Australia faces both falling house prices and a falling money supply

This morning has brought us up to date with news from what the Men at Work described as.

Living in a land down under
Where women glow and men plunder
Can’t you hear, can’t you hear the thunder?

That is of course what was called Australis and then Australia and these days in economic terms can be considered to be the South China Territories. The monetary policy statement from the Reserve Bank of Australia (RBA)  reinforces the latter point as you can see.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.

One needs to read between the lines of such rhetoric as for a central banker “remains reasonable” is a little downbeat in reality as we note the following use of “declined” “softened” and “slower”.But he was providing a background to this.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

In essence the heat is on for another interest-rate cut and if you are wondering why? There is this.

GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output.

I will come to the central bankers fear of negative wealth effects from what they call an “adjustment in housing markets” in a moment as we note they cannot bring themselves to mention lower house prices. The pattern of GDP growth looks really rather poor as we see that the trend goes 1.1%,0.8% and then 0.3% and now 0.2%. So we see a familiar pattern of much weaker growth in the second half in 2018 which if we see again in the first half of this year will see the annual rate of growth halve. Actually it may be worse than that as the only factor driving growth according to Australia Statistics was this.

Government final consumption expenditure increased 1.8% during the quarter contributing 0.3 percentage points to GDP growth.

So without it the economy would have shrunk and Australia might be on course for something it has escaped for quite a while which is a recession. Also according to the Australia Treasury Budget from earlier it is planning a dose of austerity.

The total turnaround in the budget balance between 2013-14 and 2019-20 is projected to be $55.5 billion, or 3.4 per cent of GDP.

The Government’s plan for a stronger economy ensures it can guarantee essential services while returning the budget to surplus.

This budget year will see a surplus of $7.1 billion, equal to 0.4 per cent of GDP.

Budget surpluses will build in size in the medium term and are expected to exceed 1 per cent of GDP from 2026-27.

So as you can see it seems unlikely that government spending will continue to boost the economy. Also as they are assume growth of 2.25% then those numbers as so often seem rooted in fantasy rather than reality. Next if we switch back to the RBA the austerity plan comes at this time.

 In Australia, long-term bond yields have fallen to historically low levels.

In fact they fell to an all time low for the benchmark ten-year at 1.72% recently and is spite of a bounce back are still at a very low 1.82%. So yet again we are observing a situation where countries borrow heavily when it is expensive and try in this instance not to borrow at all when it is cheap. I know it is more complicated than that but we also have this into an economic slow down.

The Government is focused on reducing net debt as a share of the economy, which is expected to peak in 2018-19 at 19.2 per cent of GDP.

The Government is on track to eliminate net debt by 2029-30.

So it may look to be Keynesian but reality seems set to intervene especially on the economic growth forecasts.

House Prices

Again we see that the Governor of the RBA cannot bring himself to say, falling house prices. It is apparently just too painful.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low.

Even worse it has implications for “the precious”.

 At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased.

Indeed a central banker would have his/her head in their hands as they see the negative wealth effects in the latest quarterly national accounts.

Real holding losses on land and dwellings were $170.8b. This marks a fourth consecutive quarter of losses and reflects the falling residential property prices over the past year. ……The real holding losses have translated into the first fall in household assets (-1.5%) since the September quarter 2011. Household liabilities increased 1.0%.

Some of the latter was falling equity prices which have since recovered but house prices have not. Here is ABC News on the first quarter of 2019.

On a national basis, the average house price fell 2.4 per cent to $540,676, and apartment prices dropped 2.2 per cent to $484,552 during that period.

CoreLogic observed that markets which experienced their peaks earlier had experienced sharper downturns.

Darwin and Perth property prices skyrocketed during the mining boom, but peaked in 2014. Since then dwelling values in both capitals have fallen by 27.5 per cent and 18.1 per cent respectively.

So it seems likely that the value of the housing stock fell again. If we move to the official series we see that in the rather unlikely instance you could sell all of Australia’s houses and flats in on e go then from the end of 2015 to early 2018 the value rose by one trillion Aussie Dollars from a bit below 6 trillion to a bit below 7. Now in a development to pack ice round a central bankers heart it has fallen to 6.7 trillion officially and if we factor in other measures is now 6.6 trillion Aussie Dollars and to quote Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’


Australia escaped the worst of the credit crunch via its enormous natural resource base. According to the RBA index of commodity prices that has not ended.

Preliminary estimates for March indicate that the index decreased by 0.9 per cent (on a monthly average basis) in SDR terms, after increasing by 5.3 per cent in February (revised)…….Over the past year, the index has increased by 11.0 per cent in SDR terms, led by higher iron ore, LNG and alumina prices. The index has increased by 16.6 per cent in Australian dollar terms.

But now we see that the domestic economy has weakened whilst the boost from above has faded. If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February. If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms. Thus the outlook for the domestic economy remains weak and could get weaker.




The UK see higher real and nominal GDP growth as house price growth slows

Today has already brought some good economic news for the UK so let us get straight to it. From the chief economist of the Nationwide Building Society.

“UK house price growth remained subdued in March, with
prices just 0.7% higher than the same month last year”

As you can see he is not keen, but I am pleased that if we look at the trend for wage growth we are now seeing annual wage growth of over 2% with respect to house prices. So there will be some welcome relief for those wishing to trade up and especially for first-time buyers. Of course it will take a long time to offset the long hard haul that led to this being reported by out official statisticians only yesterday.

On average, full-time workers could expect to pay an estimated 7.8 times their annual workplace-based earnings on purchasing a home in England and Wales in 2018. Housing affordability in England and Wales stayed at similar levels in 2018, following five years of decreasing affordability.

If you want the equivalent of earnings ratio porn then there was this from an area I will be cycling through later.

Kensington and Chelsea remained the least affordable local authority in 2018, with average house prices being 44.5 times workplace-based average annual earnings.

However returning to the Nationwide there are ch-ch-changes going on.

London was the weakest performing region in Q1, with
prices 3.8% lower than the same period of 2018 – the fastest
pace of decline since 2009 and the seventh consecutive
quarter in which prices have declined in the capital.

Indeed as there have been discussions about the Midlands in the comments section I took a look at the quarterly data which showed them growing at 2.6% in the West and 2.5% in the East. So as ever the picture is complex although even there we are seeing real wage gains albeit only small ones.

Also we need to remind ourselves that this covers Nationwide customers only although the numbers do fit the patterns we have been observing through other sources. Also whilst I welcome the change it seems clear that The Guardian does not.

Slide driven by London and south-east slowdown as Brexit chaos seems to put off buyers.

The economy

This mornings economic growth or Gross Domestic Product release brought some further good news. Not from the last quarter of 2018 which remained at 0.2% but from this.

There has been an upward revision of 0.1 percentage points to GDP growth in Quarter 3 (July to Sept) 2018 to 0.7%, due to revisions to estimates of government services;  In comparison with the same quarter a year ago, UK GDP increased by a revised 1.4%.

So we did a little better on 2018 and in particular had a really spectacular third quarter. It does look out of kilter with the rest of the year but let me point out that something which regularly gets the blame for once gets a little credit.

 where some of this activity is likely to have reflected one-off effects of the warm weather and the World Cup.

There are two catches in the series however. The first is the issue of investment which has been having a troubled period.

There have been some upward revisions to business investment in Quarter 3 and Quarter 4 2018 because of later survey returns, but business investment still fell in every quarter of 2018.

So not as bad as previously reported but even so there has been an issue here.

Business investment has now fallen for four consecutive quarters – the first such instance since 2009 –driven mainly by declines in transport equipment as well as IT equipment and other machinery. The latest estimates show that there have been some upward revisions in the second half of 2018, with business investment now estimated to have fallen by 0.9% in Quarter 4.

These revisions to the quarterly path have resulted in an upward revision to the annual figure with business investment falling 0.4% in 2018.

This is a bit of a ying and yang factor as the issue over future trade relationships and a possible Brexit are factors here. The optimistic view is that once there is more certainty it will not only pick up it will regain much of the lost ground. Maybe we will find out more later although of course today was supposed to be the day we got certainty!

Also there is this hardy perennial.

The UK current account deficit widened by £0.7 billion to £23.7 billion in Quarter 4 (Oct to Dec) 2018, or 4.4% of gross domestic product (GDP), the largest deficit recorded since Quarter 3 (July to Sept) 2016 in both value and percentage of GDP terms….Annually, the UK current account deficit widened to 3.9% of GDP in 2018, compared with 3.3% in 2017.

Regular readers will be aware I have major doubts about the accuracy of these numbers, specifically about the lack of detail we get about the important services sector. However the trend was worse last year probably driven by the weakening trade outlook generally. Here is how we paid for it.

The UK mainly financed its current account deficit through portfolio investment, where UK investors disinvested in foreign equity and debt securities, while overseas investors increased their holdings of UK debt securities.

Even more care is needed with those numbers as when you start looking into them they are built on what are often in my opinion dubious assumptions.

Unsecured Credit

With house price growth slowing Bank of England Governor Mark Carney will have a an even deeper frown today as he reads this.

The annual growth rate of consumer credit has continued to slow, though more gradually than during the second half of 2018. At 6.3% in February , it was well below its peak of 10.9% in November 2016. Within this, the growth rate of both credit card lending and other loans and advances fell slightly.

The rest of us will have another sigh of relief although there are two problems. The first is that an annual rate of growth of 6.3% is far higher than anything else in the economy. It is around double the rate of wage growth and more than quadruple the annual economic growth we have seen. The other is that the latest two monthly numbers at £1.2 and now £1.1 billion show signs of a rebound so it is a case of “watch this space” for subsequent months.

Money Supply

We saw some broad money growth in February.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £3.6 billion in February.

The waters were muddied by a large Gilt maturity in February and the Operation Twist QE bond buying we have seen in March so far. Meaning we may see a pick up in the March data although it is unclear how much will be recorded as being the financial sector and hence ignored. The annual rate of growth at 2% in February is little to write home about but was a rise.


The UK data releases have been pretty solid today. Economic growth has been revised higher and there is a hint of better money supply growth. This comes with the usual caveats of high unsecured credit growth and a balance of payments deficit. Let me move onto the numbers which illustrate my point via something which gets widely ignored in the UK data which is inventories or stocks. I was struggling to get my head around this.

There was a £4.2 billion increase in inventories in Quarter 4 2018, including alignment adjustments and balancing adjustments. However, excluding these adjustments the estimates show a slight decrease of £1.2 billion in stocks being held by UK companies.

If you are going Eh? “You are not alone” as Olive sang but let me help out by pointing out there was a £3 billion balancing adjustment in the numbers which is quite a bit more than the economic growth reported so let us hope they were right.

Let me end on some better news as there was this also.

Nominal gross domestic product (GDP) grew by 0.7% in Quarter 4 (Oct to Dec) 2018, revised up from 0.6% in the first quarterly estimate.






It is a case of harder times for the US economy

A feature of the current world economic slowdown has been that the United States has been outperforming its peers. Some of that has been genuine and some simply because the news flow was slowed by the time Federal workers were unpaid. However the chill winds are now being recorded and reported. From the Atlanta Fed.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2019 is 0.4 percent on March 13, up from 0.2 percent on March 11. After reports on durable manufacturing and construction spending were released by the U.S. Census Bureau this morning, the nowcast of first-quarter real gross private domestic investment growth increased from -2.9 percent to -2.4 percent, and the nowcast of first-quarter real government expenditures growth increased from 1.7 percent to 2.5 percent.

As you can see the latest data nudge things a little higher but only to the giddy heights of 0.1% per quarter as we record GDP growth. It is noticeable that investment growth is is still solidly negative whilst we are seeing the Trump fiscal expansion in play perhaps also. Whilst one may disagree with the details of it the plan is turning out to be anti-cyclical as fiscal policy is supposed to be as opposed to the pro cyclical effort that we observed so devastating the Greek economy only yesterday.

Stuck like glue

However the head of the Atlanta Fed Ralph Bostic wants us to focus on other matters.

The U.S. economy, by most standard metrics, is doing pretty good,” he said. “We’ve been in a growth trajectory for 10 years now coming out of the Great Recession. Unemployment is at historic lows, 3.8 or 3.9 percent — rates we have not seen since the 1960s. Job creation is happening somewhere around 200,000 to 250,000 jobs a month. And we’re not seeing signs of accelerating inflation.

So classic deflection territory as whilst that was true when he made the speech on the 5th by the 8th we had a rather different view on job creation.

Total nonfarm payroll employment changed little in February (+20,000)

That seemed rather extreme so let us look for some perspective.

After revisions, job gains have averaged 186,000
per month over the last 3 months.

So our tentative view is that a slowing economy is now feeding into lower employment growth. Yesterday we saw that this is also beginning to impact on the unemployment situation.

Initial jobless claims data came out worse than expected. Last week it grew from 223K to 229. Continued claims stood at 1776K against 1758K one week earlier. ( fxpro)

So whilst these numbers are much lower than we saw a decade ago we are now facing a situation where the falls in unemployment and the unemployment rate are about to be replaced by rises. Perhaps Ralph meant that with this but it is hard to say as you can see.

 because there are a lot of things going on.

So Ralph as Marvin Gaye would say “What’s going on?”

The Federal Reserve

If we widen the analysis to the chair of the Federal Reserve he has been shifting his position.

 Because interest rates around the world have steadily declined for several decades, rates in normal times now tend to be much closer to zero than in the past. Thus, when a recession comes, the Fed is likely to have less capacity to cut interest rates to stimulate the economy than in the past, suggesting that trips to the ELB may be more frequent.

Odd if a recession is not feared by Jerome Powell why he is so bothered about it isn’t it? Also the question is begged as to why all the interest-rate cuts and the QE below seem to have us more afraid of recessions?

Between December 2008 and October 2014, the Federal Reserve purchased $3.7 trillion in longer-term Treasury and agency securities.

As to the programme to reduce the balance sheet or Quantitative Tightening then as I pointed out on the 12th of February that seems set to be put away in a cupboard and maybe to the back of it.

Current estimates suggest, however, that something in the ballpark of the 2019:Q4 projected values may be the new normal. The normalized balance sheet may be smaller or larger than that estimate and will grow gradually over time as demand for currency rises with the economy. In all plausible cases, the balance sheet will be considerably larger than before the crisis.

Tucked way in there is a potential rationale for the QE to infinity I discussed back on the 12th of February as well. If we switch to Chair Powell a few days later we get a hint of what he is really aiming at. The emphasis is mine.

Low- and moderate-income homeowners saw their wealth stripped away as home values dropped during the financial crisis and have not recovered as quickly or completely as others. Because home equity has been the main source of wealth among low- and moderate-income people, the crisis dealt a particularly severe blow to these households. Most Americans rely on home equity to send their children to college, invest in their own education and training, or start or grow a business. These aspirations are the basis upon which a strong economy is built. 

Also Chair Powell continues to apparently deliberately ignore the countries which have negative interest-rates of which Japan comes to mind today as it has just reconfirmed its -0.1% official rate.

Just over 10 years ago, the Federal Open Market Committee (FOMC, or the Committee) lowered the federal funds rate close to zero, which we refer to as the effective lower bound, or ELB. Unable to lower rates further.

If like in the UK they felt unable to lower interest-rates further due to problems with “the precious” ( the banks) they should say so as otherwise it is simply untrue.

Money Supply

Here the news looks better because the growth rate of the narrow M1 measure has picked up. It has grown at an annual rate of 4.6% in the most recent quarter up to the 4th of this month as opposed to 4.1% over six months and 3.2% over the preceding year. Whilst there has been a rise in checkable deposits the main move has been in money or cold hard cash. Yes the same money we are supposed to neither want nor need! Although of course the US banking system is somewhat backward in electronic developments.

So in the latter half of 2018 the US economy may well see a beginning of a pick-up in economic growth. The only caveat here is that the 2018 numbers were revised lower which flatters the recent growth numbers as we mull whether they might also be revised lower?


The official data is finally telling us the scale of the US slow down as the Atlanta Fed now cast gives us a running score. We now know it is close to flatlining like so many others although it id fair to point out that as Ralph Bostic hinted out its recovery has been stronger than elsewhere and let me add it was growing more strongly in 2018. Ironically that means it has slowed the most as economics lives up to its reputation of being the dismal science.

The latter part of 2019 may see a bounce but it does not look that strong so we may be in for a period of stagflation of sorts. The of sorts part is that inflation is historically low but then wage growth is no great shakes either if we look at the weekly pattern. This is because whilst hourly wages rose by 3.4% in the latest employment report hours worked fell back by 0.1 so weekly wages rose by less.

So let us end with some lyrics inspired by Ralph Bostic..

Well if you’re stuck for a while consider our child
How can it be happy without its ma and pa
Let’s stick together
Come on, come on, let’s stick together ( Roxy Music)

The economic depression in Greece looks set to continue

A feature of the economic crisis that enfolded in Greece was the fantasy that economic growth would quickly recover. It seems hard to believe now that anyone could have expected the economy to grow at 2% ot so per annum from 2012 onwards but the fans of what Christine Lagarde amongst others called “shock and awe” did. I was reminded of that when I read this from the International Monetary Fund on Tuesday.

Greece has now entered a period of economic growth that puts it among the top performers in the eurozone.

That is to say the least somewhat economical with the truth as this from the Greek statistics office highlights.

The available seasonally adjusted data
indicate that in the 4th quarter of 2018 the Gross Domestic
Product (GDP) in volume terms decreased by 0.1% in comparison with the 3rd quarter of 2018.

So actually it may well have left rather than entered a period of economic growth which is rather different. Over the past year it has done this.

in comparison with the 4th quarter of 2017, it increased by 1.6%.

What this showed was another signal of a slowing economy as 2018 overall was stronger.

GDP for 2018 in volume terms amounted to 190.8 billion euro compared with 187.2 billion euro for 2017 recording an increase of 1.9%.

There is a particular disappointment here as the Greek economy had expanded by 1% in the autumn of last year leading to hopes that it might be about the regain at least some of the ground lost in its depression. Now we find an annual rate of growth that is below the one that was supposed to start an up,up and away recovery in 2012. Nonetheless the IMF is playing what for it is the same old song.

We expect growth to accelerate to nearly 2½ percent this year from around 2 percent in 2018. This puts Greece in the upper tier of the eurozone growth table.

Money Supply

This has proved to be a good guide of economic trends in the Euro area so let us switch to the Bank of Greece data set so we can apply it to Greece alone. The recent peak for the narrow money measure M1 was an annual rate of growth of 7.3% in December 2017 and then mostly grew between 5% and 6% last year. But then the rate of growth slowed to 3.8% last December and further to 2.7% in January.

I am sorry to say that a measure which has worked well is now predicting an economic slow down in Greece and perhaps more contractions in the first half of this year. Looking further ahead broad money growth has slowed from above 6% in general in 2018 to 4.2% in December and 3.3% in January. This gives us a hint towards what economic growth and inflation will be in a couple of years time and the only good thing currently I can say is that Greece tends to have low inflation.

The numbers have been distorted to some extent by the developments mentioned by the IMF below but they are much smaller influences now.

 For example, customers are now free to move their cash to any bank in Greece, and the banks themselves have almost fully repaid emergency liquidity assistance provided by the European Central Bank.

The Greek banks

Even in the ouzo hazed world of the IMF these remain quite a problem.

Third, we are urging the government to do more to fix banks, which remain crippled by past-due loans. This will help households and businesses to once again be able to borrow at reasonable interest rates.

They have another go later.

Directors encouraged the authorities to take a more comprehensive, well-coordinated approach to strengthening bank balance sheets and reviving growth-enhancing lending.

There are two issues with this and let me start with how many times can the Greek banks be saved? Money has been poured again and again into what increasingly looks like a bottomless pit. Also considering they think bank lending is weak – hardly a surprise in the circumstances – on what grounds do they forecast a pick-up in economic growth?

Back on the 29th of January I pointed out that the Bank of Greece was already on the case.

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

So the banks remain heavily impaired in spite of all the bailouts and are no doubt a major factor in this.

vulnerabilities remain significant and downside risks are rising……………. If selected fiscal risks materialize, the sovereign’s repayment capacity could become challenged over the medium term.

That would complete the cycle of disasters as about the only bit of good news for the Institutions in the Greek bailout saga is this.

The government exceeded its 2018 primary fiscal balance target of 3.5 percent of GDP,

Moving out of the specific area of public finances we see that money is being sucked out of the economy to achieve this which acts as a drag on economic growth.

The Eurogroup

It does not seem quite so sure that things are going well as it refrains for putting its money behind it at least for now. From Monday.

The finance ministers of the 19-member Eurozone have decided to postpone disbursing 1 billion euros ($1.12 billion) to Greece.

The reason for postponing the payment is that Greece has not yet changed the provisions of a law protecting debtors’ main housing property from creditors to the EU’s satisfaction. ( Kathimerini).

Euro area

The problem with saying you are doing better than the general Euro area is twofold. If we start with the specific then it was not true in the last quarter of last year and if we move to the general Greece should be doing far, far better as it rebounds from the deep recession/depression it has been in. That is not happening.

Also beating the Euro area average is not what it was as this from earlier highlights. From Howard Archer.

Muted news on as German Economy Ministry says economy likely grew moderately in Q1 & warns on industrial sector. Meanwhile, institute cuts 2019 growth forecast sharply to 0.6% from 1.1%, citing weaker foreign demand for industrial goods.

Some have been pointing out that this matches Italy although that does require you to believe that Italy will grow by 0.6% this year.


Let me shift tack and now look at this from the point of view of how the IMF used to operate. This was when it dealt with trade issues and problems rather than finding French managing directors shifting its focus to Euro area fiscal problems. If you do that you find that the current account did improve in the period 2011-13 substantially but never even got back to balance and then did this.

The current account (CA) deficit was wider than anticipated, reaching 3.4 percent of GDP (though in part due to methodological revisions). Higher export prices and strong external demand were more than offset
by rising imports due to the private consumption recovery, energy price hikes, and the large import share in exports and investment. The primary income deficit widened due to higher payments on foreign investments.

That is quite a failure for the internal competitiveness model ( lower real wages) especially as we noted on January 29th that times were changing there. So the old measure looks grim in fact so grim that I shall cross my fingers and hope for more of this.

The tourism and travel sector in Greece grew 6.9 percent last year, a rate that was three-and-a-half times higher than the growth rate of the entire Greek economy, a survey by the World Travel and Tourism Council (WTTC) has noted.

The survey illustrated that tourism accounted for 20.6 percent of the country’s gross domestic product, against a global rate of just 10.4 percent.

This means that one in every five euros spent in Greece last year came from the tourism and travel sector, whose turnover amounted to 37.5 billion euros. ( Kathimerini ).

The Investing Channel



The Bank of England reads the Guardian as it looks for economic clues

Yesterday brought something of a confession about the forecasting problems of the Bank of England.

As the American playwright Arthur Miller wrote, “A good newspaper, I suppose, is a nation talking to itself.” Using text analysis and machine learning, we decided to put this to test – to find out whether newspaper copy could tell us about the national economy, and in particular, whether it can help us predict GDP growth. ( Bank Underground).

As you can see there is a clearly implied view that they new help in predicting GDP growth. Curious though that they go to newspapers which are not only in decline in circulation terms but are under the “Fake News” cloud. Mind you they may well be more reliable than the Spotify playlists so beloved of Chief Economist Andy Haldane.

It is hard not to have a wry smile at the newspaper of choice here.

To find out, we used text from the daily newspaper The Guardian.

At this point the Financial Times otherwise known as the Bank of England’s house journal is likely to be somewhat miffed, although its brighter journalists will no doubt be aware of its own very poor forecasting record. Anyway Bank Underground found a nice reason to exclude it.

We chose this paper on account of it being free and easy to download;

Does the Bank of England have a poor internet connection? As to whether all of this works well they think it does.

First, their importance in forecasting current economic activity is comparable to a range of high-profile indicators, including the Index of Services, retail sales, equity prices and other confidence indicators, which are typically regarded as leading the economic cycle.

The catch is that they are comparing to this.

 the relevance of NI2 is over half the size of the IHS Markit/CIPS PMI indicator, which has come to be considered the single best survey_based predictor of current economic activity followed by many central banks and market participants.

For all their hype we know that the PMIs are not as reliable as we once thought or hoped as we mull whether the Bank of England has “amnesia” over the August 2016 PMI surveys which led to its Sledgehammer QE and Bank Rate cut as well as panicky promises of more of the same. Only for it to have a red face as it discovered it’s compass was upside down.

Upside down
Boy, you turn me
Inside out
And round and round
Upside down
Boy, you turn me
Inside out
And round and round ( Diana Ross)

Of course they could look at the money supply data which we are about to do. It has worked pretty well and it cannot be hard for them to do as they produce it themselves. It is really rather odd that they do not.

UK Money Supply

If we stay with forecasting as a theme it is really rather odd that the Bank of England abandoned the M0 money supply measure back in 2006. If it had kept it then its Chief Economist Andy Haldane may not have needed to be such a nosey parker about what everyone else is listening too on Spotify. Also for such a Europhile organisation it is rather extraordinary that today’s Money and Credit report does not include an M1 measure. After all that has proved to be an excellent economic leading indicator for the Euro area as we looked at only on Wednesday.

What we are left with is the broad money series or M4 which is very erratic on a monthly basis.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) fell £3.6 billion in January.

Not good but that follows a £12,5 billion expansion in December which was out of line the other way. If we move to the rolling three-month average it at 2.4% is better than it was at the end of last year but continues to only suggest weak economic growth.

If we switch to lending that looks stronger and January was a good month for business lending.

The increase is bank lending to businesses was driven by lending to large businesses. This increased £4.3 billion in January, significantly above the recent levels, driven by M&A activity. Bank lending to small and medium-sized enterprises (SMEs) increased by £0.2 billion in January.

It is nice for once to see SME lending rising and if we switch to the detail around a third was for manufacturing. If we look for some perspective then the annual rate of growth for total business lending has risen to 4.2% which may be hopeful although I consider lending to be more of a lagging than a leading indicator.

Unsecured Credit

This has been on something of a tear such that the Bank of England has been able to call circa 7% annual growth rates an improvement. However there was something of a turn the other way in January.

The extra amount borrowed by consumers to buy goods and services increased to £1.1 billion in January , slightly above the £0.9 billion monthly average since July 2018, but below the £1.5 billion average between January 2016 and June 2018. Within this, credit card lending picked up after a weak December and other loans and advances increased slightly on the month.

So the Bank of England is still able to report an improvement as we note the monthly rise.

Annual consumer credit growth continued to slow, reaching 6.5% in January. The monthly flow of consumer credit was marginally higher in January than the recent average.

But even at 6.5% it is far higher than anything else in the UK economy at around double the increase in wages and quadruple the rate of economic growth.

Manufacturing PMI

There is a link between the data above and this as we see this in the report.

Efforts to stockpile inputs were aided by a solid expansion of purchasing activity at UK manufacturers. This was also felt at suppliers, where the increased demand for raw materials led to a further marked lengthening in average lead times (albeit the least marked since January 2017).

So we see that manufacturers have borrowed to build up stocks which seems sensible to me. This meant that overall we did well.

The headline seasonally adjusted IHS Markit/CIPS
Purchasing Managers’ Index® (PMI®) fell to a four-month low of 52.0 in February,

The reason why I think that is good is because if we look at the Euro area for example it had a minor contraction at 49.3 with Germany at 47.6 pulling it lower. Anyway for a different perspective here is how fastFT has covered this.

UK manufacturing outlook dimmest on record, key survey shows

I fear for what they must make of Germany don’t you?


There is a lot to consider here but let us start with the economic outlook which looks steady as she goes from the monetary data set. Not much growth but some as we bumble along. On a conceptual level this poses a deep question for the Bank of England which has interfered in so many markets yet claims that economic growth now has a “speed limit” of 1.5% conveniently ignoring its own role in this. Also why did it end the narrow money supply data which works well as a leading indicator?

Much may happen at the end of this month as we wait to see what and indeed if any form of Brexit starts at the end of it. But we continue to borrow heavily on an unsecured basis and even with the better number in January be far less enthusiastic about small business borrowing. Just as a reminder the Funding for Lending Scheme of the Bank of England was supposed to provide exactly the opposite result.


The economic outlook for the Euro area looks even weaker

Today brings the economy of the Euro area into focus and to my mind yesterday brought us something to consider so let me hand you over to Statistics Netherlands.

In January 2019, prices of owner-occupied dwellings (excluding new constructions) were on average 8.7 percent higher than in the same month last year. The price increase was somewhat higher than in December 2018. This is evident from price monitoring of existing owner-occupied dwellings by Statistics Netherlands (CBS) and The Netherlands’ Cadastre, Land Registry and Mapping Agency.

This is a very familiar theme as we find that the era of low and in this instance negative interest-rates and QE bond purchases leads to higher house prices. We have looked at house prices in the Netherlands regularly over the credit crunch era so let us remind ourselves of the full scope and the emphasis is mine.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then. In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time. In January 2019, house prices reached the highest level ever.

Compared to the low in June 2013, house prices were up by almost 36 percent on average in January 2019, and 6.5 percent higher on average relative to the previous peak in August 2008.

There are various issues to consider here of which the first is simply timing. Different central banks responded in different ways to the credit crunch but house prices turning in the summer of 2013 is a rather familiar message. Also we note that the turn in house prices was driven by credit easing policies at this point as large-scale QE had not yet begun. From December 2011.

To conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year.

They amounted to around one trillion Euros and slowly we see in this instance the Netherlands housing market began to sing along with George Benson.

Turn your love around
Don’t you turn me down
I can show you how
Turn your love around

Why do central bankers love this? A speech from Peter Praet of the ECB last week gave us the two main reasons and he opened with the wealth effects.

Residential real estate (RRE) is the main component of euro area household wealth. Housing accounts for around 50% of asset holdings[2] and is largely financed through borrowing, with mortgages making up 85% of household liabilities

Then the fact that it supports “the precious”.

The corollary is a tight linkage between RRE prices and the balance sheets of the euro area banking sector. Mortgage loans account for between 40% and 90% of total lending by euro area banks to households across EU countries.

One way of looking at the problems of the Italian is to note that the balance sheets of the banks have not been helped by higher house prices for their mortgage balance sheets and troublingly in fact it is getting worse.

According to preliminary estimates, in the third quarter of 2018 the House Price Index (see Italian IPAB) decreased by 0.8% compared with both the previous quarter and the same quarter of the previous year (on annual basis it was -0.4% in the second quarter).

The linkage to the real economy was also provided by Peter Praet and at the moment he will be thinking of the positives in spite of the fact he looked at it in reverse here.

Falls in prices therefore affect the euro area business cycle through two main channels. First, by reducing households’ net wealth, which has decelerator effects on consumption[3], and weakening banks’ balance sheets through the decline in collateral and property values (the asset valuation channel); and second, by increasing the riskiness of households and of construction firms, prompting banks to tighten their lending standards (the credit risk channel).

Overall I guess he will be happy with this.

House prices rose by 4.3% in both the euro area and the EU in the third quarter of 2018 compared with the same quarter of the previous year.

This compares to a current consumer inflation rate of the order of 2.1% back then which does not seem to include house prices, can anybody think why? Let me help out by suggesting in central banker terms at least the other around 2% is wealth effects.

Returning to the monetary analysis theme and looking at the path of narrow and broad money growth it looks as though house prices move with broad money growth which is logical with the role of mortgage lending in overall bank lending. House prices may even move first perhaps in anticipation of policy moves as we have seen with bond yields and exchange rates.

Money Supply Trends

We have got used to falling numbers and today was no exception.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 6.2% in January from 6.6% in December…….annual growth rate of broad monetary aggregate M3 decreased to 3.8% in January 2019 from 4.1% in December 2018.

If we look at this as a broad sweep then M1 growth has fallen substantially from the 11.7% per annum peak of the summer of 2015 and the bounce to 9.7% in late 2017. Much of this has been a deliberate policy with the monthly QE tap having been reduced and then finally closed at the end of 2018. This has had an impact on the broader measure as well which has also been weakened by this.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at -0.8% in January, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) decreased to 0.4% in January from 0.9% in December.

Putting it another way M3 would be growing at an annual rate of 4% if only M1 was a factor and the wider measures reduced the annual rate of growth by 0.2%.


The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous. A little relief comes from the fact that inflation has fallen although that may change as we note the recent rises in the oil price. Thus it looks like more of the same weak trend in the early part of 2018.

The broad money measure has declined but in proportionate terms by much less or to put it another way this is mostly the result of the end of QE. This poses a problem as we are reminded of the words of Mario Draghi.

certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Now we see that as it has ended in terms of monthly flow economic growth in the Euro area has slowed to a crawl. Whether it will slow further I do not know but we seem set for more weak growth in the early part of this year.

Meanwhile some have claimed that bank lending growth is supporting things as opposed to my view that it is a lagging indicator and has been representing the better times seen in 2017. I guess they will be quieter today as even lagging indicators work over time.

Annual growth rate of adjusted loans to non-financial corporations decreased to 3.3% in January from 3.9% in December.

Returning to my opening theme unless there is a change the outlook for house prices in the Euro area looks set for a turn.



Money Supply data suggest it will be a weak start to 2019 for the US economy

We have an opportunity to take a look in detail at the US economy which stands out at the moment at a time of slowing economies elsewhere. Partly of course that is due to the shut down of government offices which means that we do not have economic growth or GDP data for the last quarter of 2018, but also because it had a better trajectory anyway that Europe or Japan. We get some clues from the Minutes of the January meeting of the US Federal Reserve and let me open with some old friends that rarely get a mention these days.

Standing dollar liquidity swap arrangements with
the following foreign central banks: Standing foreign currency liquidity swap arrangements with the following foreign central banks:

Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank

That sets the background as although we are supposedly out of crisis the measures enacted in response to the credit crunch never seem to go away. Another powerful point was the way that if you read between the lines the existence of a Powell Put Option for equity markets is confirmed.

Early in the new year, market sentiment improved following communications by Federal Reserve officials emphasizing that the Committee could be “patient” in considering further adjustments to the stance of policy and
that it would be flexible in managing the reduction of
securities holdings in the SOMA. On balance, stock
prices finished the period up almost 5 percent while corporate risk spreads narrowed….

This is in many ways more significant than the rhetoric about possible future interest-rate increases which seem set to fade away. Also whilst this does not actually say that QT or Quantitative Tightening is toast it gives us that impression.

Almost all participants thought that it would be desirable
to announce before too long a plan to stop reducing the
Federal Reserve’s asset holdings later this year.

Whilst it has it faults as a website sometimes Zerohedge is on the money.

Dear is there a direct line for “market participants” to complain when stocks perform not as expected?

There is also the issue of the apparent way that the Federal Reserve capitulated under pressure from President Trump who only a day earlier had made his views clear yet again.

Had the opposition party (no, not the Media) won the election, the Stock Market would be down at least 10,000 points by now. We are heading up, up, up!

His favourite song must be that one by Yazz.

Monetary Developments

Sadly the Minutes ignore this issue although they do look at credit issues.

Staff continued to monitor developments in the leveraged loan market given the sharp rise in spreads and slowdown in issuance late last year. The build-up in overall nonfinancial business debt to levels close to historical highs relative to GDP was viewed as a factor that could amplify adverse shocks to the business sector.

We can do better than them on two counts firstly by looking at the narrow money data as a leading indicator and also we have the January and some February data which they did not. Doing so shows us that M0 growth is running at an annual rate of 2% over the past three months, 3.3% over the past 6 months and 2.3% over the year. As you can see it picked up for a bit but has fallen back.

If we look for perspective we see that it was over 15% in 2011 and 12 and in more recent years was between 7% and 8%. So we can expect a slowing economic effect from it as we note that some of the decline will be due to the QT programme. Looking into the detail of the narrow money numbers we see that the amount of cash in circulation is rising (6% in the year to January) and it is demand deposits (-2.5% over the past year) which have been the main factor in the rate of growth of narrow money falling,

So we move on with noting that a monetary brake for say the first half of 2019 has been applied to the economy.

Switching to broad money gives a different picture as we recall that it applies some two years or so ahead. That is because it has picked up in the last three months to an annual rate of 6% whereas over the past twelve months the annual rate of M2 growth was 4.3%. So assuming it works and the lags are variable the US economy should see either some growth or some inflation in a couple of years time. Also Americans have been saving and as an aside as I cannot recall a mention of them for some time they also have some US $1.7 billion of what they would call travellers checks.

Consumer Credit

Earlier this month we were told this.

In 2018, consumer credit increased 5 percent, with revolving and nonrevolving credit increasing 2-3/4 percent and 5-1/2 percent, respectively. Consumer credit increased at a seasonally adjusted annual rate of 6-1/2 percent in the fourth quarter and at a rate of 5 percent in December.

As you can see that is greater than economic growth but much less exposed than my own country the UK as not only is the rate of expansion lower but the rate of economic growth which was confirmed at an annualised 3.4% for the third quarter yesterday is higher.

However if we look into the detail we can note signs of trouble in the car loans sector which has grown to US $1.155 trillion. The growth rate has roughly halved in terms of annual dollar increases from the 75-80 billion it was in 2014-16 to 37 and 41 billion in the last two years respectively. We know that the industry has done its best to halt the decline with measures such as the “extend and pretend” methodology as some car loans last 8 years. So there are signs of the market signing along with Lyndsey Buckingham.

I think I’m in trouble,
I think I’m in trouble.

On that subject let me add get well soon to Lyndsey.


Whilst we do not have the numbers for the fourth quarter due to the government shut down we do have this from the Atlanta Federal Reserve.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2018 is 1.4 percent on February 21, down from 1.5 percent on February 14. After this morning’s advance durable manufacturing report from the U.S. Census Bureau, the nowcast of fourth-quarter real nonresidential equipment investment growth declined from 4.5 percent to 3.9 percent.

As you can see that would be quite a lowing from what we saw earlier in 2018 and if we switch to the New York Fed its tracker for first quarter data released so far has US GDP growing at 1.1%. Putting all this another way this brings me back to my article on the 12th of this month as I mulled how the super massive black hole of QE to infinity seemed to be sucking us all in as we approach the event horizon. For us to avoid it we will need this from the Stranglers.

Something’s happening and it’s happening right now
You’re too blind to see it
Something’s happening and it’s happening right now
Ain’t got time to wait
I said something better change
I said something better change
I said something better change
I said something better change