The UK should issue a 100 year bond (Gilt)

Sometimes ideas come to fruition at the time but others have a much longer gestation period. My subject of today is an example of the latter as it was back in March 2012 that Chancellor George Osborne included this in the UK Budget.

In light of evidence of strong demand for gilts of long maturities and against the backdrop of historically low long-term interest rates, in 2012–13 the DMO will consult on the case for issuance of gilts with maturities significantly longer than those currently in issue, that is in excess of 50 years, and/or perpetual gilts.

By DMO he meant the Debt Management Office which is the body which manages the UK’s national debt. The plan was for it to do this.

The consultation will build an evidence base to inform the Government’s decision on whether to issue such instruments. It will seek to establish the likely strength and sustainability of demand, the cost-effectiveness and risks of issuance, and the impact on market liquidity and the good functioning of the wider gilt market.

If we look at the plan back then we see it was based on “historically low long-term interest-rates” or bond yields. That was true in March 2012 with longer maturity Gilt yields having fallen by a bit more than 1%. If you compound that over 100 years then you would be quids in so to speak as an issuer.

Investment Week

They held an online debate and Jim Leaviss of M&G told us this.

Few fund managers would publically argue that a yield of supposedly around 3.5% is good value given both inflation and political uncertainty over 100 years.

Such things are a hostage to fortune as it has turned out that any fund manager who had bought such a bond would be giving a lecture tour right now on how clever they had been, as well as deserving a large bonus. We should not be harsh on Jim as who could have predicted the last 7 years.

Currently, we are not bullish on the gilt market: it looks expensive and I am not sure you would want to lock in low yields for such a long time period.

Oh well as Fleetwood Mac would say. He did think that a 100 year Gilt would be bought in spite of that being a bad idea.

However, there has been demand for long-dated gilts given the size of the existing 2060 gilt and the 2062 linker of over £16bn and over £8bn respectively.

If a 2112 is issued, its very existence will cause index-led funds or liability matching pension funds to buy it.

Not everyone in the debate felt that it would work and others thought that the Gilt market was already too expensive. Here is Jeff Keen of JO Hanbro.

Assuming the Bank of England is successful in meeting its 2% inflation target, this implies long term gilt yields should be in the 4%-5% range rather than the currently implied yield for a 100-year gilt of around 3.5%. The difference is a downward price adjustment of around 30%. Beware – gilts are not necessarily a safe haven.

Apologies for embarrassing them.

What happened next?

There was no explicit issue although in 2015 we did covert something into a 100 year bond. From gov.uk.

The Treasury will redeem the outstanding £1.9 billion of debt from 3½% War Loan on Monday 9 March 2015.

The reason for that was the 3.5% coupon which in 2012 had seemed cheap was by then looking rather expensive for the UK taxpayer.

Austria yesterday

You may recall that Austria issued a century or 100 year bond back in 2017 well there is more of it now.

They also revised pricing lower for a tap of Austria’s outstanding debt maturing in 2117 with demand there exceeding 5.3 billion euros. That 1.25 billion euro issue priced at 48 bps over an outstanding Fed 2047 bond, translating to a yield of 1.171%. ( Reuters)

Yes you did read that yield correctly and as pointed out in the comments yesterday there was another sign that it was an issuers party for the Austrian taxpayer.

The country’s debt management agency launched the sale of 3 billion euros of five-year bonds at 23 basis points below the mid-swap rate, translating to a yield of -0.435%. The deposit rate stands at -0.40%.

There was a time when the ECB deposit rate was a barrier for bond yield issuance but as you can see that is now in the past. The bull market for bonds is so strong that it has passed the benchmark and if Germany issued a five-year bond it would blow it away at around -0.6%.

Another sign of how strong the bull market is in bonds is that there was plenty of extra demand for the two issues by the Austrian Treasury. As its overall yield is 2.08% it has improved conditions for the taxpayer there with both issues.

The UK Gilt Market

This has also been in a bull market where yields are both absolutely and historically low. We do not have the levels of much of the Euro area for several reasons. Firstly official interest-rates are lower there with the deposit rate being -0.4% as opposed to the UK Bank Rate of 0.75%. Next we have had ECB President Mario Draghi only recently hint about even lower interest-rates and more QE bond buying. Also with the planned TLTRO money market ( bank subsidy) operation it is in the process of enforcing them.

But we do have very low yields as for example both the two and five-year yields seem to have settled around 0.6%. If we look further out we do have a fifty-year Gilt which yields some 1.38% as I type this. So what is called our yield curve is pretty flat both as a curve and also in comparison with the past.

Comment

This seems clear cut to me as at present yields the UK could issue a 100 year Gilt very cheaply. There are loads of projects which would look extremely viable at these levels. If you are wondering how much? Well even if we issued at the fifty-year yield of around 1.4% that would be 2.1% below 2012. Actually if you look at the way the yield curve shapes we might be able to issue at a yield of 1.3%. Amazingly cheap and less than a tenth of past yields experienced in my career.

The flip-side of the coin is that at such a yield the percentages are heavily weighted against any buyers. So buyers of fixed-income funds might do well to be afraid and perhaps very afraid. It is a bit different for holders who have been in a long running party.

As to size well if you do it why not offer £10 billion and see what happens? I would not be surprised to see it be over subscribed.

Meanwhile every idea has its niches. From PolemicTMM.

UK should issue a 100yr zero coupon 42bio Euro-denominated bond to fund the Brexit bill (if bond mkts continue like this, we may even get -ve rates). EU institutions would end up having to buy it due to EU imposed reserve regs and so effectively end up funding Brexit.

By bio he means billion I think. The quid pro quo for an even lower interest-rate would be an exchange-rate risk.

The Investing Channel

 

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Has the UK fixed its public finances?

Last night brought us the Mansion House speeches from the Chancellor of the Exchequer and Governor of the Bank of England. Whilst there was something of a ruckus as Greenpeace arrived my attention was on what the Chancellor would say about the UK public finances.

and we have fixed the public finances………In short, while we have repaired the public finances.

Some clear politics at play but elements of that are true. Then there was a reference to what has been called a “warchest” being available.

Because it doesn’t mean that there would be no extra money to spend.

As I said at the Spring Statement, if we leave the EU in a smooth and orderly way, the fiscal headroom I have built up means an incoming Prime Minister will have scope for additional spending or tax cuts.

“Gentleman Phil” then went on to list his achievements.

As the public finances have improved, I have committed over £150bn of new spending in the last 3 years…

…including an NHS settlement which is the single largest commitment ever made by a peacetime British Government.

Public capital investment is set to reach the highest sustained level in forty years…

…as we build the critical national infrastructure we need to raise our productivity;

I’ve committed £44bn to housing, delivering more new homes last year than in all but one of the last 30 years;

And I’ve cut taxes, with over 30 million people seeing their income tax cut this year;

288,000 people benefitting so far from the abolition of stamp duty for first time buyers;

And British businesses paying the lowest corporation tax rate in the G20.

Apologies for the fact that it is not possible to completely cut politics out of that. But it does give some sort of analysis of the situation. However though the big change I have been pointed out in 2019 does not get a mention.

Borrowing is very cheap

Politicians usually avoid mentioning the falling cost of borrowing because they like to take the credit themselves for the improved public finances. From time to time they may actually be responsible but the trend this year has been across much of the world as we see expectations of more central bank easing. On Tuesday the UK will take advantage of this as we borrow an extra £2.25 billion of this.

1¾% Treasury Gilt 2049

Actually even the 1 3/4% is behind the times because as I type this the UK thirty-year yield is 1.44%. Back in the day I recall it being more than ten times that. Continuing these theme the UK issued an extra £2.75 billion of our ten-year Gilt this Tuesday at a yield of 0.89%. These are practical examples of how lower bond yields feed their way into the public accounts and if we borrow as planned it will have this impact in the next year.

Gilt sales of £117.8 billion (cash) are planned in 2019-20 ( Debt Management Office )

Also there has been a windfall from the way that the rate of inflation has fallen as we move to the latest release.

Interest payments on the government’s outstanding debt decreased by £0.3 billion compared with May 2018, due largely to movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

If we return to the broad sweep I described earlier then this from Bloomberg today highlights the ongoing trend.

The world now has $13 trillion of debt with below-zero yields.

Today’s Data

If we look at this in a thematic sense then there was food for thought for the austerity debate from this in May.

Over the same period, there was a notable increase in expenditure on goods and services of £1.9 billion.

So on the face of it the numbers do seem to back up what the Chancellor was saying last night. We do not get any breakdown of this and I have to confess I am wondering if this is a catching-up on expenditure for March 29th which was supposed to be Brexit Day? Only time will tell on that but for now we have spent more.

Switching to the revenue numbers then they were okay in May.

Central government receipts in May 2019 increased by £1.9 billion (or 3.5%) compared with May 2018, to £56.7 billion…..Much of this annual growth in central government receipts in May 2019 came from Income Tax-related revenue, with Income Tax and National Insurance contributions increasing by £0.6 billion and £0.7 billion respectively compared with May 2018.

So if they are any guide the economy continues to move ahead as one measure is tax revenue. But they were not enough to offset the additional expenditure.

Borrowing (public sector net borrowing excluding public sector banks) in May 2019 was £5.1 billion, £1.0 billion more than in May 2018;

Also the additional expenditure in May fed straight into the picture for the year to date.

Borrowing in the current financial year-to-date (April 2019 to May 2019) was £11.9 billion, £1.8 billion more than in the same period last year;

We do not get much extra perspective at this time of year as we have only had two months in the financial year. So we remain with the view that it looks like we are spending more. As to the overall picture it remains true that we are not borrowing very much and ironically in the circumstances would qualify for this part of the Maastricht criteria very comfortably.

Borrowing in the latest full financial year (April 2018 to March 2019) was £24.0 billion, £17.8 billion less than in the same period the previous year; the lowest financial year borrowing for 17 years.

What about the National Debt?

That continues to rise in absolute terms whilst falling in relative terms.

Debt (public sector net debt excluding public sector banks) at the end of May 2019 was £1,806.1 billion (or 82.9% of gross domestic product (GDP)); an increase of £25.0 billion (or a decrease of 1.4 percentage points of GDP) on May 2018.

We would fail the Maastricht criteria here as shown below.

equivalent to 86.7% of gross domestic product (GDP); 26.7 percentage points above the Maastricht reference.

It is also time for my regular reminder that some of the debt is due to yet another subsidy for our banking system.

The Bank of England’s (BoE) contribution to net debt is largely a product of their quantitative easing measures, namely the Bank of England Asset Purchase Facility Fund (APF) and the Term Funding Scheme (TFS). If we were to exclude BoE from our calculation of public sector net debt (excluding public sector banks), it would reduce by £183.9 billion.

Comment

If we look back to when the period of UK austerity started it is important to remember that it was not only a very different world but seemed a different world. The UK thought it had borrowed some 11% of GDP in a single year and was facing a ten-year Gilt yield of the order of 4%. Indeed the Office for Budget Responsibility was expecting the bond vigilante’s to turn up as it forecast that it would now be 5%. The combination of those two factors made the future public finances look dreadful.

Now we are in a completely different situation as we borrow a mere 1.5% of GDP and the ten-year UK Gilt yield is 0.84%. After all back then we were not yet fully aware of the first rule of OBR club ( for newer readers it is always wrong). The saddest part of this is that the political debate has ignored this. So for example when there were suggestions of tax cuts in the Conservative party leadership election we went back to the “can we afford it?” stage when he general we can, often easily. Whether they would be a good idea is an entirely different matter as for example abandoning VAT for a sales tax seemed curious at best.

Returning to the question in my title today then in isolation the answer is yes. The much deeper question comes from what we want the public finances to achieve as we also see examples of areas where cut backs have hurt people and sadly they are often those least able to do something about it.

 

Will fiscal policy save the US economy or torpedo it?

One of the features of the credit crunch era has been the shift in some places about fiscal policy. For example the International Monetary Fund was rather keen on austerity in places like Greece but then had something of a road to Damascus. Although sadly Greece has been left behind as it ploughs ahead aiming for annual fiscal surpluses like it is in a 2012 time warp. Elsewhere there have been calls for a fiscal boost and we do not need to leave Europe to see them. However as I have pointed out before there is quite a distinct possibility that President Donald Trump has read his economics 101 textbooks and applied fiscal policy into an economic slow down. Of course life these days is rarely simple as his trade policy has helped create the slow down and is no doubt a factor in this from China earlier..

Industrial output grew 5.0 percent in May from a year earlier, data from the National Bureau of Statistics showed on Friday, missing analysts’ expectations of 5.5% and well below April’s 5.4%. It was the weakest reading since early 2002. ( Reuters).

Also there has been another signal of economic worries in the way that the German bond future has risen to another all-time high this morning. Putting that in yield terms holding a benchmark ten-year bond loses you 0.26% a year now. Germany may already be regretting issuing some 3 billion Euros worth at -0.24% on Wednesday although of course they cannot lose.

US Fiscal Policy

Let us take a look at this from the perspective of the South China Morning Post.

The US budget deficit widened to US$738.6 billion in the first eight months of the financial year, a US$206 billion increase from a year earlier, despite a revenue boost from President Donald Trump’s tariffs on imported merchandise.

So we can look at this as a fiscal boost on top of an existing deficit. The latter provides its own food for thought as the US economy has been growing sometimes strongly for some years now yet it still had a deficit. In terms of detail if we look at the US Treasury Statement we seem that expenditure has been very slightly over 3 trillion dollars whereas revenue has been 2.28 trillion. If we look at where the revenue comes from it is income taxes ( 1.16 trillion) and social security and retirement at 829 billion and in comparison corporation taxes at 113 billion seem rather thin to me.

The picture in terms of changes is as shown below.

So far in the financial year that began October 1, a revenue increase of 2.3 per cent has not kept pace with a 9.3 per cent rise in spending.

If we look at the May data we see that the broad trend was exacerbated by monthly expenditure being high at 440 billion dollars as opposed to revenue of 232 billion. Marketwatch has broken this down for us.

Most of the jump can be explained by June 1 occurring on a weekend, which forced some federal payments into May. Excluding those calendar adjustments, the deficit still would have increased by 8%, with spending up by 6% and revenue up by 4%.

In terms of a breakdown it is hard not to think of the oil tankers attacked in the Gulf of Oman yesterday as I note the defence numbers, and I have to confess the phrase “military industrial complex” comes to mind.

What will recur are growing payments for Medicare, Social Security and defense. Medicare spending surged 73% — mostly because of the timing shift, though it would have rose 18% otherwise. Social Security benefits rose by 11% and defense spending rose 23%.

So we have some spending going on here and its impact on the deficit is being added to by this from February 8th last year.

The final conference committee agreement of the Tax Cuts and Jobs Act (TCJA) would cost $1.46 trillion under conventional scoring and over $1 trillion on a dynamic basis over ten years,

Thus policy has been loosened at both ends and the forecast of the Congressional Budget Office that the deficit to GDP ratio would be 4.2% this year looks like it will have to be revised upwards..

National Debt

This was announced as being 22.03 trillion dollars as of the end of May, of which 16.2 trillion is held by the public. Most of the gap is held by the US Federal Reserve. Just for comparison total debt first passed 10 trillion dollars in the 2007/08 fiscal year so it has more than doubled in the credit crunch era.

Moving to this as a share of the economy the Congressional Budget Office puts something of a spin on it.

boosting debt held by the public to $28.5 trillion,
or 92 percent of GDP, by the end of the period—up
from 78 percent now.

The IMF report earlier this month was not quite so kind.

Nonetheless, this has come at the cost of a continued increase in the debt-to-GDP ratio (now at 78 percent of GDP for the federal government and 107 percent of GDP for the general government).

Where are the bond vigilantes?

They have gone missing in action. The financial markets version of economics 101 would have the US government being punished for its perceived financial profligacy by higher bond yields on its debt. Except as I type this the ten-year Treasury Note is yielding a mere 2.06% which is hardly punishing. Indeed it has fallen over the past year as it was around 2.9% a year ago and last November went over 3.2%.

So in our brave new world the situation is one of lower bond yields facing a fiscal expansion. There is an element of worries about the economic situation but the main player here I think is that these days we expect the central bank to step in should bond yields rise. So the US Federal Reserve is increasingly expected to cut interest-rates and to undertake more QE style purchases of US government debt. The water here is a little murky because back at the end of last year there seemed to be a battle between the Federal Reserve and the President over future policy which the latter won. So much for the independence of central banks!

The economy

Let me hand you over to the New York Federal Reserve.

The New York Fed Staff Nowcast stands at 1.0% for 2019:Q2 and 1.3% for 2019:Q3. News from this week’s data releases decreased the nowcast for 2019:Q2 by 0.5 percentage point and decreased the nowcast for 2019:Q3 by 0.7 percentage point.

That compares to 2.2% annualised  for a month ago and 3.1% for the first quarter of the year. So the trend is clear.

Comment

As we track through the ledger we see that the US has entered into a new period of fiscal expansionism. The credit entries are that it has been done so ahead of an economic slow down and at current bond yields is historically cheap to finance. The debits come when we look at the fact that the starting position was of ongoing deficits after a decade long period of economic expansion. These days we worry less about national debt levels and more about the cost of financing them, although as time passes and debts rise that is a slippery slope.

The real issue now is how the economy behaves as a sharp slow down would impact the numbers heavily. We have seen the nowcast from the New York Fed showing a slowing for the summer of 2019. For myself I worry also about the money supply data which as I pointed out on the 8th of May looks weak. So this could yet swing either way although this from February 8th last year is ongoing.

The deep question here is can we even get by these days without another shot of stimulus be it monetary,fiscal or both?

 

The UK poverty problem is more than a story about austerity

Timing can sometimes be if not everything very important and so the release of the UN report on UK poverty by Phillip Alston on the day we get the latest data on the public finances is unlikely to be a coincidence. So let us get straight to it.

Although the United Kingdom is the world’s fifth largest economy, one fifth of its population (14 million people) live in poverty, and 1.5 million of them experienced destitution in 2017.

That is certainly eye-catching especially the use of the word destitution. However it was only on Monday that Andrew Baldwin reminded us that using purchasing power parity or PPP the UK is in fact the ninth largest economy rather than the fifth. So we note immediately that many of these concepts are more elusive than you might think. That issue particularly relates to the issue of poverty which is basic terms can be absolute or relative. With the relative definition we find that people can be better off but poverty gets worse. especially if the definitions are changed. I note that the Social Metrics Commission has done exactly that.

This new metric accounts for the negative impact on people’s weekly income of inescapable costs such as childcare and the impact that disability has on people’s needs……. The Commission’s metric also takes the first steps to including groups of people previously
omitted from poverty statistics, like those living on the streets and those in overcrowded housing.

The issue is complex and on a personal level my eyes went to one of the supporters of this which is the same Oliver Wyman which assured us that Anglo Irish Bank was the best bank in the world in 2006.  It was not too long before it was nationalised and made the largest loss in Irish corporate history.

The Detail

Be that as it may the report tells us this.

 Four million of those are more than 50 per cent below the poverty line and 1.5 million experienced destitution in 2017, unable to afford basic essentials. Following drastic changes in government economic policy beginning in 2010, the two preceding decades of progress in tackling child and pensioner poverty have begun to unravel and poverty is again on the rise. Relative child poverty rates are expected to increase by 7 per cent between 2015 and 2021 and overall child poverty rates to reach close to 40 per cent.

On the other hand if we go to the absolute poverty measure then we are told this.

“There are 1 million fewer people in absolute poverty today – a record low; 300,000 fewer children
in absolute poverty – a record low; and 637,000 fewer children living in workless households – a record low.” ( Prime Minister May)

As you can see there is an extraordinary difference between the two approaches.

UK Public Finances

We can look at the situation from this perspective so here we go.

Borrowing (public sector net borrowing excluding public sector banks) in April 2019 was £5.8 billion, £0.03 billion less than in April 2018; the lowest April borrowing since 2007.

So the monthly numbers were better albeit by the thinnest of margins so let us delve more deeply.

Borrowing in the latest full financial year (April 2018 to March 2019) was £23.5 billion, £18.3 billion less than in the previous financial year; the lowest full financial year borrowing for 17 years (April 2001 to March 2002).

As you can see we are now approaching a possible budget balance because the same rate of improvement this year would pretty much wipe the deficit out. This raises a wry smile because when the government was supposedly trying to do this it remained a mirage and was always around three years away on the forecasts. Except three years later it was three years away again! Yet the current government has regularly promised to end austerity and has in fact made quite a lot of progress towards a balance budget. Make of that what you will. In fact the situation has levels of complexity as the spending numbers make clear.

Over the same period, central government spent £740.7 billion, an increase of 2.5%.

Those are the numbers for the full financial year to March and they open the austerity debate again. It depends which inflation measure you use as to whether that is a cut in real terms (RPI) or a rise ( CPI). It also depends on how you define austerity as that too varies. Monthly numbers vary but the latest month suggests a minor reduction in it.

 while total central government expenditure increased by £1.8 billion (or 2.7%) to £66.5 billion.

Moving onto what has changed the deficit numbers ( what used to be called the PSBR) the most has been this development.

In the latest full financial year (April 2018 to March 2019), central government received £739.7 billion in income, including £559.0 billion in taxes. This was 4.9% more than in the previous financial year.

As you can see revenue has been strong and that gives us a hint that maybe the economy has been stronger than the GDP data has picked up and perhaps more in line with the employment and real wages numbers. One way of looking at the situation is to compare revenue with the national debt and if we do so using the international standard ( Maastricht) then it is 40%.

Whilst we are looking at revenue I am often critical of Royal Bank of Scotland so let me also post the other side of it.

On 14 February 2019, The Royal Bank of Scotland Group plc (RBS)announced the dividend price to be paid to shareholders on 30 April 2019. As a shareholder, the government received £0.8 billion

Comment

The report from the UN’s special rapporteur does remind us of problems as well as teaching me that the word rapporteur exists. Those familiar with my work will know that the fact that real wages are still nowhere near the previous peak is an issue. Added to this comes the enormous effort to keep house prices out of the inflation index and then the way that the costs of home ownership are represented by fantasy rents which are never paid. You might reasonably argue that home ownership is the distance of Jupiter away for the poor but the mess made of this area has affected even them as via problems with the balance between new and old rents it seems likely to me that the official rental data has recorded the wrong numbers as in too low.

Whilst the good professor has sadly resorted to a bit of politicking I thing he is on form ground pointing out issues like this.

Children are showing up at school with empty stomachs, and schools are collecting food and sending it
home because teachers know their students will otherwise go hungry…….In England,
homelessness rose 60 per cent between 2011 and 2017 and rough sleeping rose 165 per cent
from 2010 to 2018……. Food bank use increased almost
fourfold between 2012–2013 and 2017–2018,29 and there are now over 2,000 food banks in
the United Kingdom, up from just 29 at the height of the financial crisis.

The rough sleeping issue has increased in the area I live ( Battersea). I also agree that Universal Credit was a good idea that has been implemented incompetently.

Returning to the number-crunching it gets ever more complex to see through the fog as I fear HM Treasury plans to start making smoke.

In the financial year ending March 2019, £8.0 billion in dividends were transferred from the Bank of England Asset Purchase Facility Fund (BEAPFF) to HM Treasury.

Also moving to today’s inflation data which I will pick up on another time I noticed that computer games are hitting the news again, this time with a downwards effect. The official statistics are having real problems with such fashion items and @Radionotme has suggested that the trend to digital sales ( which he thinks are not reported) may also be an issue.

80 per cent of UK video game sales are now digital, new figures have revealed.

The Entertainment Retailers Association said of the £3.86bn generated by the video game market in the UK in 2018, £3.09bn was from digital and £770m was from physical sales. ( Eurogamer)

 

 

UK Retail Sales are booming again and are being driven by lower inflation

The beat of UK economic data goes on as our official statisticians do their best to flood us with it on certain days which sadly has the effect that some matters get missed. It is sadly to report that those at the top of the Office for National Statistics have rather lost the plot and if the evidence they gave to the recent parliamentary enquiry is any guide are prioritising chasing clicks rather than providing information. The labour market release which used to be fairly clear is now something of a shambles of separate releases.

Let us however buck the trend by looking at the numbers which give us an international comparison for our national debt and deficit. Regular readers will be aware that the UK ONS has its own methodology which is neither international nor understood much as I recall Stephanie Flanders when she was BBC economics editor suddenly realising some of the reality. Let me illustrate with the numbers.

At the end of December 2018, UK general government gross debt was £1,837.5 billion, equivalent to 86.7% of gross domestic product (GDP) . This represents an increase of £51.4 billion since the end of December 2017, although debt as a percentage of GDP fell by 0.4 percentage points from 87.1% over the same period. This fall in the ratio of debt to GDP implies that GDP is currently growing at a greater rate than government debt.

That quote does a fair job of explaining how the debt is now rising at a slower rate than economic output meaning it is rising in absolute terms but falling in real ones.

If we move to the annual deficit we see this.

In 2018, UK general government deficit was £32.3 billion, equivalent to 1.5% of gross domestic product (GDP) ; the lowest annual deficit since 2001. This represents a decrease of £5.8 billion compared with borrowing in 2017.

In the financial year ending March 2018, the UK government deficit was £43.3 billion (or 2.1% of GDP), a decrease of £3.0 billion compared with the previous financial year.

As you can see the pattern is familiar of a falling deficit and if we start with the deficit there is something of an irony as we note this.

This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.

Although in debt terms we are way over.

General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.

Rather confusingly the ONS points us towards the January so let us look at the deficit in tax year terms.

Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

So only a small difference here but the debt figures show a much wider one in absolute terms.

Debt (public sector net debt excluding public sector banks) at the end of January 2019 was £1,782.1 billion (or 82.6% of gross domestic product (GDP))

The two main differences are the switch from net to gross debt and the switch from public finances to central government which means a difference of around 4% of GDP.

But we see that the numbers still show a considerable improvement.

Retail Sales

The present upbeat springlike mood got an extra boost this morning from this.

The monthly growth rate in the quantity bought in March 2019 increased by 1.1%, with food stores and non-store retailing providing the largest contributions to this growth. Year-on-year growth in the quantity bought increased by 6.7% in March 2019, the highest since October 2016, with a range of stores noting that the milder weather this year helped boost sales in comparison with the “Beast from the East” impacting sales in March 2018.

The weather probably helped as noted and in case you were wondering the numbers are seasonally adjusted for Easter. But as I noted value growth of 7.3% that meant that a rough guide to inflation is 0.6% or my January 2015 theme has worked one more time.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time. ( January 29th 2015)

This poses quite a problem for central bankers as they want to push inflation back to and in some cases ( as we have recently analysed) above 2% per annum. This would weaken retail sales and other measures as the reduce real wages by doing so. Or if you prefer they would be ignoring the reality of “sticky wages” and preferring Ivory Tower theory. Maybe that is why they seem keener on targeting climate change than inflation these days as we are deflected away from their main job.

As this series is erratic on a monthly basis we need to run a check looking further back but when we do so the answer changes little.

In the three months to March 2019 (Quarter 1), the quantity bought in retail sales increased by 1.6% when compared with Quarter 4 (Oct to Dec) 2018, following sustained growth throughout the first three months of the year. All store types except department stores and household goods stores increased in the quantity bought in the three months to March 2019, when compared with the previous three months.

It seems that the UK consumer has not waited to spend the benefits of higher real wages. At least for once we may not be observing a debt financed splurge although this does on the downside pose a worry about the trade figures, especially if this morning’s PMI survey suggesting economic growth has slowed again in the Euro area is accurate.

Putting this into song it is time for the Spencer Davis Group.

So keep on running
Keep on running,

Comment

As we approach Easter on Maundy Thursday we see that much of the UK economic data is in tune with the spring and the warm sunny weather that has arrived in London. This week has seen mostly steady inflation with continuing wage and employment growth and now has retail sales on a bit of an apparent tear. This is reinforced by the delayed debt and deficit data that matches international standards. Of course the economic output or GDP data is much more sanguine as we wait to see which will be right.

All of these numbers have their flaws. If we take an even-handed view we see that the omission of the self-employed from the wages numbers is a handicap but on the other side the omission of frankly a fair bit of modern life with things like Whatsapp being free and not being in GDP is a rising problem there.

Let me wish you a happy Easter as the UK takes a long weekend and add something else. Next month Japan will take a long break due to the accession of a new Emperor as what is called Golden Week becomes more like a Golden Fortnight. Some seem to approach this with trepidation, has the control freakery become so high, it has come to this?

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?
Original pirate material
Your listening to the streets  ( The Streets)

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Some much needed better economic news for France

Today has brought some good news for the economy of France and let us start with a benefit for the future. From Reuters.

Airbus signed a deal on Monday to sell 300 aircraft to China Aviation Supplies Holding Company, including 290 A320 planes and 10 A350, the French presidency said in a statement.

So we learn that someone can benefit from a trade war as we also see Boeing’s current problem with the 737 max 8 no doubt also at play here. Airbus is a European consortium but is a major factor in the French economy and below is its description of its operations in France.

Overall, Airbus exports more than €26 billion of aeronautical and space products from France each year, while placing some €12.5 billion of orders with more than 10,000 French industrial partners annually.

Business surveys

The official measure released earlier told us this.

In March 2019, the business climate is slightly more favorable than in February. The composite indicator, compiled from the answers of business managers in the main sectors, has gained one point: it stands at 104, above its long-term mean (100).

If we look at the recent pattern we see a fall from 105 in November to 102 in December where it remained in January before rising to 103 in February and now 104 in March. So according to it growth is picking up. It has a long track record but is far from perfect as for example the recent peak was 112 in December 2017 but we then saw GDP growth of only 0.2% in the first quarter of 2018 as it recorded 110.

Continuing with its message today we are also told this about employment.

In March 2019, the employment climate has improved again a little, after a more marked increase in February: the associated composite indicator has gained one point and stands at 108, well above its long-term average.

This is being driven by the service sector.

Also things should be improving as we look ahead.

The turning point indicator for the French economy as a whole remains in the area indicating a favourable short-term economic outlook.

Although the reading has fallen from 0.7 in January to 0.5 in March.

Economic Growth

We have been updated on this too with a nudge higher.It did not come with the fourth quarter number for Gross Domestic Product ( GDP) growth which was still 0.3% but the year to it was revised up to 1% from 0.9% and the average for 2018 is now 1.6% rather than 1.5%.

National Debt

The economic growth has helped with the relative number for the national debt.

At the end of 2018, the Maastricht debt accounted for €2,315.3 bn, a €56.6 bn year-on-year growth after a €70.2 bn increase in 2017. Maastricht debt is the gross consolidated debt of the general government, measured at nominal value. It reached 98.4% of GDP at the end of 2018 as in 2017.

As you can see the debt has risen but the economic growth has kept the ratio the same. At the moment investors are sanguine about such debt levels with the ten-year yield a mere 0.37% and it has been falling since mid October last year when it was just above 0.9%. Partly that is to do with the ECB buying and now holding onto some 422 billion Euros of it plus mounting speculation it may find itself buying again.

Those who followed the way the European Commission dealt with Italy may have a wry smile at this.

In 2018, public deficit reached −€59.6 bn, accounting for −2.5% of GDP after −2,8% of GDP in 2017

With economic growth slowing and President Macron offering a fiscal bone or two to the Gilet Jaunes then 2019 looks like it will see a rise. As to the overall situation then France has a public sector which fits the description, hey big spender.

As a share of GDP, revenues decreased from 53.6% to 53.5%. Expenditure went down from 56.4% to 56.0%.

For comparison the UK national debt under the same criteria is 84% of GDP although our bond yield is higher with benchmark being 1%.

Prospects

The Bank of France released its latest forecasts earlier this month and if we stay in the fiscal space makes a similar point to mine.

After a period of quasi-stability in 2018 at 2.6% of GDP, the government deficit is expected to climb temporarily above 3% of GDP in 2019, given the one-off effect related to the transformation of the Tax Credit for Competitiveness and Employment (CICE).

So the national debt will be under pressure this year and depending on economic growth the ratio could rise to above 100%. As to economic growth here is the detail.

French GDP should grow by around 1.4-1.5% per year between 2019 and 2021. This growth rate, which has been slightly revised since our December 2018 projections, should lead to a gradual fall in unemployment to 8% in 2021.

So the omission of the word up means the revision was downwards and if they are right then we also get a perspective on the QE era as GDP growth will have gone 2.3%,1.6% and then 1.4/1.5%. So looked at like that it was associated with a rise in GDP of 1%. Also we see the Bank of France settling on what is something of a central banking standard of 1.5% per annum being the “speed limit” for economic growth.

Right now they think this.

Based on the Banque de France’s business survey published on 11 March, we estimate GDP growth of 0.3% for the first quarter of 2019.

Which apparently allows them to do a little trolling of Germany.

The deceleration in world demand is expected to weigh on activity, even though France is slightly less exposed than some of its larger euro area partners, until mid-2019.

It only has one larger Euro area partner.

Also we get a perspective in that after a relatively good growth phase should the projections have an aim that is true unemployment will be double what it is in the UK already.

Added to this we have central banks who claim to have a green agenda but somehow also believe that growth can keep coming and is to some extent automatic.

Growth should then be sustained by an international environment that is becoming generally favourable once again and export market shares that are expected to stabilise.

Oh and these days central banks are what Arthur Daley of Minder would call a nice little earner.

Like each year, the bulk of the Banque de France’s profits were paid to the government and hence to the national community in the form of income tax and dividends, with EUR 5 billion due for 2017.

Comment

There is a fair bit to consider here. Firstly we have the issue of the private-sector or Markit PMI survey being not far off the polar opposite of the official one.

At the end of the first quarter, the French private
sector was unable to continue the recovery seen in
February, as both the manufacturing and service
sectors registered contractions in business activity.

If they surveyed a similar group that is quite a triumph! The French economy can “Go Your Own Way” as for example we saw it grow at a quarterly rate of 0.2% in the first half of 2018 and then 0.3% in the second. Only a minor difference but the opposite pattern to elsewhere.

Looking at the monetary data it does seem to be doing better than the overall Euro area. There was a sharp fall in M1 growth  between November and December which poses a worry for now but then a recovery of much of it to 9.2% in January. So if this is sustained France looks like it might outperform the Euro area as 2018 progresses as it overall saw a fall in money supply growth. Or if the numbers turn out to work literally then a dip followed by a pick-up.

 

Public Finance and Retail Sales numbers are upbeat about UK economic prospects

Before we even got to the latest in the current round of UK economic data there has been something of a change in financial markets. So let us reflect this via a tweet from me as I am the only person pointing this out.

Simply extraordinary! The UK ten-year Gilt yield is a mere 1.1% and we can borrow very cheaply. A combination of this week’s £3.4 billion QE from the Bank of England and the US Fed folding last night.

I suppose it is my time in the Gilt Market which means I follow it but there has been quite a shift which is getting ignored. Let me shift to the economic implications of this of which the most obvious is that the UK government can borrow very cheaply. Even if we look at the thirty-year yield at 1.59% it is very low in historical terms and but for the fact we have seen negative yields elsewhere ( and very briefly here) I would call it ultra low. No doubt its move lower last night was influenced by the £3.4 billion of purchases by the Bank of England this week especially the £1.1 billion of our 2057 Gilt. Added to that was the way that as we expected here the US Federal Reserve folded like a deck chair last night as placed a Powell put option under the US stock market.

UK Public Finances

Another area where I have been on a lonely journey is this which I reflected on last week ahead of the Spring Statement in the UK.

 However it does provide an opportunity to make clear how much the UK public finances have improved in the last few years. This often gets ignored in the media maelstrom as the priority is more often to score a political point.

In fact the January figures had been really good but maybe a little too good to be true.

Whilst some tax may have been paid earlier this year and flattered the Income Tax self assessment season the direction of travel is and has been clear.

So let us now find out.

Borrowing (public sector net borrowing excluding public sector banks) in February 2019 was £0.2 billion, £1.0 billion less than in February 2018; this was the lowest February borrowing since 2017.

So that is hopeful as there was no reverse swing but as ever we need to take some perspective for a clearer picture.

Borrowing in the current financial year-to-date (April 2018 to February 2019) (YTD) was £23.1 billion, £18.0 billion less than in the same period last year; the lowest YTD borrowing for 17 years (April 2001 to February 2002).

We see that we have maintained the same trend as the difference between this and January is within the likely error at £500 million. Also the driving force here was as hoped a strong tax collecting season.

combined self-assessed Income Tax receipts were £18.7 billion, of which £14.7 billion was paid in January and £4.0 billion was paid in February; an increase of £1.7 billion compared with the same period in 2018…….Combined Capital Gains Tax receipts were £8.8 billion, of which £6.8 billion was paid in January and £2.0 billion was paid in February; an increase of £1.3 billion compared with the same period in 2018.

I have to confess I am a little surprised at the relative size of the capital gains take and can only think that higher asset prices have helped. Do readers have any insight on it?

This means that looked at in isolation the UK fiscal position now looks very strong and we may be approaching fiscal balance which has been 2/3  years away since about 2012! Of course it may be spent and if we widen our outlook there are plainly plenty of good causes out there such as the Universal Credit shambles and the police for starters.

The national debt position is more complex.

Debt (public sector net debt excluding public sector banks) at the end of February 2019 was £1,785.6 billion (or 82.8% of gross domestic product (GDP)); an increase of £22.7 billion (or a decrease of 1.4 percentage points of GDP) on February 2018.

As you can see the rate of rise has slowed very sharply and such that even the low rate of economic growth we have seen has exceeded it causing the debt to GDP ratio to fall. Now I was asked on here about the banks last week and replied with this.

But it misses out the banks which would add another £283 billion to this. So much less than they did but still there.

So if we put them back in then the debt to GDP ratio is more like 96% but as I then pointed out the poor design of the Bank of England Term Funding Scheme amongst other things means this happens too.

Also they impact in another way as the Bank of England adds £185 billion to the national debt mostly via help to the banks.

So if we knock that off then a more realistic ratio is perhaps 87%.

Retail Sales

These showed yet again that the UK consumer seems to have “spend,spend,spend” on the brain.

The monthly growth rate in the quantity bought in February 2019 increased by 0.4%, with a decline of 1.2% in food stores offset by growth in all other main sectors.

As an aside I have noticed more than a few articles in the media telling us that people are stockpiling food and someone posted a receipt on twitter for over £600 after doing exactly that. But if we move from the media world to the much wide real one we see this.

The monthly fall in food stores was the strongest decline since December 2016 at negative 1.5%, reversing the increase of 0.9% in January 2019, with food retailers suggesting that “getting back to normal” following the January sales had contributed to this fall.

If they stockpiled a few months ago I will only be eating tinned or frozen food at their place.

Moving to the annual picture tells us this.

Year-on-year growth in the quantity bought in February 2019 increased by 4.0%, with growth in all main sectors, while the only sub-sector to show a decline within non-food stores was household goods stores at negative 1.3%.

Those who follow my theme from January 2015 that lower inflation boosts retail sales may like to note that the figures below suggest that at 0.3% it has been at play again.

Both the amount spent and the quantity bought in the retail industry showed strong growth of 4.3% and 4.0% respectively in February 2019 when compared with a year earlier.

If we look at wage growth at over 3% we see that in terms of retail sales we are seeing substantial real wage growth if the official data is any guide.

Comment

We find that the UK economic news continues to be pretty good. There are good signs for consumption from retail sales and the strong public finances do relate to what is strong tax take.

In the current financial YTD (April 2018 to February 2019), central government received £674.9 billion in income, including £512.2 billion in taxes. This was 5% more than in the same period in 2017.

So these numbers suggest we are doing better than we would otherwise have thought and if we also factor in the real wage growth that they might continue. A little caution is required as the money supply data is weak but perhaps GDP growth could continue to bumble on at 0.3% per quarter or so. At the moment if we add in an international perspective that does not look too bad.

Meanwhile some things just cannot be avoided it would seem.

In February 2019, the UK’s GNI and VAT contribution to the European Union (EU) was £2.9 billion, £1.0 billion higher than in February 2018; the highest cash payment in any month on record (monthly records began in January 1993). This is due largely to the timing of payments made to the EU by all member states rather than a reflection of any budgetary increase.

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