The growing debt problem faced by Italy

Yesterday saw one of the themes of this website raised by a rather unusual source. The European Commission released this document yesterday.

Today’s 27 Country Reports (for all Member States except Greece, which is under a dedicated stability support programme) provide the annual analysis of Commission staff of the situation in the Member States’ economies, including where relevant an assessment of macroeconomic imbalances.

Greece is omitted presumably because it is all to painful and embarrassing although of course one of those presenting this report Commissioner Pierre Moscovici keeps telling us it is a triumph. Reality tells us a different story as this from Macropolis illustrates.

The employment balance stayed negative in January 2017, with net departures climbing to 29,817 from 9,954 a year ago, data from the Labour Ministry’s Ergani information system revealed on Tuesday.

But as we note that 13 countries in the European Union were investigated for imbalances or just under half with 12 found to have them ( oddly the troubled Finland was excluded) the Commission found itself in an awkward spot with regards to Italy. Here is the label it gave it.

excessive economic imbalances.

Which led to this.

a report analysing the debt situation in Italy

So let us investigate.

Italy’s National Debt

Firstly we get a confession of something regularly pointed out on here.

in particular low inflation, which made the respect of the debt rule particularly demanding;

No wonder the ECB is pressing on with its QE (Quantitative Easing) program and as I pointed out only yesterday seems set to push consumer inflation above target which will help the debtors. Also in that section was something awkward as you see it is a statement of Italy’s whole period of Euro membership.

the unfavourable economic conditions,

We have an old friend returning although of course pretty much everyone has ignored it even Germany.

namely: (a) whether the ratio of the planned or actual government deficit to gross domestic product (GDP) exceeds the reference value of 3%; and (b) whether the ratio of government debt to GDP exceeds the reference value of 60%, unless it is sufficiently diminishing and approaching the reference value at a satisfactory pace.

Yep the Stability and Growth Pact is back although these days in the same way as the leaky Windscale became the leak-free Sellafield it is mostly referred to as the Fiscal Compact. The real issue here for Italy though is the debt numbers are from a universe far,far away.

Italy’s general government deficit declined to 2.6 % of GDP in 2015 (from 3% in 2014), while the debt continued to rise to 132.3% of GDP (from 131.9 % in 2014), i.e. above the 60% of GDP reference value. For 2016, Italy’s 2017 Draft Budgetary Plan7 projects the debt-to-GDP ratio to peak at 132.8%, up by 0.5 percentage points from the 2015 level. In 2017, the Draft Budgetary Plan projects a small decline (of 0.2 percentage points) in the debt-to-GDP ratio to 132.6%.

We get pages of detail which skirt many of the salient points. So let me remind them. firstly a debt-to-GDP target of 120% was established back in 2010 for Greece to avoid embarrassing Italy (and Portugal). Since then both have cruised through it which poses a question to say the least for this.

Italy conducted a sizeable fiscal adjustment between 2010 and 2013, which allowed the country to exit the excessive deficit procedure in 2013

So as soon as it could Italy returned to what we might call normal although whilst it runs fiscal deficits they are lower than the UK for example. Whilst the EU peers at them they are not really the causal vehicle here. Regular readers of my work will not be surprised to see my eyes alight on this bit.

the expected slow recovery in real GDP growth

This is the driving factor here as we note that even in better times the Italian economy only grows by around 1% a year ( 1.1% last year for example) yet in the bad times it does shrink faster than that as the -3.2% annual growth rate of the middle of 2012 illustrates. The Commission describes it like this.

Italy’s GDP has not grown compared to 15 years ago, as against average annual growth of 1.2% in the rest of the euro area.

Putting it another way the economy seems set to get back to where it was at the opening of 2012 maybe this spring but more likely this summer. In such an environment any level of borrowing will raise not only the debt level but also its ratio to GDP. Thus the pages and pages of detail on expenditure would be much better spent on looking at and then implementing economic reform.

A fiscal boost

This has come form the policies of Mario Draghi and the ECB.

taking advantage of the fiscal space created by lower interest expenditure, which declined steadily from the peak of 5.2% of GDP in 2012 to 3.9% in 2016.

Of course debt costs have lowered across the world but the ECB has contributed a fair bit to this gain of over 1% per annum in economic output. I doubt Italy’s politicians admit this as they rush to spend it and bathe themselves in the good will.

Monte dei Paschi

Another old friend so to speak but it does illustrate issues building for Italy as the Commission admits. Firstly to the debt numbers explicitly.

For instance, in 2017, both the deficit and debt figures could be revised upwards following the EUR 20 billion (or 1.2 % of GDP) banking support package earmarked by the
government in December 2016.

But also implicitly as we mull current and future economic performance.

At the current juncture, following the protracted crisis, banks are burdened by a large stock of non-performing loans and may not be able to fully support the
recovery.

We left MPS itself on the 30th of December as it was socialised and in state ownership. You might reasonably think it would have been solved over the New Year break. Er no as this from the Financial Times today highlights.

Rome’s proposal to recapitalise MPS has been in limbo since December because the ECB, the bank’s supervisor, and the European Commission, which polices state aid, have different views on their responsibilities and the merits of taxpayer bailouts.

There was always going to be trouble over whether this turned out to be a bailout, a bailin or a hybrid of the two. Has any progress at all been made?

The two-month stand-off leaves fundamental questions over the rescue proposals, including the level of state support allowed, the amount of losses that creditors will suffer and the depth of restructuring needed to make the bank viable.

The creditor issue is one that resonates because ordinary Italian depositors were persuaded to buy the banks bonds in a about as clear a case of miss selling as there has been. The trouble is that the guilty party the bank’s management cannot pay on the scale required and nor can the bank inspite of it being in “optimal condition” according to Finance Minister Padoan.

Indeed some may be having nightmares about the return of a phrase that described so much economic destruction in Greece.

An Italian official said talks were on track.

Comment

This is a situation which continues to go round in circles. Europe concentrates on fiscal deficits and now apparently the national debt but ignores the main cause which is the long-term lack of economic growth. There is a particular irony that at every ECB policy press conference the Italian Mario Draghi reads out a paragraph asking for more economic reform and the place where it happens so little is his home country.

The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost investment, productivity and potential output growth in the euro area.

Yet when the European authorities get involved we see as in the MPS saga that they “dilly and dally” as Claudio Ranieri might say. Exactly the reverse of what they expect from the Italian government and people. The next issue for the banking sector is that for all its faults the UK for example began dealing with them in 2008 whereas Italy has looked the other way and let it drag on. That poor battered can is having to be picked up.

My suggestion would be an investigation into what is now called the unregulated economy to see how much has escaped the net. Maybe people do not want to do so because they fear that it has increased but what is there to be afraid of in the truth?

Tip TV Finance

http://tiptv.co.uk/boes-deflection-strategy-not-yes-man-economics/

The UK Public Finances are another source of embarrassment for Mark Carney

Today sees the latest data on the UK Public Finances which so far have meandered on in the same not entirely merry way as before the EU leave vote. This is in stark contrast to the modeling provided by HM Treasury.

In the ‘shock scenario’ presented in the short-term analysis, in 2017-18, real GDP would be 2.9% lower than baseline, but potential GDP would have declined by 2.1% compared to the baseline.

Believe it or not this was the more moderate scenario and as we have not entered that fiscal year it could of course happen but so far we have seen nothing like that.Of course we should have done as the UK economy was supposed to immediately shrink by up to 1%. The consequence was that the fiscal or budget deficit would rise by £24 billion in 2017/18 and the more extreme “severe shock” would see it rise by £39 billion.

There is a particularly worrying postscript to this in that it was personally signed off by former Bank of England Deputy Governor Professor Sir Charles Bean who of course made a right charlie of himself. Well he is now at the Office of Budget Responsibility producing more growth and borrowing forecasts. There is a particular irony in the lack of responsibility and indeed the rewards for failure on display here.

The Financial Times brings up forecasts of a dire future almost as quickly as it has to offer mea culpae for the previous ones being wrong.

The EU’s Brexit negotiators expect to spend until Christmas solely discussing Britain’s divorce from the bloc, denying London any trade talks until progress is made on a €60bn exit bill and the rights of expatriate citizens.

The Bank of England

The Governor of the Bank of England Mark Carney is of course familiar with the concept of providing “alternative facts” and he was on that road at this month’s Inflation Report.

First, the Chancellor’s Autumn Statement eased fiscal policy over the coming years. This explains about half of our forecast upgrade.

Actually there was an announced change but of course that relies on you believing the forecasts of George Osborne. For example the UK budget was originally supposed to be in surplus right now which of course faded not to the grey of Visage but remained solidly in red ink. So it was the sort of claimed change which probably ends up at the same destination. The flight boards may say a diversion Helsinki but somehow the flight lands at the original destination Copenhagen. At the time of typing this Andrew Tyrie of the Treasury Select Committee is really skewering the Bank of England Chief Economist Andy Haldane on this subject by pointing out that this stimulus is apparently much more stimulative than others of the same size and asking why?

Of course Governor Carney is on the road to changing the UK public finances for the worse in two respects. As we move forwards the inflation he is so keen on “looking through” will raise the cost of financing index-linked bonds. As these are linked to the Retail Price Index which is rising at an annual rate of 2.6% the bill is on its way. Also part of the “Sledgehammer” of policy action last August was the Term Funding Scheme which has raised the national debt which shows a clear lack of forethought. You need to make your way to Appendix 9 but there it is some £31.37 billion of additional debt so that the Bank of England can subsidise the banks yet again.

Today’s data

We open with the traditional January surplus.

Public sector net borrowing (excluding public sector banks) was in surplus by £9.4 billion in January 2017, a £0.3 billion larger surplus than in January 2016; this is the highest January surplus since 2000.

There was some good news in the receipts column.

Self-assessed Income Tax and Capital Gains Tax receipts increased by £2.0 billion to £19.8 billion in January 2017 compared with January 2016; this is the highest January on record (monthly recording of self-assessed tax receipts began in April 1999).

Of course it should be the best on record as it is inflated by economic growth and of course inflation over time. However the rises in the tax-free Personal Allowance over the past 2 government’s will have dampened this somewhat.

Something familiar

This is the ongoing issue of ch-ch-changes to the methodology stirring up all the grit from the bottom of the pot so that the water goes from clear to murky.

In this month’s bulletin we have introduced a new methodology for the recording of Corporation Tax and Bank Corporation Tax Surcharge receipts.

It is hard not to groan a little although of course it is badged as an improvement.

Previously, we have used cash receipts for these taxes as a proxy for accrued revenue. An improved methodology derives accrued revenue figures by adjusting cash receipts to more accurately reflect the time at which the economic activity relating to the tax receipts took place.

It is in fact a type of seasonal adjustment.

The impact of introducing the new methodology is to distribute the tax revenue more evenly over individual months in the year.

Actually it also makes the amount in recent years higher. Do they not know how much was collected?

A deeper perspective

This is provided by the financial year so far.

Public sector net borrowing (excluding public sector banks) decreased by £13.6 billion to £49.3 billion in the current financial year-to-date (April 2016 to January 2017), compared with the same period in the previous financial year;

This is essentially because of a good performance on the revenue front.

In the current financial year-to-date, central government received £553.7 billion in income; including £416.8 billion in taxes. This was around 5% more than in the previous financial year-to-date.

Also contrary to the hints of a fiscal boost we received last autumn and still be trumpeted by the Bank of England this morning there has been some restraint in public expenditure.

Over the same period, central government spent £581.2 billion; around 2% more than in the previous financial year-to-date.

Care is needed here but this is quite close to the current official inflation measure ( CPI 1.8%), the same as what next month will be the new measure at the top of the release ( CPIH 2%), and below the number used for index-linking for that sector of the UK Gilt market ( RPI 2.6%). Of course much of the period here was  where inflation was lower but its rise may well tighten policy in real terms. This would be consistent with what we are hearing from the NHS and councils although the former always needs more money.

The National Debt

If he was still Chancellor of the Exchequer George Osborne would be shouting this from the rooftops.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,589.2 billion at the end of January 2017, equivalent to 80.5% of gross domestic product (GDP); an increase of £43.6 billion (or a decrease of 0.6 % points as a ratio of GDP) since January 2016.

He was so keen to be able to declare the latter part of that quote but sadly for him he was the past before it arrived. Poor George, although if we look at his fees for speeches maybe not so poor George. The more eagle-eyed amongst you will have spotted the “improvement” which helped.

Public sector net debt (excluding public sector banks) was £1,682.8 billion at the end of January 2017, equivalent to 85.3% of gross domestic product (GDP); an increase of £91.7 billion (or 1.9 % points as a ratio of GDP) since January 2016.

Actually the internationally comparable figure was 87.6% of GDP as of last March.

Comment

As ever much is going on. If we start with the Bank of England then it has not so much moved the goalposts as built its Ivory Tower on the wrong pitch. As the Ivory Tower is fixed in the ground then reality has to change so it has spent so much of this morning talking about a theoretical concept called U* unemployment which does some of the trick. They were discomfited trouble when Andrew Tyrie simply asked them when this had happened before? I did not expect Mark Carney to know as of course the UK did not exist before June 2013 but the blank embarrassed faces of the others were a sight to behold. Sadly nobody asked about why so many female members were leaving the Monetary Policy Committee this year?

The public finances continue to improve albeit more slowly than we would have hoped. There are dangers ahead from the cost of index-linked Gilts as inflation continues to rise and the impact of this inflation on the wider economy. But there are other issues as for example an area near to me in Battersea Park often becomes a trailer park in the search for more revenue, although sadly I understand that the benefit goes more to a private company ( Enable ) than the council itself.

 

 

 

 

 

Greece meets its final countdown one more time

A constant sad theme of this website has been the way that Greece got into economic trouble and then had a so-called “shock and awe” rescue which made everything worse and plunged it into what can now be called a great depression. Last week’s official national accounts detail just continued the gloom.

The available seasonally adjusted data indicate that in the 4 th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 3 rd quarter of 2016, while it increased by 0.3% in comparison with the 4 th quarter of 2015.

I pointed out last week that the trumpeting of European Commissioner Moscovici only a day before was in very bad taste.

After returning to growth in 2016, economic activity in is expected to expand strongly in 2017-18.

You see Monsieur Moscovici and his colleagues have a serial record of saying a recovery is just around the corner. For example the 0.3% annual increase in GDP compares with 2.9% forecast in the spring of 2015.  There is a familiar theme here because if we look at the forecasts from the spring of 2016 they forecast more or less the same ( 2.7%) for 2017. This repeated failure where an optimistic forecast bears no relationship to reality has gone on since 2012 which was when the original 2010 bailout forecasts told us Greece would return to economic growth and from 2013 onwards would grow by you’ve guessed it by 2%+ per annum. As PM Dawn told us.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine.

The truth was that Greece had to be forecast as growing as otherwise the national debt numbers would look out of control and could not be forecast to be 120% of GDP in 2020. That was a farcical benchmark which exploded as it was chosen so as not to embarrass Portugal and Italy who cruised through it anyway. Greece of course blasted through it and the major reason was the economic depression.

The Great Depression

I will keep this simple so GDP in the third quarter of 2008 was the peak for Greece at 60.8 billion Euros and at the end of 2016 it was 44.1 billion Euros. So a decline of 27.5% which certainly qualifies as a Great Depression.

Austerity

Macropolis has pointed out the scale of the austerity applied to Greece and let us start with taxes.

The Greek economy has been burdened with 35.6 billion euros in all sorts of taxes on income, consumption, duties, stamps, corporate taxation and increases in social security contributions. When totting all this up, it is remarkable that the economy still manages to function.

Of course you could easily argue that in more than a few respects it does not function as we switch to the expenditure or spending ledger.

During the same period, the state has also found savings of 37.4 billion euros from cutting salaries, pensions, benefits and operational expenses.

So 5 months worth of economic output at current levels. Also like a dog chasing its tail they cry has gone up for what can be called “Moar, moar”.

The IMF’s Thomsen, now the director of its European Department, recently argued that Greece doesn’t need any more austerity but brave policy implementation. Somehow, though, the discussion has ended up being about finding another 3.5 billion euros in taxes and cuts to pension spending.

Of course dog’s have the intelligence to eventually tire of chasing their tale whereas the Euro area establishment continue with the same old song.

The official view

The ESM or European Stability Mechanism is the main supplier of finance to Greece these days and its head Klaus Regling has this on repeat.

Then, public creditors eased lending conditions significantly. This reduced the economic value of the country’s debt by around 40 per cent. As a result, Greece enjoys budgetary savings of about €8 billion annually — the equivalent of about 4.5 per cent of gross domestic product — and will continue to do so for years to come.

Sometimes what is true can be misleading. You see it is summed up in the word timing. Greece had an austerity program front loaded onto it and it was hit hard by it as I have described. Later the Euro area changed tack and made the loans much cheaper but by then it was too late as Greece was plunging into an economic depression at a rate exceeding 8% per annum in 2011 and much of 2012.

In spite of the calamitous situation Klaus told the Financial Times in late January  that the future was bright.

Greek debt levels are no longer cause for alarm

Of course Klaus has to churn out such a line in an attempt to distract attention from this.

The European Financial Stability Facility and the European Stability Mechanism, the eurozone’s rescue funds, have disbursed €174 billion to Greece.

This brings me to a point where Bloomberg are to some extent peddling what might be labelled fake news today.

The 2-year yield is now 180 basis points higher than the 10-year yield

You see Greek bond yield twitter if I may put it like that refers to something which exists but is not the source of funding for Greece any more a reflects a market which as I have pointed out many times barely trades. Even Bloomberg points this out.

volumes are low, with just 26 million euros trading during January on the inter-dealer platform.

With volumes so low it is easy for those with vested interests to manipulate such a market.

Trouble ahead

Where a crunch can come is when a bond needs redeeming. This is where all the proclamations to triumph and success met a hard reality of a lack of cash or another form of credit crunch. Eyes are already turning to July on that front.

Greece faces a few maturities in the coming months, but the heavy lifting is in July, when 6.2 billion euros of debt matures.

This is the capital issue I highlighted on the 30th of January.

We can bring in that poor battered can now because the Euro area and the IMF thought they had kicked it far enough into the future not to matter whereas the IMF is now having second thoughts.

The Euro area can talk all it likes about interest repayments but this ignores the fact that it cannot repay the capital which might make Euro area taxpayers mull another of the promises of Klaus Regling.

We would not have lent this amount if we did not think we would get our money back.

In a couple of months time another 1.4 billion Euros is due. This is owed to the ECB and we know that the first rule of it’s debt fight club is that every last cent must be repaid.

The IMF

My theme about the IMF has been that it has been twisted by politicians so that it no longer is an institution dealing with trade balance problems. The Greek data for 2016 bear this out as with all the improvements Greece should be exporting more especially as many of its economic partners had a better economic year.

The total value of exports-dispatches, for the 12-month period from January to December 2016 amounted to 25,411.4 million euros (28,198.4 million dollars) in comparison with 25,879.3 million euros (28,776.8 million dollars) for the corresponding period of the year 2015, recording a drop, in euros, of 1.8%

So simply no as we mull again the lack of economic reform in Greece and note that the trade issue got worse and not better.

The deficit of the Trade Balance, for the 12-month period from January to December 2016 amounted to 18,551.2 million euros (20,310.3 million dollars) in comparison with 17,745.3 million euros (19,439.6 million dollars) for the corresponding period of the year 2015, recording an increase, in euros, of 4.5%.

Comment

Today’s Eurogroup meeting in Greece is being badged as a “last chance saloon” which of course is a phrase that long ago went into my financial lexicon for these times as it occurs so regularly. Still did the band Europe know how much free publicity the future would provide for their biggest hit?

It’s the final countdown.
The final countdown

Meanwhile as its economic prospects are kicked around like a football Greece itself is pretty much a bystander. If only it was a final countdown to a default and devaluation meaning it would leave the Euro. Meanwhile some reports are bizarre as this from the fast FT twitter feed last week proves.

Greece made a stunning exit from three years of deflation and low price growth in January

Greek workers and consumers however will be rueing any rises in prices as we wonder how higher prices in the UK can be a disaster according to the FT but higher prices in Greece are “stunning”?

Podcasts

I have been running a private trial of putting these updates out as podcasts as the world continues to change and move on. I thought I would ask how many of you use podcasts?

Greece is drowning under all the debt its “rescue” brought

After looking at the recent economic success of Spain on Friday, which was confirmed this morning by the official data showing 3.2% GDP growth in 2016 it is time to look at the other side of the Euro area coin. This is a situation that continues to be described by one of the songs of Elton John.

It’s sad, so sad
It’s a sad, sad situation
And it’s getting more and more absurd
It’s sad, so sad
Why can’t we talk it over
Oh it seems to me
That sorry seems to be the hardest word

This is the situation facing Greece which is on its way back into the news headlines after of course another sequence of headlines proclaiming a combination of triumph and improvement. What is triggering this is some new analysis from the IMF or International Monetary fund and it is all about the debt burden. It is hard not to have a wry smile at this as the IMF has been telling us the burden is sustainable for quite some time in spite of it obviously not being so as I have regularly pointed out in here.

The IMF analysis

The Financial Times has summarised it like this.

Greece faces what is likely to be an “explosive” surge in its public debt levels that within decades will mean it will owe almost three times the country’s annual economic output unless given significant debt relief, the International Monetary Fund has warned in a confidential report.

Not that confidential then! Or perhaps conforming to the definition of it in Yes Prime Minister. Worrying after some better news in relative terms from the World Economic Forum suggesting that Greece was a lot further down the list of national debt per person (capita) than you might think. Japan of course was at the head at US $85.7k per person and intriguingly Ireland second at US $67.1k per person but Greece was a fair way down the list at US $32.1k each. Of course it’s problem is relative to the size of its economic output or GDP (Gross Domestic Product).

If we look at the detail of the IMF report it speaks for itself.

The fund calculated that Greece’s debt load would reach 170 per cent of gross domestic product by 2020 and 164 per cent by 2022, “but become explosive thereafter” and grow to 275 per cent of GDP by 2060.

If we switch to Kathimerini we find out the driving force of the deterioration in the debt sustainability analysis.

Greece’s gross financing needs are estimated at less than 20 percent of GDP until 2031 but after that they skyrocket to 33 percent in 2040 and then to 62 percent by 2060.

If we step back for some perspective here we see confirmation of one of my main themes on Greece. This has been that the debt relief measures have made the interest burden lighter but have done nothing about the capital debt burden which has in fact increased in spite of the PSI private-sector debt reprofiling. We can bring in that poor battered can now because the Euro area and the IMF thought they had kicked it far enough into the future not to matter whereas the IMF is now having second thoughts. In short it has looked at the future and decided that it looks none too bright.

The crux of the matter is the amount of the austerity burden that Greece can bear going forwards. Back in May 2016 the IMF expressed its concerns of future economic growth.

Against this background, staff has lowered its long-term growth assumption to 1¼ percent, even as over the medium-term growth is expected to rebound more strongly as the output gap closes.

That will do nothing for the debt burden and will have been entwined with the extraordinary amount of austerity required under the current plans.

This suggests that it is unrealistic to assume that Greece can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a primary surplus of 3½ percent of GDP.

As an alternative the IMF suggested something of a relaxation presumably in the hope that Greece could then sustain a higher economic growth rate.

The Euro area view

This was represented last week by Klaus Regling of the European Stability Mechanism or ESM.

I think it’s really important for Greece because it will reduce interest rate risk and improve Greek debt sustainability.

What was that Klaus?

we are dealing here with a bond exchange, where floating rate notes disbursed by the ESM and EFSF to Greece for bank recapitalisation will be exchanged for fixed coupon notes. There are measures related to swap arrangements that will reduce the risk that Greece will have to pay a higher interest rate on its loans when market rates go up………In addition, the EFSF waived the step-up interest rate margin for the year 2017 on a particular loan tranche. A margin of 2% had originally been foreseen, to be paid from 2017 on.

As you can see each time Greece is supposed to pay more they discover it cannot and we need more “short-term” measures which according to Klaus will achieve this.

All this will go a long way in easing the debt burden for Greece over time, according to our debt sustainability analysis. It could lead to a cumulative reduction of the Greek debt to GDP ratio of around 20 percentage points over the time horizon until 2060.

It does not seem a lot when you look at the IMF numbers does it. Also Euro area ministers repeated something which they have said pretty much every year of the crisis, from the FT.

Mr Dijsselbloem, who is also the Dutch finance minister, said that Greece was recovering faster than anyone expected.

Really? What was that about fake news again?

Retail Sales

We can learn a lot from these numbers and let us start with some badly needed good news.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in November 2016, recorded an increase of 3.6%.

Although sadly some of the gloss fades when we note this.

The seasonally adjusted overall volume index in November 2016 compared with the corresponding index  of October 2016 recorded a decrease of 0.2%.

So overall a welcome year on year rise and the strongest category was books and stationery. However perspective is provided if we look at the index which is at 69.7 where 2010 was 100. As that sinks in you get a true idea of the economic depression that has raged in Greece over the period of the “rescue” and the “bailout”. Most chilling of all is that the food beverages and tobacco index is at 55.6 on the same basis leaving us with the thin hope that the Greeks have given up smoking and fizzy drinks.

Also it is far from reassuring to see the European Commission release consumer confidence data for Greece indicating a fall of 3.4 to 67.8.

Comment

There is much to consider here but we find ourselves looking back to the Private-Sector Initiative or debt relief of 2012. I stated back then that the official bodies such as the ECB and IMF needed to be involved as well because they owned so much of the debt. It did not happen because the ECB said “over my dead body” and as shown below what were then called the Troika but are now called the Institutions pursued a course of fake news.

Thanks to Michael Kosmides of CNN Greece who sent me that chart. As we note the fake news let me give you another warning which is that Greece these days depends on its official creditors so news like this from Bloomberg last week is much less relevant than it once was.

The yield on Greece’s two-year bonds surged 58 basis points to 7.47 percent, while those on benchmark 10-year bonds rose 22 basis points to 7.13 percent as of 2:41 p.m in London.

The real issue is that Greece desperately needs economic growth and lots of it. As I pointed out on December 16th.

Compared to when she ( Christine Lagarde of the IMF) and her colleagues were already boasting about future success, the Greek economy has shrunk by 19%, which means that the total credit crunch contraction became 26%

 

 

 

The recent economic success of Spain makes a refreshing change

Back in the days of the Euro area crisis Spain found itself being sucked into the whirlpool. The main driver here was its housing market and the way that it had seen an enormous boom which turned to dust. Pick your theme as to whether you prefer empty towns or an airport that was never used. If we look back to my post yesterday on GDP I immediately find myself thinking that developments which are never used should be counted in a separate category. Of course the housing problems also caused trouble for the Spanish banks.

GDP

We do not yet have the data for the latest quarter but in recent times short-term forecasts by the Bank of Spain have been pretty accurate.

In Spain, economic activity has continued to post a high rate of increase in recent months. Specifically, in Q4, GDP is expected to have grown by 0.7%, unchanged on the rate observed in Q3 (see Chart 1) and underpinned by the strength of domestic spending.

We do have a link in that Spain seems to follow the pattern of the UK economy more than many of its Euro area neighbours and hence there might be for once some logic in using the same currency. But the main point is that such growth would continue what has been a much better phase for Spain. This meant that the official data for the third quarter told us this.

 Growth in relation to the same quarter of the previous year stood at 3.2%,

If we look back we see that the Spanish economy was hit hard by the initial impact of the credit crunch with the peak quarterly contraction being of the order of 1.5% of GDP. Then the economy bounced back but was then sent into decline as the Euro area crisis raged and quarterly economic growth did not turn positive again until 2013 moved in to 2014. However since then economic growth has been strong. If the fourth quarter does turn out to be 0.7% then it will follow 0.7%, 0.8%,0.8%,0.8%,0.9%,0.8% and 1%. Maybe a minor fading but I think that would be harsh on a country which has put in a strong performance.

If we look back for some perspective then let us compare with what sadly is often the laggard which is Italy. From Spain’s Royal Institute.

the contrast between cumulative growths is significant: 50% since 1997 in Spain versus 10% in Italy. Moreover, according to EU forecasts, in 2018 Spain will surpass Italy in per capita GDP (in PPP terms) for the first time ever.

Employment

The Euro area crisis has been characterised by high levels of unemployment so it was nice to see this in the GDP report of Spain.

In annual terms, employment increases at a rate of 2.9%, one tenth more than in The second quarter, which represents an increase of 499 thousand jobs
Equivalent to full-time in one year.

Yesterday we got a further update on this front from Spain’s statistics agency.

Employment has grown in 413,900 people in the last 12 months. The annual rate is 2.29%……….In the last year employment has risen in all sectors: in the Services there are 240,400 more occupied, in Industry 115,700, in Agriculture 37,000 and in Construction 20,800.

Not everything was perfect as the numbers dipped by 19,400 on a quarterly basis but overall the performance has been such that we can report this.

The number of unemployed falls this quarter in 83,000 people (-1.92%) and is in 4,237,800. In seasonally adjusted terms, the quarterly variation is -3.78%. In The last 12 months unemployment has decreased by 541,700 people (-11.33%).

Or if you prefer.

The unemployment rate stands at 18.63%, which is 28 cents lower than in The previous quarter. In the last year this rate has fallen by 2.26 points.

So we have a ying of lower unemployment combined with a yang of the fact that it is still high. If we return to the comparison with Italy then according to the Royal Institute the situation is better than it first appears to be.

From 1990 to 2014 female participation has risen from 34% to 53% in Spain and from 35% to only 40% in Italy (seeWorld Bank data). Hence, although there is a much lower unemployment rate in Italy, the latter’s inactivity rate is much higher than Spain’s.

The other point I would make is that whilst it is pleasing that Spain is creating more jobs the fact that the growth rate in them is similar to the economic growth means that it too will have its productivity worries.

Looking ahead

The Bank of Spain is reasonably optimistic in its latest Bulletin.

Hence, after standing in 2016 at 3.2% (the same rate as that observed a year earlier), average GDP growth is expected to ease to 2.5% in 2017 (see Table 1). In 2018 and 2019, the estimated increase in output would stand at 2.1% and 2%, respectively.

As to the private-sector business surveys Markit tells us this about services.

Rate of expansion in activity remains marked in December

And this about manufacturing.

The Spanish manufacturing PMI signalled that the sector ended 2016 on a high, with growth back at the levels seen at the start of the year.

Fiscal Position

The situation here has been summed up by El Pais this morning like this.

After missing its deficit targets for five straight years, Spain on Thursday made a commitment in Brussels to make additional adjustments “if necessary.”

If you look at its economic performance you might be wondering if Spain got it right although of course that is far from the only issue at hand. The current state of play is shown below.

Spain believes that the tax hikes slapped on companies, alcohol, tobacco and sugary drinks, as well as rises in a range of green taxes – together with strong economic growth – will be enough to keep the deficit at 3.1% of GDP. But Brussels is forecasting 3.3% instead.

If we move to the national debt it is in the awkward situation it has breached the 100% of GDP barrier. The reason this is awkward is that as described Spain has seen good levels of economic growth and the ECB has bought a lot of Spanish government debt keeping debt costs relatively low. It has bought some 150.3 billion Euros worth so far as of the end of last week and the ten-year yield is at 1.6% meaning that in spite of recent rises debt costs are very low. Thus the ratio has risen at a time when two favourable winds have been blowing in Spain.

House Prices

As this was a signal last time I can report that as of the end of the third quarter they were rising at an annual rate of 4% so relatively moderate by past standards. However as the last quarter of 2015 saw a quarterly 0% this seems set to rise. Price rises may also be capped by the fact that the bad bank Sareb is selling off some of the stock that it inherited ( believed to be around 105,000 homes). Mind you there does appear to be considerable rental inflation if this from The Spanish Brick is any guide.

The price of rental dwellings has increased in Spain by 5.8% during the second quarter of 2016, being the price of the square meter 7.8 euros per month. On an inter-annual rate, it is an 8.5% increase, according to the main property portal in Spain. ( BankInter)

Comment

There has been plenty of good economic news for Spain in recent times and we should welcome that. After all it makes a nice change from the many down beat stories that are around. But if we use the phrase “escape velocity” so beloved of Bank of England Governor Mark Carney we see that work remains to be done. If we look back and set 2010 at 100 then GDP peaked at 104.4 in the second quarter of 2008 but only reached 102.4 in the third quarter of 2016 so another just under 2% is required to scale the previous peak. Spain will need to do that relatively quickly to prevent a type of “lost decade” but even as it does so, which I expect it to do it then looks back on a decade which overall has been a road to nowhere overall.

Should Spain continue to follow the British economic pattern then worries for the UK of rising inflation affecting the economy may have a knock-on effect. As to literal links the UK Office for National Statistics has helped out a little today.

Spain is host to the largest number of British citizens living in the EU (308,805); just over a third (101,045) of British citizens living in Spain are aged 65 years and over.

The UK National Debt rises to pay for yet another bank subsidy

The credit crunch era has seen two opposing schools of thought on the public finances. One side labelled as austerity is where the deficits which appeared and rose are then cut back and the other side labelled as stimulus was happy to let deficits flow anticipating that they would create economic growth in the future to solve the problem. Actually these were mostly theories as practice remained different as for example the UK looked to restrain the growth of public expenditure rather than actually reduce it. The one place where austerity was clearly applied was on Greece and that went badly as it was already slipping into depression and received a further push downwards,

More recently fiscal stimulus came back en vogue. To some extent this began back in 2013 with this mea culpa of sorts from the IMF (International Monetary Fund).

We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis.

In 2016 we saw more and more calls for fiscal stimulus from the IMF and other global institutions with something of a U-Turn on Japan. From Reuters.

The International Monetary Fund said Tuesday Japan should coordinate fiscal stimulus with further central bank easing measures that could include rate cuts and more asset purchases.

Although maybe not quite a U-Turn.

Japan needs to show it will regain fiscal discipline with gradual increases in the consumption tax and an explicit cap on social security spending, he said.

So actually rather confused but the mood music did switch towards stimulus of a fiscal nature as we looked at the plans of both US Presidential candidates and the UK.  But whilst it is still very early days for President Trump some of the pressure for a fiscal boost seems to have eased so bond markets have rallied. The UK has seen one or two small piecemeal schemes but these have seemed ad hoc political moves rather than any sort of coherent plan. Although yesterday’s industrial strategy did repeat a past promise of more spending. From the Financial Times.

A government promise made in November to increase infrastructure investment by 60 per cent from £14bn in 2016 to £22bn in 2021 was reiterated in the document.

But the hints of more fiscal expansionism seem otherwise to have faded somewhat.

Today’s data

We see a familiar marginal improvement in the monthly data.

Public sector net borrowing (excluding public sector banks) decreased by £0.4 billion to £6.9 billion in December 2016, compared with December 2015.

If we look into the detail of the numbers we see that there was a 2.2% increase in spending but that it was lower than this.

Central government receipts in December 2016 were £53.8 billion, an increase of £2.9 billion, or 5.6%, compared with December 2015.

The particular areas which were strong are shown below.

Social (National Insurance) contributions increased by £1.0 billion, or 10.1%, to £10.6 billion….. Income Tax-related payments increased by £0.7 billion, or 5.8%, to £13.3 billion……Corporation Tax increased by £0.4 billion, or 12.4%, to £4.0 billion.

It doesn’t seem that much of an improvement considering the strength of those receipts does it? Also it relies somewhat on the increase in some National Insurance rates.

Some Perspective

We get a better idea of the trends if we look at the performance in the UK fiscal year to date.

In the financial year-to-date (April to December 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £63.8 billion; a decrease of £10.6 billion, or 14.3% compared with the same period in 2015.

So an improvement but along the lines of edging forwards especially as we note that the economy continued to growth through this period. We see some confirmation of the fact that the economy has been growing by the tax receipt figures.

Central government receipts for the financial year-to-date (April to December 2016) were £476.8 billion, an increase of £21.9 billion, or 4.8%, compared with the same period in the previous financial year.

As we look into the numbers we see that income tax receipts rose by 2.6% and Value Added Tax ( a consumption tax) rose by 3.2% broadly confirming the economic growth. There is also a ying and yang to the numbers as an area for which government’s are often criticised  performed well.

Corporation Tax increased by £3.3 billion, or 9.9%, to £36.2 billion

I suppose there is an irony in such news coming on the day that we find out that less Corporation Tax will be paid by BT after its corruption problems in Italy which seem to have risen to £530 million from £145 million. But the real yang to the ying above is the sort of last hurrah we are seeing for Stamp Duty receipts.

Stamp Duty on land and property increased by £0.8 billion, or 9.4%, to £9.5 billion

With the prospects for UK house prices and activity the surge looks set to end. Actually Stamp Duty full stop has been in a boom.

Stamp Duty on shares increased by £0.5 billion, or 23.7%, to £2.8 billion

So not a bad set and I have put the 9.2% increase in National Insurance contributions at the end because they were also driven by a rise in contribution rates for some.

By contrast central government expenditure rose by 1.4% of which the fastest rising component was this.

debt interest increased by £2.4 billion, or 6.7%, to £38.1 billion; of this £38.1 billion,

That is too soon to be the rise in Gilt yields having an impact and is much more likely to be the impact of the rise in the cost of UK Index-Linked Gilts which pay out relative to the Retail Price Index.

National Debt

The numbers continue to rise.

Public sector net debt (excluding public sector banks) was £1,698.1 billion at the end of December 2016, equivalent to 86.2% of gross domestic product (GDP); an increase of £91.5 billion, or an average of £251 million each day over the last year.

There was something new in the rise however as the Bank of England move in August helped push the national debt higher. Here is the impact of the Term Funding Scheme or TFS.

By the end of December 2016, the Bank of England had made £20.1 billion of loans through the Term Funding Scheme.

Thanks Mark Carney! Raising the national debt to subsidise the banks.

Also as we move forwards we need to note that the international standard for what is the size of the national debt is different so here are the UK numbers on that basis.

general government gross debt was £1,652.0 billion at the end of March 2016, equivalent to 87.6% of gross domestic product (GDP); an increase of £47.9 billion on March 2015.

Comment

It is easy to forget that we were supposed to be basking in a fiscal surplus now under the original plans of the coalition government back in the summer of 2010. The colder harder reality is that whilst we have made considerable progress in reducing the deficit it remains a substantial sum. As time passes the danger rises of us seeing another slow down and perhaps recession and upwards pressure going back on the numbers.A challenge will be posed at 2017 develops by the rise of consumer inflation.

Meanwhile the national debt continues to rise. In terms of debt costs that has not been much of an issue so far because of the extraordinary falls in UK Gilt yields. But they are now back to similar levels to when the Bank of England began its new QE operations and of course index-linked Gilts are becoming more expensive to finance due to the rise in inflation. It has been quite a while since government’s have felt a squeeze from this area as the QE era has brought them plenty of windfalls, and this of course just illustrates another area where QE is like a spider’s web.

Mind you compared to some forecasts we have ended 2016 in pretty good shape! So we should perhaps be grateful for that….

The “Sledgehammer” of Mark Carney raises the UK National Debt

Firstly welcome to the winter solstice and the realisation that the only way is up for the length of the day although the coldest day is not due for a month. Of course I should not forget my readers on the underside of the world who have the benefit of the longest day but not the light prospects! Although the weather should get warmer for a while. As today updates us on the UK Public Finances let us continue in an end of year reflective vein. We can gain some wry amusement from looking back and noting where we were supposed to be now.

It is entirely appropriate that we should on the darkest day of the year pull out the forecasts of the UK Office for Budget Responsibility. Let us go back to the summer of 2010 as it emerged blinking into the sunlight.

public sector net borrowing (PSNB) to fall from 11.0 per cent of GDP in 2009-10 to 1.1 per cent in 2015-16;

There is more.

public sector net debt (PSND) to increase from 53.5 per cent of GDP in 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

Plus a coup de grace for this section.

the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in 2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent of GDP in 2015-16.

A surplus? Well even the OBR back then could only manage it by imposing an economic cycle. This is a politically inspired wheeze as you see by changing the cycle you can get pretty much any result you want whilst of course reality remains unchanged. As PM Dawn reminded us.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine
Reality used to be a friend of mine.
Reality used to be a friend of mine
Please don’t ask me ’cause I don’t know why,
but reality used to be a friend of mine.

Number Crunching

Taken independently, and on the basis of our central forecast, there is a greater than 50 per cent chance of this target being met in 2015- 16. There is also a greater than 50 per cent chance of it being met a year early, in 2014-15.

So that’s 100% +, do I have that right? Anyway let us move on from a world where wage growth is 5% and we are just about to eliminate the current account deficit, I kid you not.

Today’s data

Let us open with a cheery improvement.

Public sector net borrowing (excluding public sector banks) decreased by £0.6 billion to £12.6 billion in November 2016, compared with November 2015.

So we have an improvement showing that the public finances have not collapsed, at least so far, after the EU leave vote. That is of course awkward for the OBR new boy Professor Sir Charlie Bean who signed off an official forecast saying the UK economy would shrink by between 0.1% and 1% in the quarter following a leave vote. You could argue therefore that he was a perfect candidate to continue the past record of the OBR.

If we move to the more reliable quarterly numbers we see a familiar pattern.

Public sector net borrowing (excluding public sector banks) decreased by £7.7 billion to £59.5 billion in the current financial year-to-date (April to November 2016), compared with the same period in 2015.

We are a very long way from the surplus predicted by the OBR! That went to 2019/20 and now seems to have vanished in a puff of smoke. The real point here though is that whilst our deficit continues to decline it is doing so at a slower rate than you might expect as the official economic growth figures turned nearly four years ago.

You can compare the number above with what the OBR told us in March to see that it has retained its skill set.

In the Spring Budget (16 March 2016),OBR estimated that the public sector would borrow £55.5 billion during the financial year ending March 2017 (April 2016 to March 2017).

What is economic growth?

Not this time an existential style discussion what I intend to do is use the revenue and taxes numbers as a guide. After all tax receipts are an actual number as opposed to some of the imputations of GDP. On the face of it we seem to be doing reasonably well.

Central government receipts for the financial year-to-date (April to November 2016) were £421.8 billion, an increase of £17.8 billion, or 4.4%, compared with the same period in the previous financial year.

However we need to take care as the strongest numbers are from National Insurance where some rates were raised this year. But what we might consider the core numbers are not far off what we think economic growth is,especially if we recall that income tax receipts have been negatively influenced by the raising of the Personal Allowance.

VAT receipts increased by £2.5 billion, or 2.9%, to £89.1 billion…Income Tax-related payments increased by £2.1 billion, or 2.1%, to £101.9 billion

So a bit under 3% say as an estimate. Oh and there was a boost from an expected and an unexpected source.

Corporation Tax increased by £2.8 billion, or 9.7%, to £32.2 billion…….Stamp Duty on land and property increased by £0.7 billion, or 9.2%, to £8.2 billion

So we are collecting more Corporation Tax than many would like you to believe although we could do better. Also Stamp Duty per se has been on a bit of a tear.

Stamp Duty on shares increased by £0.5 billion, or 24.4%, to £2.5 billion.

National Debt

There is a little bit of statistical chicanery going on here as the improvement in the ratio compared to GDP has stopped.

At the end of November 2016, the provisional estimate of PSND (Public Sector Net Debt) ex as a percentage of GDP stood at 84.5%; an increase of 0.1 percentage points compared with November 2015.

But in the spirit of the OBR above we have apparently found a new “cycle” or something like that.

At the end of November 2016, the provisional estimate of PSND ex BoE as a percentage of GDP stood at 81.6%; a decrease of 0.5 percentage points compared with November 2015. This is the sixth successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than PSND ex BoE.

One day perhaps we will have PSND excluding debt.

Mark Carney

You may wonder what he is doing here. Well two of his “Sledgehammer” policy decisions from August have increased the UK National Debt.

any private sector corporate bonds purchased will lead to an increase in public sector net debt equal to the total purchase price of the bonds as the bonds are not liabilities of the public sector.

Also this.

By the end of November 2016, the Bank of England had made £5.8 billion of loans through the Term Funding Scheme. These transactions have been financed by the creation of central bank reserves and so will increase public sector net debt accordingly.

Comment

So we find ourselves in a familiar position where the UK fiscal deficit is falling but more slowly than we would have hoped and expected in the circumstances. If we step back there were two decisions which have contributed to this. The largest influence was the so-called triple lock for increases to the basic state pension which has been especially expensive in real terms in recent times due to the low rate of the official consumer inflation number. Also on the revenue side there was the decision to push the Personal ( tax-free) Allowance substantially higher which has held income tax revenues back.

Meanwhile as we review the way that the Bank of England cut Bank Rate into a currency fall we see yet another side-effect. This is that the Term Funding Scheme and Corporate Bond purchases increase the National Debt. This is particularly ill-fated for the purchases of foreign companies like Maersk where they benefit but the UK taxpayer pays.