about 7 percent of GDP.

Economic Surveys

Italy has released its official version this morning.

As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) improved passing from 99.2 to 99.8.

That for obvious reasons attracts attention and if we look we see there may be a similar problem as we saw on the Markit IHS survey for Germany.

The confidence index in manufacturing increased only just from 100.0 to 100.6. Among the series included
into the definition of the climate, the opinions on order books bettered from -15.5 to -14.3 while the
expectations on production decreased from 5.6 to 4.7

As you can see the expectations  for production have fallen. Perhaps we should note that this index averaged 99.5 in the last quarter of 2019 when the economy shrank by 0.3%

France had something similar yesterday.

In February 2020, households’ confidence in the economic situation has been stable. The synthetic index has stayed at 104, above its long-term average (100).

This continued a theme begun on Tuesday.

In February 2020, the business climate is stable. At 105, the composite indicator, compiled from the answers of business managers in the main market sectors, is still above its long-term mean (100). Compared to January, the business climate has gained one point in retail trade and in services.

Really? This is a long-running set of surveys but we seem to be having a divorce from reality because if we return to household confidence I note that consumption fell in December.

Household consumption expenditure on goods fell in December (–0.3%) but increased over the fourth quarter (+0.4%).

Money Supply

This may give us a little clue to the surveys above. From the ECB earlier.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.9% in January, compared with 8.0% in December.

Whilst the number has dipped recently from the two 8.4% readings we saw in the latter part of 2019 it is much better than the 6.2% recorded last January. So maybe the surveys are in some sense picking an element of that up as the interest-rate cut and recommencement of QE bond buying feeds into the data.

Comment

If we switch to the ECB looking for clues as to what is happening in the economy then I would suggests it discounts heavily what the European Commission has just released.

In February 2020, the Economic Sentiment Indicator (ESI) increased in both the euro area (by 0.9 points to 103.5) and the EU (by 0.5 points to 103.0).

 

 

That does not fit with this at all.

GERMANY’S VDA SAYS CORONAVIRUS IS AFFECTING SUPPLY CHAINS OF CAR MANUFACTURERS AND SUPPLIERS ( @PriapusIQ )

Anyway the newly appointed Isabel Schnabel of the ECB has been speaking today and apparently it is a triumph that its policies have stabilised economic growth somewhere around 0%.

Although the actions of major central banks over the past few years have succeeded in easing financial conditions and thereby stabilising growth and inflation, current and expected inflation rates remain stubbornly below target, in spite of years of exceptional monetary policy support.

Next she sings along with The Chairmen of the Board.

Give me just a little more time
And our love will surely grow
Give me just a little more time
And our love will surely grow

How?

This implies that the medium-term horizon over which the ECB pursues the sustainable alignment of inflation with its aim is considerably longer than in the past.

Another case of To Infinity! And Beyond! Except on this occasion we are addressing time rather than the amount of the operation which no doubt will be along soon enough.

Indeed she echoes Alice in Wonderland with this.

For the ECB, this means that the length of the “medium term” – which is an integral part of its definition of price stability – will vary over time.

Which sounds rather like.

When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Although briefly she seems to have some sort of epiphany.

central banks often have only a limited understanding of the precise configuration of the forces

But it does not last and as ever I expect the result to be even lower interest-rates and more QE as the “lower bound” she mentions gets well er lower again.

Some of this is beyond the ECB’s control as there is not much it can do about a trade war and nothing about a virus outbreak. But by interfering in so many areas it has placed itself in the game and is caught in a trap of its own making. Or returning to The Chairmen of the Board.

There’s no need to act foolishly
If we part our hearts won’t forget it
Years from now we’ll surely regret it

Italy continues to see features of an economic depression

Today gives us an opportunity to compare economic and financial market developments in Italy as this week has brought some which are really rather extraordinary. Let us start with the economics and look at the IMF ( International Monetary Fund ) mission statement yesterday.

Real GDP growth in 2019 is estimated at 0.2 percent, down from a 10-year high of 1.7 percent in 2017.

As you can see they are agreeing with my theme that Italy struggles to sustain any rate of economic growth above 1% per annum. Then they also agree with my “Girlfriend in a Coma” theme as well.

 Real personal incomes remain about 7 percent below the pre-crisis (2007) peak and continue to fall behind euro area peers. Despite record employment rates, unemployment is high at close to 10 percent, with much higher rates in the South and among the youth. Female workforce participation is the lowest in the EU.

The real income situation is particularly damning of the economic position especially if we note that unemployment has continued to be elevated. That brings us back to the economic growth not getting above 1% for long enough for unemployment to fall faster.

What about now?

The IMF has a go at saying things will get better but then lapses into the classic quote of a two-handed economist.

The economic situation is projected to improve modestly but is subject to downside risks.

So let us see if the detail does better than it might go up or down?

Real GDP growth is forecast at ½ percent in 2020 and 0.6-0.7 percent thereafter. These forecasts are the lowest in the EU, reflecting weak potential growth. Materialization of adverse shocks, such as escalating trade tensions, a slowdown in key trading partners or geopolitical events, could lead to a much weaker outlook.

As you can see there is not much growth which frankly in measurement terms would take several years even to cover any margin of error. I also note a rather grim ending as the IMF maybe gives us its true view “could lead to a much weaker outlook.” Another slow down or recession would be a real problem as we note again that real personal incomes are 7% lower than before. If that is/was the peak then how long will this economic depression go on?

The Euro zone

If we look wider for en economic influence the news is not that good either. For example the situation from the overall flash Markit PMI business survey was this.

The ‘flash’ IHS Markit Eurozone Composite PMI®
was unchanged at 50.9 in January, signalling a
further muted increase in activity across the euro
area economy. The rate of expansion has remained
broadly stable since the start of the final quarter of
2019, running at the weakest for around six-and-ahalf years.

If we now move to my signal for near-term economic developments the ECB told us this yesterday.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.0% in December from 8.3% in November.

The money supply situation had improved in 2019 but as you can dipped at the end. So the impetus is weaker than it was. In case you are wondering we have seen this before in phases of QE which is currently 20 billion Euros a month and thus boosting the numbers. There are other influences as well.

The broader money supply had a sharper fall and represents the outlook for 2021/22.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in December 2019 from 5.6% in November, averaging 5.4% in the three months up to December.

We will have to see if this is a new development or just a financial market glitch.

The annual growth rate of marketable instruments (M3-M2) was -7.2% in December, compared with -1.1% in November.

Back to Italy

The troubled area across much of the world is the industrial sector and the latest we have on that is this from the Italian statistics office.

The seasonally adjusted volume turnover index (only for the manufacturing sector) remained unchanged
compared to the previous month; the average of the last three months increased by 0.3% compared to
the previous three months. The calendar adjusted volume turnover index increased by 0.2% with respect
to the same month of the previous year. ( November )

This morning there was troubling news for those of us who have noted that employment has often been a leading ( as opposed to the economics 101 view of lagging) indicator in the credit crunch era.

The estimate of employed people decreased (-0.3%, -75 thousand); the employment rate went down to
59.2% (-0.1 percentage points).
The fall of employment concerned both men and women. A rise is observed among 15-24 aged people (+6
thousand), people aged 25-49 decreased (-79 thousand), while people over 50 remained stable.

This meant that if we look for some perspective progress seems to have stopped.

In the fourth quarter 2019, in comparison with the previous one, a slight increase of employment is registered (+0.1%, +13 thousand) and it concerned only women.

We will have to see if that continues as we worry about possible implications for this.

The number of unemployed persons slightly grew (+0.1%, +2 thousand in the last month); the increase
was the result of a growth among men (+2.2%, +28 thousand) and a decrease for women (-2.2%, -27
thousand), and involved people under 50. The unemployment rate remained stable at 9.8%, as also the
youth rate, unchanged at 28.9%.

Italian bond market

If we return to the IMF statement the story starts badly.

 Italy needs credible medium-term consolidation as fiscal space remains at risk.Debt is projected to remain high at close to 135 percent of GDP over the medium term and to increase in the longer term owing to pension spending. If adverse shocks were to materialize, debt would rise sooner and faster.

Somehow in the current economic environment the IMF seems to think that more austerity would be a good idea. Amazing really!

But this week has in fact seen this.

Massive, massive move in #Italy’s 10-year bond yield from 1.44% to 0.95% now. A 50 basis point move in a matter of days party driven by a #Salvini right-wing loss in regional elections. ( @jeroenblokland ) 

These days almost whatever the fiscal arithmetic we see that investors are so desperate for yield they will buy anything and hope the central bank will step up and buy it off them for a profit. Just as a reminder back around 2012 the yield went above 7% on fears the fiscal position suggested Italy was insolvent which of course were self-fulfilling as a yield of 7% made sure it was. But apart from QE what is really different now?

Comment

The depth of the problem is highlighted by this from the IMF.

Steadfast implementation of structural reforms would unlock Italy’s potential and durably improve outcomes. Reforms to liberalize markets and decentralize wage bargaining should be prioritized. They are estimated to yield real income gains of about 6-7 percent of GDP over a decade.

That’s a convenient number isn’t it? But the real issue is that this is a repetition of the remarks at the ECB press conference which are repeated every time. Why? Nothing ever happens.

The longer the economic depression goes on then the demographics become a bigger issue.

The number of births continues to decrease: in 2018, 439,747 children were registered in the General Register Office, over 18,000 less than the previous year and almost 140,000 less than 2008.

The persistent decline in the birthrate has an impact above all on the firstborn children, who decreased to 204,883, 79 thousand less than 2008.

Italy is a lovely country but the economics is an example of keep trying to apply the things that have consistently failed.

The Investing Channel