France decides to Spend! Spend! Spend!

Yesterday brought something that was both new and familiar from France. The new part is a substantial extra fiscal stimulus. The familiar is that France as regular readers will be aware had been pushing the boundaries of the Euro area fiscal rules anyway, This is something which has led to friction with Italy which has come under fire for its fiscal position. Whereas France pretty much escaped it in spite of having its nose pressed against the Growth and Stability Pact limit of 3% of Gross Domestic Product for the fiscal deficit. Actually that Pact already feels as if it is from a lifetime ago although those who have argued that it gets abandoned when it suits France and Germany are no doubt having a wry smile.

The Details

Here is a translation of President Macron’s words.

We are now entering a new phase: that of recovery and reconstruction. To overcome the most important in our modern history, to prevent the cancer of mass unemployment from setting in, which unfortunately our country has suffered too long, today we decide to invest massively. 100 billion, of which 40 billion comes from financing obtained hard from the European Union, will thus be injected into the economy in the coming months. It is an unprecedented amount which, in relation to our national wealth, makes the French plan one of the most ambitious.

So the headline is 100 billion Euros which is a tidy sum even in these inflated times for such matters. Also you will no doubt have spotted that he is trying to present something of a windfall from the European Union which is nothing of the sort. The money will simply be borrowed collectively rather than individually. So it is something of a sleight of hand. One thing we can agree on is the French enthusiasm for fiscal policy, although of course they have been rather less enthusiatic in the past about such policies from some of their Euro area partners.

There are three components to this.

Out of 100 billion euros, 30 billion are intended to finance the ecological transition.

As well as a green agenda there is a plan to boost business which involves 35 billion Euros of which the main component is below.

As part of the recovery plan, production taxes will be reduced by € 10bn from January 1, 2021, and by sustainable way. It is therefore € 20bn in tax cuts of production over 2021–2022.

That is an interesting strategy at a time of a soaring fiscal deficit to day the least. So far we have ecology and competitiveness which seems to favour big business. Those who have followed French history may enjoy this reference from Le Monde.

With an approach that smacks of industrial Colbertism

The remaining 35 billion Euros is to go into what is described as public cohesion which is supporting jobs and health. In fact the jobs target is ambitious.

According to the French government, the plan will help the economy make up for the coronavirus-related loss of GDP by the end of 2022, and help create 160,000 new jobs next year.  ( MarketWatch)

Is it necessary?

PARIS (Reuters) – French Finance Minister Bruno Le Maire believes that the French economy could perform better than currently forecast this year, he said on Friday.

“I think we will do better in 2020 than the 11% recession forecast at the moment,” Le Maire told BFM TV.

I suspect Monsieur Le Maire is a Beatles fan and of this in particular.

It’s getting better
Since you’ve been mine
Getting so much better all the time!

Of course things have got worse as he has told us they have got better. Something he may have repeated this morning.

August PMI® data pointed to the sharpest contraction in French construction activity for three months……….At the sub-sector level, the decrease in activity was broad based. Work undertaken on commercial projects fell at the
quickest pace since May, and there was a fresh decline in civil engineering activity after signs of recovery in June and July. Home building activity contracted for the sixth month running, although the rate of decrease was softer than in July. ( Markit)

We have lost a lot of faith in PMi numbers but even so there is an issue as I do not know if there is a French equivalent of “shovel ready”? But construction is a tap that fiscal policy can influence relatively quickly and there seems to be no sign of that at all.

Indeed the total PMI picture was disappointing.

“The latest PMI data came as a disappointment
following the sharp rise in private sector activity seen
during July, which had spurred hopes that the French
economy could undergo a swift recovery towards precoronavirus levels of output. However, with activity
growth easing considerably in the latest survey period,
those hopes have been dashed…”

So the data seems to be more in line with the view expressed below.

It is designed to try to “avoid an economic collapse,” French Prime Minister Jean Castex said on Thursday. ( MarketWatch)

Where are the Public Finances?

According to the Trading Economics this is this mornings update.

France’s government budget deficit widened to EUR 151 billion in the first seven months of 2020 from EUR 109.7 billion a year earlier, amid efforts to support the economy hit by the coronavirus crisis. Government spending jumped 10.4 percent from a year earlier to EUR 269.3 billion, while revenues went down 6.3 percent to EUR 142.25 billion

I think their definition of spending has missed out debt costs.

As of the end of June the public debt was 1.992 trillion Euros.


I have avoided being to specific about the size of the contraction of the economy and hence numbers like debt to GDP. There are several reasons for this. One is simply that we do not know them and also we do not know how much of the contraction will be temporary and how much permanent? We return to part of yesterday’s post and France will be saying Merci Madame Lagarde with passion. The various QE bond purchase programmes mean that France has a benchmark ten-year yield of -0.18% and even long-term borrowing is cheap as it estimates it will pay 0.57% for some 40 year debt on Monday. That’s what you get when you buy 473 billion Euros of something and that is just the original emergency programme or PSPP and not the new emergency programme or PEPP. On that road the European Union fund is pure PR as it ends up at the ECB anyway.

The Bank of France has looked at the chances of a rebound and if we look at unemployment and it looks rather ominous.

However, the speed of the recovery in the coming months and years is more uncertain, as is the peak in the unemployment rate, which the Banque de France forecasts at 11.8% in mid-2021 for France……….Chart 1 shows that in France, Germany, Italy, and the United States, once the unemployment rate peaked, it fell at a rate that was fairly similar from one crisis to the next: on average 0.55 percentage point (pp) per year in France and Italy, 0.7 pp in Germany, and 0.63 pp in the United States.

There is not much cheer there and they seem to have overlooked that unemployment rates have been much higher in the Euro area than the US. But we can see how this might have triggered the French fiscal response especially at these bond yields.

But Giulia Sestieri is likely to find that her conclusion about fiscal policy is likely to see the Bank of France croissant and espresso trolley also contain the finest brandy as it arrives at her desk.

Ceteris paribus, the lessons of economic literature suggest potentially large fiscal multipliers during the post-Covid19 recovery phase

Mind you that is a lot of caveats for one solitary sentence.

Some welcome good economic news for the UK

Today is proving to be something of a rarity in the current Covid-19 pandemic as it has brought some better and indeed good economic news. It is for the UK but let us hope that such trends will be repeated elsewhere. It is also in an area that can operate as a leading indicator.

In July 2020, retail sales volumes increased by 3.6% when compared with June, and are 3.0% above pre-pandemic levels in February 2020.

As you can see not only did July improve on June but it took the UK above its pre pandemic levels. If we look at the breakdown we see that quite a lot was going on in the detail.

In July, the volume of food store sales and non-store retailing remained at high sales levels, despite monthly contractions in these sectors at negative 3.1% and 2.1% respectively.

In July, fuel sales continued to recover from low sales levels but were still 11.7% lower than February; recent analysis shows that car road traffic in July was around 17 percentage points lower compared with the first week in February, according to data from the Department for Transport.

As you can see food sales dipped ( probably good for our waistlines) as did non store retailing but the recovery in fuel sales from the nadir when so few were driving was a stronger influence. I suspect the fuel sales issue is likely to continue this month based on the new establishment passion for people diving their cars to work. That of course clashes with their past enthusiasm for the now rather empty looking public transport ( the famous double-decker red buses of London are now limited to a mere 30 passengers and the ones passing me these days rarely seem anywhere near that). Actually it also collides with the recent public works for creating cycle lanes out of is not nowhere restricted space in London which has had me scratching my head and I am a regular Boris Bike user.

As we look further I thought that I was clearly not typical as what I bought was clothing but then I noted the stores bit.

Clothing store sales were the worst hit during the pandemic and volume sales in July remained 25.7% lower than February, even with a July 2020 monthly increase of 11.9% in this sector.

Online retail sales fell by 7.0% in July when compared with June, but the strong growth experienced over the pandemic has meant that sales are still 50.4% higher than February’s pre-pandemic levels.

In fact the only downbeat part of today;s report was the implication that the decline of the high street has been given another shove by the current pandemic. On the upside we are seeing innovation and change. Also if we look for some perspective we see quite a switch on terms of trend.

When compared with the previous three months, a stronger rate of growth is seen in the three months to July, at 5.1% and 6.1% for value and volume sales respectively. This was following eight consecutive months of decline in the three-month on three-month growth rate.

It is easy to forget in the melee of news but UK Retail Sales growth had been slip-sliding away and now we find ourselves recording what is a V-Shaped recovery in its purest form.

There is another undercut to this which feeds into a theme I first established on the 29th of January 2015 which is like Kryptonite for central bankers and their lust for inflation. If we look at the value and volume figures we see that prices have fallen and they have led to a higher volume of sales.I doubt that will feature in any Bank of England Working Paper.

Purchasing Manager’s Indices

These do not have the street credibility they once did. However the UK numbers covering August also provided some good news today.

August’s data illustrates that the recovery has gained speed
across both the manufacturing and service sectors since July. The combined expansion of UK private sector output was the fastest for almost seven years, following sharp improvements in business and consumer spending from the lows seen in April.

Public-Sector Finances

This is an example of a number which is both good and bad at the same time.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in July 2020 is estimated to have been £26.7 billion, £28.3 billion more than in July 2019 and the fourth highest borrowing in any month on record (records began in 1993).

That is because we did need support for the economy ( how much is of course debateable) and even so the monthly numbers are falling especially if we note this as well.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in June 2020 was revised down by £6.0 billion to £29.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions.

We can now switch to describing the position as the good the bad and the ugly.

Borrowing in the first four months of this financial year (April to July 2020) is estimated to have been £150.5 billion, £128.4 billion more than in the same period last year and the highest borrowing in any April to July period on record (records began in 1993), with each of the months from April to July being records.

The size of the debt is a combination of ugly and bad but we see that the numbers look like they are falling quite quickly now. Indeed if we allow for the effect of the economy picking up that impact should be reinforced especially if we allow for this.

Self-assessed Income Tax receipts were £4.8 billion in July 2020, £4.5 billion less than in July 2019, because of the government’s deferral policy;

National Debt

There has been some shocking reporting of this today which basically involves copy and pasting this.

Debt (public sector net debt excluding public sector banks, PSND ex) has exceeded £2 trillion for the first time; at the end of July 2020, debt was £2,004.0 billion, £227.6 billion more than at the same point last year.

It is a nice click bait headline but if you read the full document you will spot this.

The Bank of England’s (BoE’s) contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund (APF), Term Funding Schemes (TFS) and Covid Corporate Financing Facility Fund (CCFF).

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of BoE, PSND ex at the end of July 2020 would reduce by £194.8 billion (or 9.8 percentage points of GDP) to £1,809.3 billion (or 90.7% of GDP).

Regular readers may be having a wry smile at me finally being nice to the Term Funding Scheme! But its total should not be added to the national debt and nor should profits from the Bank of England QE holdings. Apparently profit is now debt or something like that.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £115.8 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase.


It is nice to report some better news for the economy and let us hope it will continue until we arrive at the next information point which is how the economy responds to the end of the furlough scheme in October. As to the Public Finances I have avoided any references to the Office for Budget Responsibility until now as they have managed to limbo under their own usual low standards. Accordingly even my first rule of OBR Club that the OBR is always wrong may need an upwards revision.

Let me now take you away from the fantasy that the Bank of England has taken UK debt above £2 trillion and return to an Earth where it is implicitly financing the debt. Here is the Resolution Foundation.

These high fiscal costs of lockdown look to be manageable, though. 1) The @UK_DMO   has raised over £243bn since mid-March. 2) While debt is going up, the costs are still going down. Interest payments were £2.4bn in July 2020, a £2bn fall compared with July 2019.

That shows how much debt we have issued but how can it be cheaper? This is because the Bank of England has turned up as a buyer of first resort. At the peak it was buying some £13,5 billion of UK bonds a week and whilst the weekly pace has now dropped to £4.4 billion you can see that it has been like a powered up Pac-Man. Or if you prefer buying some £657 billion of something does tend to move the price and yield especially if we compare it to the total market.

Gilts make up the largest component of debt. At the end of July 2020 there were £1,681.2 billion of central government gilts in circulation.

Finally the UK Retail Prices Index consultation closes tonight and please feel free to contact HM Treasury to ask why they are trying to neuter out best inflation measure?



Today’s surveys show that any economic recovery in France remains distant

Today out focus shifts to the second largest economy in the Euro area as La Belle France takes centre stage. Let us open with the thoughts of the finance minister on the economic state of play.

PARIS (Reuters) – Recent economic indicators for France are satisfactory but too fragile to change the forecast for an 11% economic contraction this year, Bruno Le Maire said Thursday.

The Minister of the Economy, speaking to the National Assembly for the debate on the orientation of public finances for 2021, said he expected economic growth of 8% for France next year and expressed the will that the in 2022, activity returns to its levels preceding the crisis linked to the new coronavirus.

Only a politician could use the words “satisfactory” and “too fragile” in the same sentence and it is a grim one of a 11% decline in GDP ( Gross Domestic Product) for this year. This means that the expectations for France are worse than those for the Euro area as a whole.

The expectations of SPF respondents for euro area real GDP growth averaged -8.3%, 5.7% and 2.4% for 2020, 2021 and 2022, respectively. ( ECB 16th July)

So around 3% worse which is interesting and I note that there is a similar pattern of predicting most but far from all of it returning in 2021. That is what you call making a forecast that is like an each-way bet where if you do recover no-one will care and if you do worse than that you highlight you did not expect a full recovery. The truth is that none of us know how 2020 will finish let alone what will happen next year. Maybe the quote below suffers from translation from French but “expressed the will?”

expressed the will that the in 2022, activity returns to its levels preceding the crisis

What does that mean? So let us move on knowing 2020 will be bad with a likely double-digit fall in economic output.

Right Here, Right Now

This morning has brought the latest in the long-running official survey on the economy.

In July 2020, the business climate has continued its recovery started in May. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 7 points. At 85, the business climate is however still significantly below its long-term average (100), and a fortiori below its relatively high pre-lockdown level (105).

The ending of the lockdown has seen a welcome rally of 7 points but sadly only to 85% of the long-term average. If we look back though I note it was recording a relatively high 105 which makes me mull this.

In Q1 2020, real gross domestic product (GDP)* fell sharply: -5.3% after -0.1% in Q4 2019, thus a revision of +0.5% compared with the first estimate published in April.

I think the relevant number is the contraction in the last quarter of 2019 and how does that relate to a relatively high reading. As the fall is only 0.1% we could argue the economy was flat lining but we still have a measure recording growth when there wasn’t any.

Going back to the survey we see a similar pattern but weaker number for employment.

In July 2020, the employment climate has continued to recover sharply from the April low. At 77, it has gained 10 points compared to June, but it still remains far below its pre-lockdown level.


The position here is particularly bad.

According to the business managers surveyed in July 2020, the business climate in industry has continued to improve. The composite indicator has gained 4 points compared to June, after losing 30 points in April due to the health crisis. However, at 82, it remains far below its long term average (100).

Looking ahead the order book does not look exactly auspicious either.

In July 2020, slightly fewer industrialists than in June have declared their order books to be below normal. The balances of opinion on total and foreign order books have very slightly recovered. Both stand at very low levels although slightly higher than in 2009.

If we look back this measure had a recent peak around 112 as 2018 began. This represented quite a rally compared to the dips below 90 seen at times in 2012 and 13. But after that peak it began slip-sliding away to around 100 and now well you can see above.


Whilst debt hits the headlines the breakdown of the GDP data shows that it is not the only thing going on.

At the same time, household consumption fell (-5.6% after +0.3%), resulting in a sharp rise of the saving rate to 19.6% after 15.1% in Q4 2019.

The pandemic has seen higher levels of saving which has two drivers I think. Firstly many simply could not spend their money as so many outlets closed. Next those who can look like they have been indulging in some precautionary saving which is something of a disaster for supporters of negative interest-rates.

National Debt

Having just looked at ying here is part of the yang.

In Q1 2020 the public deficit increased by 1.1 points: 4.8% of GDP after 3.7% in Q4 2019.

So we see that pandemic France was borrowing more and regular readers will have noted this from past articles. For the year as a whole France had its nose pressed against the Growth and Stability Pact threshold of 3% of GDP. I know some of you measure an economy by tax receipts so they were 1.275 trillion in 2019.

Moving to the national debt we see this.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Looking ahead this is the view of the Bank of France.

As a result of the wider deficit and the fall in GDP, government debt should rise substantially to 119% of GDP in 2020, from 98.1% in 2019, and should scarcely decline over the rest of the projection horizon. The average debt-to-GDP ratio for the euro area should also increase in parallel, but to a more limited extent (to 101% of GDP in 2022, easing to 100% by end-2022).


There are some familiar patterns of a sharp drop in economic output followed by plenty of rhetoric about a sharp recovery next year. However the surveys we have looked at show a very partial recovery so far so that the “V-shaped” hopium users find themselves singing along with Bonnie Tyler.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning

Switching to the mounting debt burden it is a clear issue in terms of capital and if you like the weight of the debt. Also estimates of economies at around 120% of GDP went spectacularly wrong in the Euro area crisis. But in terms of debt costs then with a ten-year yield of -0.19% France is often being paid to issue debt. Although care is needed because the ECB does not buy ultra long bonds ( 30 years is its limit) meaning that France has a fifty-year bond yield of 0,58%. We should not forget that even the latter is very cheap, especially in these circumstances.

Also there is this from the head of the ECB Christine Lagarde.

In my interview with @IgnatiusPost

, I explained that price stability and climate change are closely related. Consequently, we must take climate-related risks into account in our central banking activities.




UK Public-Sector Borrowing starts to improve

Today has brought the UK public-sector finances into focus and we find some better news which is very welcome in these times. I was going to type good but as you will soon see the numbers remain somewhat eye-watering. Let me illustrate with the opening paragraph from this morning’s release.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in June 2020 is estimated to have been £35.5 billion, roughly five times (or £28.3 billion more) that in June 2019 and the third highest borrowing in any month on record (records began in 1993).

We can’t call that good when we were pre pandemic thinking of borrowing that sort of amount in the whole year. But it represents a slowing on the pandemic trend which is reinforced by this from May.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in May 2020 was revised down by £9.8 billion to £45.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions

The better news theme continues with two nuances. The first is simply welcoming a lower number and the second is the strong hint that the economy was doing better than so far thought via stronger tax receipts. So I dug a little deeper.

Central government tax receipts and NICs for May 2020 have been increased by £6.6 billion and £2.3 billion respectively compared with those published in our previous bulletin (published 19 June 2020). Previous estimates of Pay As You Earn (PAYE) Income Tax increased by £4.2 billion and Value Added Tax (VAT) increased by £2.3 billion, both because of updated data.

This is outright good news as we see that both income taxes and expenditure or consumption taxes are better than previously thought. For overseas readers National Insurance Contributions can be confusing as they are presented as everything they are not. For example they hint they are for pensions and the like when in fact they just go in a common pot, and they give the impression they are not income taxes when they are.

Oh and something else we have been noting was in play.

Alcohol duty collected in May has increased by £0.5 billion (on a national accounts basis) compared with our previous estimate. A large proportion of this additional revenue relates to repayment of arrears of duty payments (or debt) from February, March and April 2020.

Perhaps whoever was collecting those numbers had been having a drink themselves….

Tax Receipts

This pandemic has reminded us that they are not what you might expect.

To estimate borrowing, tax receipts and NICs are recorded on an accrued (or national accounts) rather than on a cash receipt basis. In other words, we attempt to record receipts at the point where the liability arose, rather than when the tax is actually paid.

In a modern online IT area that seems poor to me. But it gets worse as we note my first rule of OBR club which for newer readers is that it is always wrong.

This process means many receipts are provisional for the latest period(s) as they depend on both actual cash payments and on projections of future tax receipts (currently based on the Office for Budget Responsibility’s (OBR’s) Coronavirus Reference Scenario ( 14 May 2020) , which are “accrued” (or time adjusted) back to the current month(s)).

So as usual we see that in May the OBR was wrong.


After noting the above please take this with a pinch of salt.

In June 2020, central government receipts are estimated to have fallen by 16.5% compared with June 2019 to £49.4 billion, including £35.0 billion in taxes…..This month, tax revenue on a national accounts basis fell by 20.1% compared with June last year, with Value Added Tax (VAT), Corporation Tax and Pay As You Earn (PAYE) Income Tax receipts falling by 45.1%, 19.2% and 1.6% respectively.

Hopefully they have learned something from the May experience. There is some hope from this although surely it should also apply to NICs?

However, we have applied an additional adjustment to PAYE Income Tax and Air Passenger Duty (APD).

There are a couple of extra points to note from the detail. For example they expect Stamp Duty on property to be £600 million as opposed to £900 million last June which gives us some more data on the property market. Also in the light of the upwards revision to alcohol duty I am a bit surprised they expect less this June ( £200 million lower) but £100 million more from tobacco.

We are spending much more.

In June 2020, central government spent £80.5 billion, an increase of 24.8% on June 2019.

There was also quite a win from reporting lower inflation levels.

Interest payments on the government’s outstanding debt in June 2020 were £2.7 billion, a £4.6 billion decrease compared with June 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.


We get some from this.

Borrowing in the first quarter of this financial year is estimated to have been £127.9 billion, £103.9 billion more than in the same period last year and the highest borrowing in any April to June period on record (records began in 1993), with each of the months from April to June being records.

We only get some written detail.

This unprecedented increase largely reflects the impact of the pandemic on the public finances, with the furlough schemes (CJRS and SEISS) adding £37.6 billion in borrowing alone as subsidies paid by central government to the private sector.

So let me help out a bit. Income taxes are only a little bit down on last year but VAT receipts are £10.8 billion lower which means there has been some saving going on. Fuel Duty is unsurprisingly some £3.2 billion lower and Stamp Duty some £1.2 billion lower.

One matter I would note is that expenditure on debt is down substantially by some £5.6 billion and I would caution about putting it all down to lower inflation and inflation ( RPI) linked Gilts. We have begun to issue the occasional Gilt at negative yields and others for little or nothing which will add to this. It is a development which I think only  we have had on our radar which is that whilst we are issuing so much debt it is at only a small annual cost. By the way this is another area which the OBR has got spectacularly wrong and confirmed my first rule about them one more time.


So we learn that the UK economy has been doing better than previously reported as one of the signals is tax receipts. However, that is relative and one could easily type less badly. Moving onto the National Debt I have to confess I had a wry smile.

At the end of June 2020, the amount of money owed by the public sector to the private sector was just under £2.0 trillion (or £1,983.8 billion), which equates to 99.6% of gross domestic product (GDP).

So I was both right and wrong in awarding myself a slice of humble pie last month. Right in that unless you can prove the numbers are wrong you take it on the chin. But on the other side I was in fact more accurate than the Office for National Statistics in expecting the breaching of the 100% threshold to take longer. Also my first rule of OBR Club won again. Oh well! As Fleetwood Mac sang.

Another matter of note is how the Bank of England is affecting these numbers which is two ways. It has inflated how we record the debt.

If we were to remove the temporary debt impact of APF and Term Funding Scheme, public sector net debt excluding public sector banks (PSND ex) at the end of June 2020 would reduce by £192.9 billion (or 9.7% percentage points of GDP) to £1,790.9 billion (or 89.9% of GDP).

However all its purchases ( another £3.45 billion today) mean that we are borrowing very cheaply with some bond yields negative ( out to 6/7 years) and even the fifty-year being only 0.53%.



How much do the rising national debts matter?


A symptom of the economic response to the Covid-19 virus pandemic is more government borrowing. This flows naturally into higher government debt levels and as we are also seeing shrinking economies that means the ratio between the two will be moved significantly. I see that yesterday this triggered the IMF (International Monetary Fund) Klaxon.

This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies.

Firstly we need to take this as a broad-brush situation as we note yet another IMF forecast that was wrong, confirming another of our themes.

Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below our April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

It is hard not to laugh. At the moment things are so uncertain that we should expect errors but the issue here is that the media treat IMF forecasts as something of note when they are regularly wrong. Be that as it may they do give us two interesting comparisons.

These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis………Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

Being the IMF we do not get any analysis on why we always seem to need economic support.

What do they suggest?

Here come’s the IMF playbook.

Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time.

Readers will have differing views on the green washing but that is simply an attempt at populism which once can understand. After all if you has made such a hash of the situation in Argentina and Greece you would want some PR too. That leads me to the last sentence, were the poor protected in Greece and Argentina under the IMF? No.

The IMF has another go.

Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

Would the “wasteful spending” include the part of this below that props up Zombie companies?

and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants.

Now I know it is an extreme case but this piece of news makes me think.

BERLIN (Reuters) – German payments company Wirecard said on Thursday it was filing to open insolvency proceedings after disclosing a $2.1 billion financial hole in its accounts.

You see the regulator was on the case but….

German financial watchdog #Bafin last year banned short selling in its shares, and filed a criminal complaint against FT journalists who had written critical pieces. .. ( @BoersenDE)

Whereas now it says this.

The head of Germany’s financial watchdog says the Wirecard situations is “a disaster” and “a shame”. He accepts there have been failings at his own institution. “I salute” those journalists and short-sellers who were digging out inconsistencies on it , he says. ( MAmdorsky )

As you can see the establishment has a shocking record in this area and I have personal experience of it blaming those reporting financial crime rather than the criminals. I raise the issue on two counts. Firstly I am expecting a raft of fraud in the aid schemes and secondly I would point out that short-selling has a role in revealing financial crime. Whereas the media often lazily depict it as being a plaything of rich financiers and hedge funds. Returning directly to today’s theme the fraud will be a wastage in terms of debt being acquired but with no positive economic impulse afterwards.

Still I am sure the Bank of England is not trying to have its cake and eat it.

Join us on 30 June for an interactive webinar with restaurateur, chef and The Great British Bake Off judge, @PrueLeith . Find out more and register for your place here:

Debt is cheap

The IMF does touch on this although not directly.

monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

It does not have time for the next step, although it does have time for some rhetoric.

In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.

Then it tip-toes around the subject in a “look at the wealth effects” sort of way.

This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened.

Let me now give you some actual figures and I am deliberately choosing longer-dated bonds as the extra debt will need to be dealt with over quite a period of time. In the US the long bond ( 30 years) yields 1.42%, in the UK the fifty-year Gilt yields 0.43%, in Japan the thirty-year yield is 0.56% and in Germany it is -0.01%. Even Italy which is doing its best to look rather insolvent only has a fifty-year yield of 2.45%

I know that it is an extreme case due to its negative bond yields but Germany is paying less and less in debt interest per year. According to Eurostat it was 23.1 billion in 2017 but was only 18.5 billion in May of this year. Care is needed because most countries pay a yield on their debt but presently the central banks have made sure that the cost is very low. Something that the IMF analysis ( deliberately ) omits.


So we are going to see lots more national debt. However the old style analysis presented by the IMF has a few holes in it. For a start they are comparing a stock (debt) with an annual flow (GDP). For the next few years the real issue is whether it can be afforded and it seems that central banks are determined to make it so. Here is yet another example.

Brazil may experiment with negative interest rates to combat a historic recession, says a former central bank chief who presided over some of the highest borrowing costs in the country’s recent history ( @economics)

That is really rather mindboggling! Brazil with negative interest-rates? Anyway even the present 2.25% is I think a record low.

If we go back to debt costs then we can look at the Euro area where they were 2.1% of GDP in 2017 but are expected to be 1.7% over the next year. Now that does not allow for the raft of debt that will be issued but of course a few countries will be paid to issue ( thank you ECB!). The outlier will be Italy.

Looking further ahead there is the capital issue as this builds up. I do not mean in terms of repayment as not even the Germans are thinking of that presently. I mean that as it builds up it does have a psychological effect which is depressing on economic activity as we learnt from Greece. Which leads onto the final point which is that in the end we need economic growth, yes the same economic growth which even before the pandemic crisis was in short supply.


UK Retail Sales and Public-Sector Borrowing Surge

We were supposed to be receiving some grand news from the Bank of England this morning. But in fact we find ourselves simply noting a rather botched public relations spinning effort.

You spin me right round, baby
Right round like a record, baby
Right round round round ( Dead or Alive)

The main movement was in the value of the UK Pound £ which fell by around 1% so we saw using the old rule of thumb monetary easing equivalent to a 0.25% Bank Rate cut. How much of that was due to the PR shambles?

Anyway there was some good news in an implied better trajectory for the UK economy and that has been backed by the data this morning.

The monthly growth rate in May 2020 is strong because of a combination of recent increasingly rapid growth in non-store retailing and a pick-up for non-food stores from the lowest levels ever experienced.

Also let me give the Office for National Statistics credit for this.

Weights to total retail are calculated from the amount of money typically spent in each retail sector and used as a proportion to calculate growth contributions. For example, around 38.1 pence of every pound is typically spent in food stores, providing us with a weight of 38.1 to total retail. In May 2020, these proportions were recalculated to reflect the changes in spending during the pandemic. The amount of money spent in food stores increased to 51.4%,

In what are volatile and uncertain times one needs to keep on our toes and this example should be spread to the inflation numbers. The data should reflect as best we can what is happening not a world “far,far,away”. As you can see,doing so makes quite a difference. The number below gives a hint of how the inflation data would be affected and in my opinion it is a great shame that the Bank of England Minutes ignored this factor yesterday.

Fuel sales usually has a weight of just over 10.4% to total retail, but was at around 5.5% in May 2020, resulting in a positive contribution of 2.3 and 2.7 percentage points for value and volume sales respectively.

Actually the release even hints at this.

Fuel prices also continued to fall in May 2020………When compared with the same month a year earlier, fuel prices fell by 14.9%

However whilst the monthly improvement was very welcome and you might like to note was another example of the “expert” forecasters missing the dartboard as they were expecting more like 6% growth as opposed to 12% or so, we need a deeper perspective.

While we see some partial bounce back on the monthly growth rate in May 2020 at 12.0%, levels of sales do not recover from the strong falls seen in March and April 2020 and are still down by 13.1% on February 2020 before the impact of the corona virus pandemic.

Putting this another way the volume index was 93.7 in May if we set 2016 as the base level of 100. Previously the numbers were bouncing around 108.

I doubt any of you will be surprised by the shift to online retailing.

Online sales as a proportion of all retailing reached a record high of 33.4% in May 2020, exceeding the original record reported last month of 30.7%.

There was a larger uptake of online spending for food, which reached record proportions, from 9.3% in April to 11.3% in May.

Should consumers continue with this trend this is more bad news for the high street. Although as a counterpoint the mobs that descended on the shops which opened recently suggests there is some hope, although the health message sent from that was rather different.

Public Finances

Let me start with an apology as I was asked about this and thought it would probably take place in June.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of May 2020 was 100.9% of gross domestic product (GDP), the first time that debt as a percentage of GDP has exceeded 100% since the financial year ending March 1963.

There are a couple of factors in my defence however and one of them we have just been noting. That is a further hint that the economy is doing better than the consensus expectations. Oh and my first rule of OBR Club is likely to help me out.

 the current estimate of GDP used to calculate this ratio uses forecasts based on expectations published in the Office for Budget Responsibility’s (OBR’s) Coronavirus Reference Scenario.

They look well on their way to being wrong again. Also there is the large £13.9 billion revision to borrowing for April and we learn quite a bit from it. Take a look at this for example.

Central government tax receipts and National Insurance contributions for April 2020 have been increased by £5.4 billion and £2.4 billion respectively compared with those published in our previous bulletin (published 22 May 2020). Within tax receipts, Pay As You Earn income tax has been increased by £3.0 billion and Value Added Tax has been increased by £2.8 billion, both because of updated data.

As you can see there is another hint from the numbers that the economy was doing better than so far reported in April as we see upwards revisions to both income and expenditure taxes.Indeed the numbers have quite a conceptual problem as we mull whether imputation is like a pandemic?

In other words, we attempt to record receipts at the point where the liability arose, rather than when the tax is actually paid.

Oh and you can’t say I have not regularly warned you about the OBR!

On 4 June 2020, the OBR published an update to its Corona Virus analysis in which it reduced previous estimates of CJRS expenditure.


We can start with May.

Over this period, the public sector borrowed £55.2 billion, £49.6 billion more than it borrowed in May 2019.

But via the revisions noted above we have already seen how unreliable a single month is so we do a little better looking at this.

In the current financial year-to-date (April to May 2020), the public sector borrowed £103.7 billion, £87.0 billion more than in the same period last year.

Although we need to note that we will be lucky if it is accurate to the nearest £10 billion. Within the receipts numbers there are some points of note. The Retail Sales numbers with monthly rises of 30%,61% and now 3,6% for the category with includes alcohol sales meets alcohol duty receipts which have fallen from £2.1 billion to £1.6 billion. Perhaps a health kick has been going on as tobacco receipts fall by £400 million to £1 billion. Also a slowing in the housing market is kicking in as Stamp Duty receipts fall from £2 billion to £1.1 billion.

Switching to the national debt there is this.

Debt (PSND ex) at the end of May 2020 was £1,950.1 billion, an increase of £173.2 billion (or 20.5 percentage points) compared with May 2019, the largest year-on-year increase in debt as a percentage of GDP on record (monthly records began in March 1993).


We have some welcome news today on the economy but context is needed as we have still experienced quite a drop, simply one which is smaller than reported so far. There is an irony in the two numbers released as we see this being reported which gives a worse impression.

Just in: UK government debt exceeded the size of the country’s economy in May for the first time in more than 50 years, official data published on Friday showed, as borrowing surged to pay for coronavirus response measures ( Financial Times)

Having awarded myself a slice of humble pie let me move onto an issue that the more clickbaity reports have ignored.

If we were to remove the temporary debt impact of APF and TFS, public sector net debt (excluding public sector banks) at the end of May 2020 would reduce by £195.5 billion (or 10.1% percentage points of GDP) to £1,754.6 billion (or 90.8% of GDP).

That is the role of the Bank of England in raising the reported level of the national debt and frankly this bit below is one of the silliest inclusions.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £95.7 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase. Note that the final debt impact of the APF depends on the disposal of the gilts at the end of the scheme.

Oh well. Let me end by bringing yesterday’s extra QE bond purchases and the borrowing together with these two numbers.

At the end of May 2020, the gilt holdings of the APF have increased by £46.7 billion (at nominal value) compared with the end of April 2020, to £475.1 billion in total. This increase is of a similar order of magnitude to the new issuance by the DMO in May 2020, which means that gilt holdings by units other than the APF have changed very little since April 2020.

As I have pointed out before if we take a broad brush the Bank of England is implicitly financing the government spending. That is why we can borrow so cheaply with some gilt yields negative and the fifty-year a mere 0.55%.



The Italian Job covers unemployment.zombie banks and industrial production

Sometimes economic news makes you think of a country via its past history.

LONDON/FRANKFURT (Reuters) – European Central Bank officials are drawing up a scheme to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak, two people familiar with the matter told Reuters.

After all the Italian banks have plenty of expertise, if I may put it like that, in this area. So perhaps a growth area for them in more ways than one.

The amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans and mortgages, according to official statistics.

There is a conceptual issue though as we mull why we always need “bad- banks” and whether the truth is that ordinary banks are bad? Also the Irish banking crisis taught us that the numbers are fed to us on a piece of string with notches and are driven by what they think we will accept rather than reality. So get ready for the half a trillion to expand and that may get a little awkward if this from Kathimerini proves true.

Enria said the ECB was studying how banks could cope were the crisis to worsen. He said banks had more than 600 billion euros ($680 billion) of capital and this would probably be enough, unless there were a second wave of infections.

If we focus now on the Italian banks there is of course the issue of the Veneto banks and Monte Paschi in particular. Let me take you back 3 days over 3 years.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

Back then I also pointed out the problems for the bailout vehicle called variously Atlante and Atlas. Looking at Monte dei Paschi the share price is 1.4 Euros which if we allow for the many rights issues and the like compares to a pre credit crunch peak of around 8740 Euros according to my chart.. Some quite spectacular value destruction as we again mull what “bad bank” means and recall that in 2016 Prime Minister Renzi told people it was a good investment. That is before we get to this from January 2012 on Mindful Money.

In October, Shaun Richards outlined a 13-step timeline for the collapse of a bank . He appeared on Sky News yesterday suggesting that Unicredit, Italy’s had now reached stage 3 of that process – i.e. “The Bank tries to raise more private capital in spite of it having no need for it”.

It was worth 19 Euros then and as it is worth 8.24 Euros now my description of it as a zombie bank was right, especially if we allow for all the aid packages and subsidies in the meantime.

Oh and in case we had any doubts about the story I see this from ForexLive.

European Commission says no formal work is underway for an EU ‘bad bank’

So they are informally looking at it then….

The Economy

This morning’s official release was always likely to be bad news.

In April 2020 the seasonally adjusted industrial production index decreased by 19.1% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -23.2%.

The theme was unsurprisingly continued by the annual picture.

The calendar adjusted industrial production index decreased by 42.5% compared with April 2019 (calendar
working days being 21 versus 20 days in April 2019).
The unadjusted industrial production index decreased by 40.7% compared with April 2019.

If we compare to 2015 we see that the calendar adjusted index was at 58.4. The breakdown shows that pharmaceuticals were affected least ( -6.7%) and clothing and textiles the most ( -80.5%). The latter was a slight surprise as I though the manufacture of masks and other PPE might help but in fact it did even worse than the transport sector ( -74%).

On Monday Italy’s statisticians reminded us of our Girlfriend in a Coma theme.

At the end of 2019, the Italian economy was in stagnation with few recovery signals coming from industrial production and external trade at the very beginning of 2020.

Which was followed by this.

Eventually, the conventional economic indicators assessing the dramatic fall of GDP in the first quarter 2020 (-5.3% q-o-q) were published.

They point out it is difficult to collect data right now but were willing to have a go at a forecast.

Under these assumptions, we forecast a strong GDP contraction in 2020 (-8.3%) followed by a recovery in 2021 (+4.6%, Table 1). This year, the fall of GDP will be determined mainly by domestic demand net of inventories (-7.2 p.p.) due to the contraction of household and NPISH consumption (-8.7%) and of investments (-12.5%). Net exports and inventories will also contribute negatively to GDP growth (respectively -0.3 p.p. and -0.8 p.p.).

I wonder how much of what is called domestic demand reflects the fall in tourism as the summer is already well underway and it is a delightful country to visit? Here is the OECD version from earlier this week that highights the tourism issue.

GDP is projected to fall by 14% in 2020 before recovering by 5.3% in 2021 if there is another virus outbreak
later this year (the double-hit scenario). If further outbreaks are avoided (the single-hit scenario), GDP is
projected to fall by 11.3% in 2020 and to recover by 7.7% in 2021. While Italy’s industrial production may
restart quickly as confinement measures are lifted, tourism and many consumer-related services are
projected to recover more gradually, weighing on demand

As we know so little about what is happening right now the forecasts for 2021 are about as much use as a chocolate teapot in my opinion.

Switching back to Italy’s statisticians they seem to have doubts about their own unemployment numbers. perhaps they read my post on the third of this month.

The trend of unemployment rate will be different because it reflects the ricomposition between unemployed and inactive people and the fall in hours worked.

Anyway they have reported the unemployment rate at 6.3% and I think it is more like 11%.


Now we need to switch tack to one of the consequences of all this which relates to the fact that Italy already had a large national debt in both relative and absolute terms. If we use the OECD data as a framework we see that the debt to GDP ratio will be of the order of 160 to 170% at the end of this year which looks rather Greek like, Now we see the real reason for the forecasted bounce back in 2021 which reduces the number to 150% to 165%. The establishment assumption that we will see a “V-shaped” recovery has nothing to do with believing in it,rather it is to make the debt metrics look better. Again there are echoes of Greece here when Christine Lagarde was talking about “Shock and Awe” back in the day. Remember when we were guided to a debt to GDP ratio of 120%? That was to protect Italy ironically ( as well as Portugal).

That was then and this is now. The game-changed in the meantime has been the fall in bond yields due mostly to the policies and buying of the ECB. So a benchmark yield that rose to 7% in the last crisis is now 1.45% as I type this. Thus the previous concept of debt vigilante’s has been neutered and debt costs are low. The catch is that the debt burden will soar and that does seem to have an impact if we think of the issue of Japanification. Italy has already had its “lost decade” since it joined the Euro and the lack of economic growth has been the real issue here. For it to change I think we need reform of its structure and especially its zombie banks but instead we are being guided towards yet another bailout in what feels like a never-ended stream. Let me leave you with some humour on the issue of bad banks from GreatLakesForex.

They should correct that statement to the actual fact that they are desperate to create a Good bank in the Eurozone.

The UK is being paid to borrow just as it borrows record amounts

Sometimes even when you expect something it still creates something of a shockwave. We knew that UK public spending was on speed and that tax receipts were going to be like one of those cartoon characters running off the edge of a cliff. But even so this had an impact.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in April 2020 is estimated to have been £62.1 billion, £51.1 billion more than in April 2019; the highest borrowing in any month on record (records began in January 1993).

Boom Boom Pow as the Black Eyed Peas would say. As we break it down we see it is a central government game as it also is pouring money into local authorities as we noted last time.

In April 2020, central government borrowed £66.2 billion, while local government was in surplus by £7.3 billion. This local government surplus partially reflects the increase in current transfers from central government to fund its COVID-19 measures.

If we look at spending we see this.

In April 2020, central government spent £109.3 billion, an increase of 38.3% on April 2019.

There was an increase of £1.6 billion in social benefits which ordinarily would be a big deal but this time gets swamped as the “other” category rises by £36.1 billion. We can start to break that down.

This month we have recorded the expenditure associated with the Coronavirus Job Retention Scheme (CJRS) for the first time. CJRS is a temporary scheme designed to help employers pay wages and salaries to those employees who would otherwise be made redundant……..In April 2020, central government subsidy expenditure was £16.3 billion, of which £14.0 billion were CJRS payments.

A fair bit of the amount below would have gone on the NHS.

Departmental expenditure on goods and services in April 2020 increased by £7.1 billion compared with April 2019, including a £1.2 billion increase in expenditure on staff costs and a £5.7 billion increase in the purchase of goods and services.

Also I did say they were pouring money into local government.

Central government grants to local authorities in April 2020 increased by £14.2 billion compared with April 2019, mainly to fund additional support because of the COVID-19 pandemic.

The only gain was from lower inflation

Interest payments on the government’s outstanding debt in April 2020 were £5.0 billion, a £1.2 billion decrease compared with April 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

Tax Receipts

This is an awkward category as it relies on past patterns and well you can guess the rest. But they have tried to come up with some suggestions.

In April 2020, central government receipts fell by £16.4 billion compared with April 2019 to £45.6 billion, including £29.6 billion in tax revenue.

They have tried to allow for the lower level of activity although sadly the numbers they have used have come from the Office for Budget Responsibility or OBR. For newer readers the first rule of OBR Club is that it is always wrong.

We do get some further clues from the Retail Sales numbers also released earlier.

The volume of retail sales in April 2020 fell by a record 18.1%, following the strong monthly fall of 5.2% in March 2020.

As you can see VAT receipts will be hit as will income tax payments from many shop workers. Also we got evidence that there was a lot of panic buying of food when the pandemic hit.

The fall of 4.1% for food stores was mainly due to a fall back from the strong growth of 10.1% in March 2020. Retailers provided feedback of panic buying in March, which caused a sales spike.

Also I hope that you are all sober when you are reading this.

In April, 13.6% of alcohol and tobacco stores reported having zero turnover, however, the volume of sales for these stores increased by 2.3%; a further rise from the strong growth of 23.9% in March.

As you can imagine a trend we have been noting for some years got another boost.

Online sales as a proportion of all retailing reached a record high of 30.7% in April 2020, exceeding the original record reported last month of 22.4%. All sectors reached their highest-recorded proportions except non-store retailing, which reached record proportions in February and March 2020, both at 83.2%.

As well as being sober I hope you are dressed reading this.

The sharp decline in April 2020 has resulted in the lowest levels seen in the volume of textile, clothing and footwear sales since the beginning of the series, when March 1988 was at a similar level.

Last Month

The uncertainty about the amount of tax receipts is highlighted by what has just happened to the March data.

Borrowing in March 2020 was revised up by £11.7 billion to £14.7 billion, largely due to a reduction in the previous estimate of tax receipts and National Insurance contributions and the recording of expenditure associated with the Coronavirus Job Retention scheme.

The main player here was this.

Additionally, the subsidies paid by central government in March 2020 have been increased by £7.0 billion to reflect the additional CJRS payments not previously recorded.

National Debt

This comes with some caveats but the ONS has tried to allow for an expected lower level of economic activity here so fair play.

The Bank of England’s contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund and Term Funding Schemes.

If we were to remove these temporary effects, debt at the end of April 2020 would reduce by £184.5 billion (or 9.6% percentage points of GDP) to £1,703.1 billion (or 88.1% of GDP).

Of course we know about the word “temporary” as regards Bank of England activities! However I have always thought it odd ( and frankly a bad design) where the Term Funding Scheme ended up inflating the national debt. Losses on it should be counted but there is collateral held so any net impact should be far lower than the gross.

The only flaw here is the use of an OBR scenario as I have explained above, but it is a worthy attempt none the less.


I thought I would now spin things around a little because if this was a film there would be no demand for any with titles like “Revenge of the Bond Vigilante’s”. Over the past week or two the UK has in fact increasingly been paid to borrow, so in fact we now inhabit a sort of anti matter driven Bond Vigilante universe. I have been noting for a while that the two-year UK Gilt yield has been on the edge and it has been slip-sliding away this week to -0.07%. It has been joined by the five-year which is now -0.02%.

Now let me shift to the causes of this as at first the Bond Vigilantes will be revving up on the start line.

In April 2020, the Debt Management Office (DMO) issued £51.7 billion in gilts at nominal value, raising £58.5 billion in cash. This represents an unprecedented increase in gilts issuance (at nominal value) compared with March 2020.

But the Bank of England has stepped in with its QE purchases.

At the end of April 2020, the gilt holdings of the APF have increased by £43.7 billion (at nominal value) compared with the end of March 2020,

As you can see this effectively neuters a lot of it and let me bring you right up to date. This week the UK debt management office has been working hard and issued some £16.5 billion of UK Gilts but if it was a race the Bank of England has only been a few paces back as it bought some £13.5 billion. Also the Bank of England has been driving us into negative yields by for the first time buying them as it has done on at least 4 occasions this week.

So we borrow enormously and can do so at record low yields. So for now we are “lucky” according to the definition provided by Napoleon. On the pattern so far we may see our benchmark ten-year yield go negative as well ( currently 0.14%). One consequence of this is I expect cheaper fixed-rate mortgage deals as the five-year yield is my proxy for that and it has gone negative. If the banks are as “resilient” as we keep being told they will be slashing rates. Meanwhile back in the real world we may see some mortgage rates being trimmed.


The USA will Spend! Spend! Spend! As we wonder whatever happened to the debt ceiling?

Yesterday evening there was a piece of news which created a stir even in these inflated times. So without further ado let me hand you over to the US Treasury Department.

During the April – June 2020 quarter, Treasury expects to borrow $2,999 billion in privately-held net marketable debt, assuming an end-of-June cash balance of $800 billion.  The borrowing estimate is $3,055 billion higher than announced in February 2020.

I have to confess the numbers did not look right so I checked the February release.

During the April – June 2020 quarter, Treasury expects to pay down $56 billion in privately-held net marketable debt, assuming an end-of-June cash balance of $400 billion.

This was to be quite an improvement on where it was at the time.

During the January – March 2020 quarter, Treasury expects to borrow $367 billion in privately-held net marketable debt, assuming an end-of-March cash balance of $400 billion.

So we return to the concept of some US 3 trillion dollars being borrowed in a single quarter. As to the higher cash balance which is in the process of being doubled that looks as though it is simply because the US is spending at such a rate it needs more to avoid the risk of a cash crunch. Indeed the process is well under way.

During the January – March 2020 quarter, Treasury borrowed $477 billion in privately-held net marketable debt and ended the quarter with a cash balance of $515 billion.  In February 2020, Treasury estimated privately-held net marketable borrowing of $367 billion and assumed an end-of-March cash balance of $400 billion. The $110 billion increase in borrowing resulted primarily from the higher end-of-quarter cash balance.

Where is the money going?

The US Treasury is light on some detail but the Paycheck Protection Program had spent some US $350 billion very quickly so we then saw this.

Washington (CNN)The Trump administration announced Sunday that 2.2 million small business loans worth $175 billion have been made in the second round of the Paycheck Protection Program……Treasury Secretary Steve Mnuchin and Small Business Administration Administrator Jovita Carranza said in a joint statement that the average size of a loan made under the second iteration of the program, which began Monday, was $79,000.

The original stimulus effort was described below by CNN.

Congressional lawmakers put the finishing touches on a $2 trillion stimulus bill to respond to the coronavirus pandemic, with cash and assistance for regular Americans, Main Street businesses and hard-hit airlines and manufacturers, among others……..Key elements of the proposal are $250 billion set aside for direct payments to individuals and families, $350 billion in small business loans, $250 billion in unemployment insurance benefits and $500 billion in loans for distressed companies.

We can see that like the small business loans the numbers are likely to have been climbing higher and higher. As to the new higher employment benefits they seem to be being paid to ever higher numbers.

The advance unadjusted number for persons claiming UI benefits in state programs totaled 17,776,006, an increase of 1,498,784 (or 9.2 percent) from the preceding week. The seasonal factors had expected a decrease of 648,558 (or -4.0 percent) from the previous week. A year earlier the rate was 1.1 percent and the volume was 1,647,874 ( Department of Labor)

I think we can figure out for ourselves what has been happening to tax revenues.

Treasury Bonds and QE

In ordinary times one might have expected this market to have cratered. I have worked through times when futures markets prices limits are employed ( it was initially 2 points and then moves to 3 points). But the surge in expected borrowing has provided nothing of the sort and these days eyes turn first to the US Federal Reserve and its Quantitative Easing programme. The emphasis below is mine.

To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate.

That is a sort of combination of “whatever it takes” and “To Infinity! And Beyond!” in my opinion. We saw purchases of US $75 billion a day in the height of the panic and we should not forget that in the heat of the “Not QE” phase some US $60 billion of US Treasury Bills were bought a month. So we see that it now owns some US $3.97 trillion of Treasury Securities which has risen by US $1.8 trlllion on the past year.

Thus although we are now seeing a much lower daily amount of QE purchases the surge of buying has anaesthetised the market. This week only US $8 billion a day is being bought and yet we see the benchmark yield for the ten-year Treasury Note if a mere 0.67%. The long bond ( 30 year) has responded a little but at 1.33% is less than half what it was this time last year.

Foreign Holdings

There is a long wait for such numbers but here is what the US Treasury thinks that they are.

The survey measured the value of foreign portfolio holdings of U.S. securities as of end-June 2019 to be $20,534 billion, with $8,630 billion held in U.S. equities, $10,991 billion in U.S. long-term debt securities [/1] (of which $1,417 billion are holdings of asset-backed securities (ABS) [/2] and $9,575 billion are holdings of non-ABS securities), and $913 billion held in U.S. short-term debt securities.


Remember the debt ceiling?

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary. ( US Treasury )

Anyway the total national debt was US $23.7 trillion at the end of March and is about to go on something of a tear. On the other side of the coin economic output as measured by GDP or Gross Domestic Product is about to plunge.

The WEI is currently -11.58 percent, scaled to four-quarter GDP growth, for the week ending April 25 and -10.86 percent for April 18; for reference, the WEI stood at 1.58 percent for the week ending February 29. ( New York Fed )

Or if you prefer.

The New York Fed Staff Nowcast stands at -9.3% for 2020:Q2.

Also the US Federal Reserve is about to get rather popular as we note how this trend will change in 2020.

In 2019, the Federal Reserve remitted a total of $54.9 billion to the Treasury, less than the $65.3 billion remitted in 2018, owing primarily to a decline in net income resulting from a decrease in average SOMA domestic securities holdings.

I guess both the US Federal Reserve and Treasury will be singing along with Prince for a while.

Money don’t matter to night
It sure didn’t matter yesterday
Just when you think you’ve got more than enough
That’s when it all up and flies away
That’s when you find out that you’re better off
Makin’ sure your soul’s alright
‘Cause money didn’t matter yesterday,
And it sure don’t matter to night


How much extra will the UK government borrow?

A feature of our economic life going forwards will be much higher levels of national debts. This is being driven by much higher levels of government spending which will lead to a surge in fiscal deficits. That is before we even get to lower tax receipts a hint of which has been provided by Markit with its PMI reports this morning.

Simple historical comparisons of the PMI with GDP indicate that the April survey reading is consistent with GDP falling at a quarterly rate of approximately 7%. The actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the self-employed and the retail sector, which have been especially hard-hit by
the COVID-19 containment measures

I think you can see for yourselves what that will do to tax receipts and that will add to the falls in revenue from the oil market. After all how do you tax a negative price? As an aside Markit do not seem to have noticed that the economists they survey are wrong pretty much every month. They seem to have to learn that every month.

The UK in March

Whilst the world has moved on we can see that the UK government was already spending more before the virus pandemic fully arrived,

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in March 2020 was £3.1 billion, £3.9 billion more than in March 2019; the highest borrowing in any March since 2016.

A further push was given to an existing trend.

Borrowing in the latest full financial year was £48.7 billion, £9.3 billion more than in the previous financial year.

Because of the situation we find ourselves in let us in this instance peer into the single month data for March.

In March 2020, central government receipts fell by 0.7% compared with March 2019 to £67.2 billion, including £47.5 billion in tax revenue.

That is a change and the actual situation is likely to be worse due to the way the numbers are collected.

These figures are subject to some uncertainty, as the accrued measures of both Value Added Tax (VAT) and Corporation Tax contain some forecast cash receipts data and are liable to revision when actual cash receipts data are received.

By contrast spending soared.

In March 2020, central government spent £72.6 billion, an increase of 11.2% on March 2019.

Also one big new scheme is not yet included.

We have not yet included central government expenditure associated with the coronavirus job retention scheme, some of which is expected to relate to March 2020.

Tucked away in the detail was quite a shift in the structure of the UK public-sector.

In March 2020, central government transferred £13.6 billion to local government in the form of a current grant. This was £4.2 billion more than in March 2019, is mainly to fund additional support because of the COVID-19 pandemic, and represents the highest March transfer on record.

There was also a rise in social benefits from £8.2 billion to £9.2 billion in another signal of a slowing economy.

One warning I would make is that Stamp Duty receipts at £1 billion are supposed to be the same as March 2019, does anyway believe that?

Looking Ahead

This morning also brought some strong hints as to what the UK government thinks.

The UK Debt Management Office (DMO) is today publishing a revision to its 2020-21 financing remit covering the period May to July 2020. In line with the revision to the DMO’s financing remit announced by HM Treasury today, the DMO is planning to raise £180 billion during the May to July 2020 (inclusive) period, exclusively through issuance of conventional and index-linked gilts.

They are hoping that it will prove to be one higher burst of borrowing.

In order to meet the immediate financing needs resulting from the government’s response to COVID-19, it is expected that a significantly higher proportion of total gilt
sales in 2020-21 will take place in the first four months of the financial year (April to July 2020).

If we look back we can see that they planned to issue some £156 billion in the whole financial year previously whereas now we plan to issue some £225 billion by the end of July. This is because we are already issuing some £45 billion this month.

We can add to this flashes of examples of where some of that money will be spent. Here is the Department of Work and Pensions or DWP from yesterday.

Around 1.8 million new benefits claims have been made since mid-March – over 1.5 million for #UniversalCredit

Also the amounts are now higher.

We’ve increased #UniversalCredit, making people up to £1,040 better off a year and are doing all we can to make it as straightforward as possible for people to claim a benefit, easing some of the worry that many are facing right now:

National Debt

As we will not be seeing numbers this low again and we need some sort of benchmark here we go.

At the end of March 2020, the amount of money owed by the public sector to the private sector stood at approximately £1.8 trillion (or £1,804.0 billion), which equates to 79.7% of gross domestic product (GDP). Though debt has increased by £30.5 billion on March 2019, the ratio of debt to GDP has decreased by 1.0 percentage point, as UK GDP has grown at a faster rate than debt over this period.

As you can see the increase in debt over the past year will be happening each month now and with GDP falling the ratio will sing along with Fat Larry’s Band.

Oh zoom, you chased the day away
High noon, the moon and stars came out to play
Then my whole wide world went zoom
(High as a rainbow as we went flyin’ by)


We are seeing fiscal policy being pretty much dully deployed. If we consider this from economic theory we are seeing the government attempting to step in and replace private sector spending declines. That means not only will the deficit balloon but the number we compare it too ( GDP) will drop substantially as well. We should avoid too much panic on the initial numbers as the real issue going forwards will be the long-term level of economic activity we can maintain which we will only find out in dribs and drabs. One example has been announced this morning as the construction company Taylor Wimpey has announced it will restart work in early May.

Next comes the issue of spurious accuracy which has two factors. There are issues with the public finances data at the best of times but right now they are there in spades. To be fair to our official statisticians they have made the latter point. So messages like this from the Resolution Foundation are pie in the sky.

But the Government’s financing needs could reach as high as £500bn if the lockdown last for six months, or £750bn if it last for 12 months.

We struggle to look three months ahead and a year well it could be anything.

One thing we should welcome is that the UK continues to be able to borrow cheaply. Yesterday £6.8 billion of some 2024 and 2027 Gilts and had to pay 0.12% and 0.16% respectively. So in real terms we could sing along with Stevie Nicks.

What’s cheaper than free?
You and me

That brings me to the other side of this particular balance sheet which is the rate at which the Bank of England is buying Gilts to implicitly finance all of this. By the end of today it will be another £13.5 billion for this week alone. I have given my views on this many times so let me hand you over to the view of Gertjan Vlieghe of the Bank of England from earlier.

I propose that these types of discussions about monetary financing definitions are not useful. One person
might say we have never done monetary finance, another might say we are always doing monetary finance,
and in some sense both are correct.

Nobody seems to have told him about the spell when UK inflation want above 5% post the initial burst of QE.

 Instead, the post-crisis recovery was generally characterised by inflation being too weak, rather
than too strong.

Anyway I dread to think what The Sun would do if it got hold of this bit.

If we were the central bank of the Weimar Republic or Zimbabwe, the mechanical transactions on our
balance sheet would be similar to what is actually happening in the UK right now

The Investing Channel