How quickly is the economy of Germany slowing?

Until last week the consensus about the German economy was that is was the main engine of what had become called the Euro boom. Some were thinking that it might even pick up the pace on this.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

This was driven by the PMI or Purchasing Managers Index business surveys from Markit which as I pointed out on the 3rd of January were extremely upbeat.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

This was followed by the overall or Composite PMI rising to 59 in January which suggested this.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

Actually that was for the overall Euro area which had a reading of 58,8. The catch has been that even this series has been dipping since as we now see this being reported.

The pace of growth in Germany’s private sector cooled at the end of the first quarter, with the services PMI retreating further from January’s recent peak to signal a loss of momentum in line with that seen in manufacturing.

This led to this being suggested.

it still promises to be a strong 2018 for the German economy – with IHS Markit forecasting GDP growth to pick up to 2.8%

Still upbeat but considerably more sanguine than the heady days of January. Then there was this to add into the mix.

However, unusually cold weather in March combined with continuing payback from January’s jump in activity has led to the construction PMI falling into contraction territory for the first time in over three years

Official Data on Production and Trade

The official data posted something of a warning last week.

In February 2018, production in industry was down by 1.6% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)…….In February 2018, production in industry excluding energy and construction was down by 2.0%. Within industry, the production of capital goods decreased by 3.1% and the production of consumer goods by 1.5%. The production of intermediate goods showed a decrease by 0.7%. Energy production was up by 4.0% in February 2018 and the production in construction decreased by 2.2%.

As you can see the monthly fall was pretty widespread and only offset by a colder winter. Whilst this did show an annual increase of 2.6% that was a long way below the 6.3% that had been reported for January and December. So on this occasion the PMI surveys decline seems to have been backed by the official numbers as we await for the March numbers which if the relationship holds will show a further slowing on an annual basis.

Thrown into this mix is concern that the decline is related to fear over the rise in protectionism and possible trade wars.

If we move to this morning’s trade data it starts well but then hits trouble.

Germany exported goods to the value of 104.7 billion euros and imported goods to the value of 86.3 billion euros in February 2018. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 2.4% and imports by 4.7% in February 2018 year on year. After calendar and seasonal adjustment, exports fell by 3.2% and imports by 1.3% compared with January 2018.

This may well be an issue going forwards if it is repeated as last year net exports boosted the German economy and added 0.8% to GDP ( Gross Domestic Product) growth.

On a monthly basis we saw this.

Exports-3.2% on the previous month (calendar and seasonally adjusted). Imports –1.3% on the previous month (calendar and seasonally adjusted).

Of course monthly trade figures are unreliable but this time around they do fit with the production data. The export figures look like they peaked at the end of 2017 from an adjusted ( seasonally and calendar) 111.5 billion Euros to 107.5 billion on that basis in February.

What are the monetary trends?

If we look at the Euro area in general then there are signs of a reduced rate of growth.

The annual growth rate of the narrower aggregate M1, which includes currency in circulation
and overnight deposits, decreased to 8.4% in February, from 8.8% in January.

The accompanying chart shows that this series peaked at just under 10% per annum last autumn. So that surge may have brought the recorded peaks in economic activity around the turn of the year but is not heading south. If we move to the broader measure we see this.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.2% in February 2018, from
4.5% in January, averaging 4.4% in the three months up to February.

This had been over 5% last autumn and like its narrower counterpart has drifted lower. If you apply a broad money rule then one would expect a combination of lower inflation and growth which is awkward for a central bank trying to push inflation higher.  If we move to credit then the impulse is fading for households and businesses.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation
and notional cash pooling) decreased to 3.0% in February, compared with 3.3% in January.

This is more of a lagging than leading indicator of circumstances.

These are of course Euro area statistics rather than Germany but they do give us an idea of the overall state of play. A possible signal of issues closer to home are the ongoing travails of Deutsche Bank. There has been a bounce in the share price today in response to the new Chief Executive Officer or CEO as Sewing replaces Cryan but 11.8 Euros compares to over 17 Euros last May. Yet in the meantime the economy has been seeing a boom and added to that as I looked at late last month house price growth will have been boosting the asset book of the bank yet the underlying theme seems to come from Coldplay.

Oh no, what’s this?
A spider web and I’m caught in the middle
So I turned to run
And thought of all the stupid things I’d done

Comment

The heady days of the opening of 2018 have gone and in truth the business surveys did seem rather over excited as I pointed out on January 3rd.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth.

We can bring that more up to date.

 In February 2018, roughly 44.3 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with February 2017, the number of persons in employment increased by 1.4% (+621,000 people).

Thus we see that it continues to suggest steady if not spectacular growth and bypasses the excitement at the turn of the year. Looking forwards we see that the monetary impulse is slowing which is consistent with the reduction in monthly QE to 30 billion Euros a month from the ECB. We then face the issue of how Germany will follow a good first quarter? At the moment a growth slow down seems likely just in time for the ECB to end QE! So it may well be a case of watch this space…..

 

 

 

 

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What does the 10 year yield of Greece tell us?

Today’s headline or title introduces a subject which I find both frustrating and annoying.This is not only because it regularly misunderstood but also because it represents something of a financialisation of the human experience. What I mean by that is that some have used it as a way of suggesting an improvement in Greek economic performance that does not exist. Personally I sometimes wonder if it is used because it is the one signal that does show a clear improving trend. Let me illustrate with this from the LSE European Politics blog this morning.

A fall like that looks good on the face of it. Few point out the irony which is that falls in bond yields like that used to mean that a country was heading into at best a recession and probably a depression. Actually a drop from around 10% to around 4% indicates that something may be wrong so let us investigate.

The Greek bond market

A troubling sign arrives when we look for the benchmark 10 year bond of Greece and see that the benchmark page at the Hellenic Republic debt agency or PDMA is “under construction”. If we look at the data at the end of 2017 we see that of total debt of 328.7 billion the total of bonds is around 50.4 billion and if we add in treasury bills and the like we get to 65.4 billion.

By comparison the European Stability Mechanism or ESM tells us this.

The loan packages from the ESM and EFSF are by far the largest the world has ever seen. The two institutions own half of Greece’s debt.

Actually the support for Greece totals some 233 billion Euros which means we need to add the IMF and the original Greece “rescue” package to the numbers above.

Oh and as to the bond total well there is still the SMP which sounds like something used in the Matrix series of films but is in fact the Securities Markets Program which has mostly been forgotten but still amounts to 85 billion Euros. These days that is I guess a balancing item in the ECB accounts but it does appear here and there.

The ECB’s interest income from its SMP holdings of Greek government bonds amounted to €154 million (2016: €185 million).

There was a time that the SMP was a big deal and regular readers will recall so was its “sterilisation” but the ECB got bored with that in 2014 and gave up. Oh well!

But if we move on we see that there are relatively few Greek bonds around and of those that do exist the ECB holds a fair bit.

Why has the bond yield fallen then?

You could argue that the bond yield should have fallen before. A possible reason for it not doing so is that it is now too small a market for big hedge funds to bother with, especially if we note that a busy month now for the market (December) had a volume of 120 million Euros. But if we look from now there have been changes in the bond metrics. For example the average maturity of Greek bonds has risen mostly by the fact that ESM loans have an average maturity of 32 years. Also bond investors may have noticed a certain “To Infinity! And Beyond” willingness from the ESM and added that to the overall bond maturity of 18.32 years.

Fiscal Matters

The LSE blog summarises matters like this.

Greece has outperformed Programme budget targets . According to the Hellenic Fiscal Council, Greece may have reached a 3.5% primary surplus in 2017 already, versus a target of 1.75%. There are reasons to be optimistic about Greece meeting the fiscal targets in 2018 as well. Maintaining a 3.5% primary surplus also in the years to come appears feasible. On balance, the overall improvement of the fiscal situation is impressive.

From a bond investor’s point of view this if combined with the extended average maturity looks more than impressive as it means on their metrics the thorny issue of repayment has been kicked into the future. They will also like this statement from the ESM on the 27th of March.

 Today the Board of Directors of the European Stability Mechanism (ESM) approved the fourth tranche of €6.7 billion of ESM financial assistance for Greece. …….The tranche will be used for debt service, domestic arrears clearance and for establishing a cash buffer.

Problems in the real economy

There is a very descriptive chart in the LSE blog.

This shows us that the initial credit crunch impact on Greece was what we might call Euro area standard. But those of a nervous disposition might want to take the advice of BBC children’s programming from back in the day and look away now from the real crisis. Here we saw “shock and awe” but not of the form promised by Christine Lagarde which back then was France’s Finance Minister. An attempt to achieve the fiscal probity so approved of by bond markets saw the economy plunge into quite a recession and made an already bad situation worse. But the rub is that the recovery such as it is was not the “V-shaped” bounce back you might expect but rather this.

However, not only is there no indication of any catching up following the crisis, but also the pace of growth remains below the Eurozone’s.

So whilst we now have some growth there has been no relative recovery and in fact on that metric things have got worse. This comes in spite of the “Grecovery” theme of around 2013 which was an example of what we now call Fake News and of course was loved by the Euro area establishment. The reality is not only did thy make the recession worse they seem to have managed to prevent a bounce back as well. We can bring this up to date with the latest business survey for Greek manufacturing.

At 55.0, the index reading signalled a
marked rate of growth, albeit one that was weaker
than the multi-year high seen in February (56.1).

I am pleased to see that but you see that is slightly worse than what the UK did in March. I will not tire you with the different themes and descriptions in the media but simply say I am sad for Greece and  its people and use the famous words of Muhammad Ali.

Is that all you’ve got George?

Comment

If we step back we can see the impact of what is called “internal competitiveness” or if you prefer squeezing real wages. Let us look at that a different way as the UK had some of this albeit not as much. But the measure here we gives us a scale of the disaster is unemployment which has got better in Greece but comparing an unemployment rate of 20.8% with one of 4.3% is eloquent enough I think.

It also gives us an easy cause of this issue raised by the LSE.

Direct tax revenues are not performing very well. The high rate of social contributions has probably increased the area of tax evasion.

Also I am reminded that the IMF has failed in an area it mostly used to be successful in.

The external position has improved sharply, although more because of weakness in domestic demand than strength in export activity. Export performance remains underwhelming.

You see on that performance any improvement will simply put Greece back into balance of payments problems which is sort of where we came in. Also there is this from the Bank of Greece.

On 8 March 2018 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €16.6 billion, up to and including Wednesday, 11 April 2018, following a request by the Bank of Greece.

The reduction of €3.2 billion in the ceiling reflects an improvement of the liquidity situation of Greek banks, taking into account flows stemming from private sector deposits and from the banks’ access to wholesale financial markets. 

So it has got better but it has yet to go away.

Thus in summary we see that we have seen something of a divorce between the Greek financial and real economies. Prospects for the bond market look good but the real economy has not done much more than stop falling with a lot of ground still to be reclaimed. Those who look at credit conditions will not be reassured by this from the LSE blog.

 According to the Bank of Greece, the annual growth rate of credit to the private sector stood at -1.0% in February, and that of credit to corporations at 0.2%.

There was a time when the supporters and acolytes of the Euro area “shock and awe” package accused me and others who were in the default and devaluation camp of being willing to collapse the economy so let me finish with some Michael Jackson.

Remember the time
Remember the time
Do you remember, girl
Remember the time

 

 

How is the economy of France doing?

It is time for us once again to nip across the Channel of if you prefer La Manche and see what is happening in the French economy. One of the oddities of the credit crunch era is how the UK and French economies have been so out of concert and rhythm. Yes both were hit by the initial impact but then France began to recover whilst the UK struggled. But then the Euro area crisis dragged France down whilst the UK pushed ahead from around 2013 . Now we may be experiencing another switch over so let us take a look.

France GDP

If we start with the economic output as measured by Gross Domestic Product or GDP then Insee told us this on Tuesday.

In Q4 2017, GDP in volume terms* increased again: +0.6%, after +0.5% in Q3. On average over the year, GDP accelerated markedly: +1.9% after +1.1% in 2016.

We can quickly see that it was both a better quarter and a better second half to the year meaning that 2017 was a fair bit better than 2016. This matters in itself but also because France had previously looked like it had got what you might call the Portuguese or Italian disease where so often even in what should be good years the economy only manages to grow by around 1%. Or if we one of the phrases of Bank of England Governor Mark Carney France had looked nowhere near “escape velocity” but now is building up speed.

Economists will like a break-down which includes both higher investment and what used to be badged as export-led growth.

Total gross fixed capital formation (GFCF) accelerated
slightly (+1.1% after +0.9%) while household consumption
expenditure slowed down (+0.3% after +0.6%)…….Foreign trade balance contributed positively to GDP
growth (+0.6 points after −0.5 points): exports accelerated
markedly (+2.6% after +1.1%) while imports slowed down
sharply (+0.7% after +2.4%).

A feature of this has been something we have also seen in the UK which is an improvement in the manufacturing sector.

In Q4 2017, total production accelerated slightly in Q4
(+0.8% after +0.7%), mainly due to manufactury industry
(+1.5% after +0.8%)……..On average over the year, total production sped up (+2.3% after +0.9%), in particular in manufacturing industry (+2.0% after +0.8%) and in construction.

A difference is to be seen in the construction sector which grew by 2.4% in France in 2017 whereas the UK construction sector has seen a 9 month recession. There is a hint of slowing in France as unlike the overall economy the construction sector slowed but it continued to grow.

Before we move on we need to note that the trade position for the year was not as good as the last quarter because of rising imports.

On average over the year, exports considerably accelerated
(+3.5% after +1.9% in 2016) while imports progressed
virtually at the same pace than in 2016 (+4.3%
after +4.2%).

Looking ahead

The various business surveys are positive with this morning’s being especially so.

French manufacturing sector growth remained
elevated at the start of 2018, pulling back only
marginally from December’s near 17-and-a-half
year peak. ( Markit PMI )

Even the higher value for the Euro on the foreign exchanges has done little so far to reduce the upbeat view.

Goods-producers continued to benefit from strong
demand conditions in both domestic and foreign
markets, with the rates of expansion in total new
orders and new export orders among the sharpest
in the survey history.

Also there was good news for a still troubling issue.

In turn, firms took on additional workers to enhance operating capacity and boost output.

This added to the picture provided in the latter part of January for the overall economy.

The French private sector economy started 2018
where it left off last year, with the headline flash
composite output PMI figure remaining among the
highest recorded in the survey’s near 20-year
history.

Also more hopeful news for the unemployed.

A sharp pick-up in client demand – indeed the
strongest recorded by the PMI in over six-and-ahalf
years – encouraged a further sharp round of
job creation.

As you can see the official forecast for the early part of 2018 is upbeat too.

In January 2018, the business climate has faltered slightly after having reached its highest level for ten years last December. The composite indicator, compiled from the answers of business managers in the main sectors, has lost two points. Nevertheless, at 110, it is still well above its long-term mean (100).

Another type of boost?

From the International Business Times.

France will include sales of illegal drugs in its gross domestic product (GDP) calculations.

The Insee statistics agency made the announcement as part of a pan-European effort for nation states to include the sales of drugs in their economic growth figures.

So er higher and higher but France will not walk this way so far at least.

Unlike the Dutch, France has ruled out including prostitution in the figures, saying that it cannot always be verified whether a sex worker has provided consent.

True I guess but a more fundamental issue is whether we have any real idea of the numbers as let’s face it these are areas where people are perhaps most likely to not tell the truth.

As to how much? There is this.

The head of Insee’s national accounts, Ronan Mahieu, downplayed the impact that the new calculations could have on French GDP figures.

He told the Local that France’s current GDP of €2.2tn (£1.9tn) would only increase by “a few billion euros”.

I have to confess that this bit was a little mind-boggling.

French revenues for illegal drug use will be based upon figures that are provided to Insee’s economics department by specialists.

Should they ever have to advertise for such “specialists” the internet may break!

Labour market

Here there have been improvements as in the year to December the unemployment rate had fallen from 9.9% to 9.2%. The catch was that it is still above the Euro area average of 8.7% and well above the 7.3% of the European Union.

If we switch to employment we see that whilst things are continuing to improve as of the last data set the state of play is not as positive from this leading indicator as the ones above.

In Q3 2017, net payroll job creation reached 44,500,
that is an increase of +0.2% after an increase of +0.4%
in the previous quarter. The payroll employment
increased by 49,900 in the private sector while it
decreased by 5,400 in the public sector.

Comment

As we make our journey through the French economy it is nice to be able to record better times. How much good news that provides to the UK I am not so sure as whilst it should be helpful to us via trade we have been out of phase with each other for a while now. A burst of economic growth will help France with this issue.

At the end of Q3 2017, the Maastricht debt reached €2,226.1 billion, a €5.5 billion decrease in comparison to Q2 2017. It accounted for 98.1% of gross domestic product (GDP), 1.0 point lower than last quarter. The net public debt declined more slightly (€ −1.5 billion).

But the major difference with the UK is the way that the employment and unemployment situations have diverged. Much of the difference but not all has been in lower paid jobs but jobs none the less. Meanwhile there is an area where the French seem to be getting more like the British.

In Q3 2017, the rise of prices of second-hand dwellings amplified: +1.6% compared to the previous quarter (provisional seasonally adjusted results), after +0.7%. As observed since the end of 2016, the increase is more important for flats (+1.9%) than for houses (+1.4%).

Over a year, the increase in prices continued to accelerate: +3.9% compared to Q3 2016, after +3.1% the quarter before.

If there is a catch it is around the need for such an expansionary monetary policy with negative interest-rates and ongoing QE at a time of accelerating growth.

Is the UK construction sector in a recession?

So far 2017 has been a year of steady but unspectacular growth for the UK economy. However one sector has stood out on the downside and that is construction. Of course this is the opposite of what the unwary might think as we are regularly assailed with official claims that house building in particular is a triumph. But the pattern of the official data series is certainly not a triumph.

Construction output contracted by 0.9% in the three-month on three-month series in September 2017…….This fall of 0.9% for Quarter 3 (July to September) follows a decline of 0.5% in Quarter 2 (April to June), representing the first consecutive quarter-on-quarter decline in current estimates of construction output since Quarter 3 2012.

Whilst our official statisticians avoid saying it this is the criteria for a recession with two quarterly falls in a row and in fact they had revised it a bit deeper.

The estimate for construction growth in Quarter 3 2017 has been revised down 0.2 percentage points from negative 0.7% in the preliminary estimate of gross domestic product (GDP), which has no impact on quarterly GDP growth to one decimal place.

The last month in that sequence which was September showed little or no sign of any improvement.

Construction output fell 1.6% month-on-month in September 2017, stemming from falls of 2.1% in repair and maintenance and 1.3% in all new work.

September detail

Here is an idea of the scale of output.

Total all work decreased to £12,628 million in September 2017. This fall stems from decreases in both all new work, which fell to £8,209 million, and total repair and maintenance, which fell to £4,419 million.

And here are the declines.

Construction output fell by £361 million in September 2017. This fall stems predominantly from a £236 million decrease in private commercial new work, as well as a fall of £165 million from total housing repair and maintenance.

There may be some logic in new commercial work being slow but the fall in repair and maintenance seems odd to say the least. The issues for the former might be that there has been so much building in parts of London combined with uncertainty looking ahead in terms of slower economic growth and what the Brexit deal may look like.

Maybe we are seeing some growth in new house building if we look at the longer trend.

Elsewhere, the strongest positive contributions to three-month on three-month output came from housing new work, with private housing growing £138 million and public housing expanding by £65 million.

Boom Boom

This weaker episode followed what had been a very strong phase for the UK construction industry. The nadir for it if we use 2015 as 100 was 85.3 in October 2012 as opposed to the 105.9 of September this year.  Over this period it has been even stronger than the services sector which has risen from 93.7 to 104.4 over the same period. Of course at 6.1% of the UK economy as opposed to 79.3% the total impact is far smaller but relatively it has been the fastest growing of the main UK economic categories in recent times.

If we look back to possible factors at play in the turnaround it is hard not to think yet again of the Funding for Lending Scheme of the Bank of England which was launched in the summer of 2012. There is a clear link in terms of private housing in terms of the way it lowered mortgage rates by more than 1% and the data here makes me wonder if some of the funding flowed into the commercial building sector as well. At this point we do see something of an irony as of course the FLS was supposed to boost lending to smaller businesses but sadly many of those in the construction sector were wiped out by the onset of the credit crunch.However this from the TSB suggests an impact.

As part of our participation in the Funding for Lending Scheme*, we have reduced the interest rate by 1% on all approved business loan and commercial mortgage applications.

Indeed some loans were made although as Co Star reported in January 2013 maybe not that many.

The Lloyds FLS-funded senior loan funded last Friday. Kier said the “competitively-priced” £30m loan will be used in connection with its infrastructure and related projects.

This is understood to be only the second commercial real estate loan drawn by Lloyds’ Commercial Banking division under the FLS scheme, after the bank drew down a further £2bn under the scheme before Christmas, taking its total capacity to £3bn.

The issue is complex as the Bank of England itself was worried about the state of play in 2014.

 The majority of the aggregate fall in net lending in 2014 Q1 was accounted for by a continued decline in lending to businesses in the real estate sector (Chart 2).

One area that I think clearly did see growth but is pretty much impossible to pick out of the data is lending to what are effectively buy-to let businesses.

Looking ahead

There has been a flicker of winter sunshine this morning from the Markit PMI business survey.

November data pointed to a moderate rebound in
UK construction output, with business activity rising
at the strongest rate since June. New orders and
employment numbers also increased to the greatest
extent in five months.

Indeed in an example of the phrase “there is a first time for everything” the government may this time be telling the truth about house building.

House building projects were again the primary
growth engine for construction activity. Survey
respondents suggested that resilient demand and a
supportive policy backdrop had driven the robust and
accelerated upturn in residential work.

Whilst the overall growth was not rapid at 53.1 ( where 50 in unchanged) at least we seem to have some and it was reassuring to have another confirmation of my theme that the 2016 fall in the UK Pound £ is wearing off.

However, cost inflation eased to its least marked for 14 months, with some firms reporting signs that exchange-rate driven price rises had started to lose intensity.

Comment

So the overall picture is of a boom which then saw a recession and hopefully of the latest surveys are correct a short shallow one. However not everyone is entirely on board with the recession story as this from Construction News last month points out.

Industry activity continued to grow between July and September, according to a new survey by the Construction Products Association.

The official data series in the UK for construction has been troubled to put it politely. The official version is this.

The Office for Statistics Regulation has put out a request for feedback and comments from users of these statistics, as part of the process for re-assessing the National Statistic status for Construction statistics: output, new orders and price indices.

In essence you cannot say what real output is until you have some sort of grip on the price level. Also  the excellent Brickonomics pointed out several years ago that some of the improvement in the data was via simply transferring a large business from services to construction. Solved at the stroke of a pen? Also this year there were large revisions to last year which is not entirely reassuring.

The annual growth rate for 2016 has been revised from 2.4% to 3.8%.

If that error was systemic then this years recession could easily be revised away. The truth is that there is way too much uncertainty about this which is surprising in the sense that the industry relies on physical products many of which are large. A few weeks back I counted the number of cranes along Nine Elms ( 24) for example in response to a question asked in the comments.

So we had a boom ( maybe) followed by a recession (maybe) and are now recovering (maybe). Hardly a triumph for the information era…..

Some Music

Here is a once in a lifetime opportunity to hear Donald Trump as a Talking Head.

 

 

Can the economy of Italy awake from its coma?

A pleasant feature of 2017 has been the way that the economy of Italy has at least seen a decent patch.  Although sadly the number this morning has been revised lower.

In the third quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.4 per cent with respect to the second quarter of 2017 and by 1.7 per cent in comparison with the third quarter of 2016

The improved economic outlook for the Euro area has pulled Italy with it although you may note that even with it the numbers are only a little better than the UK so far in annual terms and we of course are in a weaker patch or an economic disaster depending what you read. In fact if you look at annual growth Italy has been improving since the beginning of 2014 but for quite some time it was oh so slow such that the annual rate of growth did not reach 1% until the latter part of 2015 and it is only this year that it has pushed ahead a bit more. Back in 2014 there was a lot of proclaiming an Italian economic recovery whereas in fact the economy simply stopped shrinking.

Girlfriend in a coma

This means that in spite of the better news Italy looks set in 2017 to reach where it was in terms of economic output between 2003 and 2004. This girlfriend in a coma style result has been driven by two factors. First is the fact that the initial impact of the credit crunch was added to by the Euro area crisis such that annual economic output as measured by GDP fell by 8.5% between 2007 and 2014. The second is the weak recovery phase since then which has not boosted it much although of course it is now doing a little better.

If we look ahead a not dissimilar problem seems to emerge. From the Monthly Economic Outlook.

In 2017 GDP is expected to increase by 1.5 percent in real terms.The domestic demand will provide a
contribution of 1.5 percentage points while foreign demand will account for a negative 0.1 percentage
point conterbalaced by the contribution of inventories (0.1 pp). In 2018 GDP is estimated to increase
by 1.4 percent in real terms driven by the contribution of domestic demand (1.5 percentage points)
associated to a negative contribution of the foreign demand (-0.1 percentage points).

When ECB President Mario Draghi made his “everything it takes ( to save the Euro)” speech back in 2012 he might have hoped for a bit more economic zest from his home country.  Even now with the Euro area economy displaying something of a full head of steam Italy does not seem to be doing much better than its long-term average which is to grow at around 1% per annum. That is in the good times and as we noted earlier it gets hit hard in the bad times.

The girlfriend in a come theme builds up if we recall this from the 4th of July.

If we move to a measure which looks at the individual experience which is GDP per capita we see that it has fallen by around 5% over that time frame as the same output is divided by a population which has grown.

There will have been an improvement from the growth in the third quarter but we are still noting a fall in GDP per capita of over 4% in Italy in the Euro era. So more than a lost decade on that measure. As I have pointed out before Italy has seen positive migration which helps with future demographic issues but does not seem to have helped the economy much in the Euro area. For example net immigration was a bit under half a million in 2007 and whilst it has fallen presumably because of the economic difficulties it is still a factor.

During 2016, the international net migration grew by more than 10,000, reaching 144,000 (+8% compared to
2015). The immigration flow was equal to nearly 301,000 (+7% compared to 2015).

Putting it another way the population of Italy was 56.9 million when it joined the Euro and at the opening of 2017 it was 60.6 million. So more people mostly by immigration as the birth rate is falling have produced via little extra output according to the official statistics.

The labour market

If we switch to the labour market we see a reflection of the problem with output and GDP.

In October 2017, 23.082 million persons were employed, unchanged over September 2017. Unemployed
were 2.879 million, -0.1% over the previous month.

So only a small improvement but the pattern below begs more than a few questions.

Employment rate was 58.1%, unemployment rate was 11.1% and inactivity rate was 34.5%, all unchanged
over September 2017.

There are of course issues with a double-digit unemployment which has as part of its make-up an ongoing problem with youth unemployment.

Youth unemployment rate (aged 15-24) was 34.7%, -0.7 percentage points over the previous month

If UB40 did a song for youth unemployment in Italy it would have to be the one in three ( and a bit) not the one in ten

Also the employment rate is internationally low which is mostly reflected in a high inactivity rate. The unemployment rate in Italy is not far from where it was when it joined the Euro.

The banks

It was only last week I looked at the ongoing problems of the Italian banks and whilst they have had many self-inflicted problems it is also true that they have suffered from a weak Italian economy this century. So they have suffered something of a double whammy which means Banca Carige is trying to raise 560 million Euros with the state of play being this according to Ansa.

Out of the main basket Carige, closed the trading of rights to raise capital, it remains at 0.01 euros.

A share price of one Euro cent speaks rather eloquently for itself. If you go for the third capital increase in four years what do you expect?

National Debt

Italy is not especially fiscally profligate but the consequence of so many years of economic struggles means that the relative size of the national debt has grown. From it statistics office.

The government deficit to GDP ratio decreased from 2.6% in 2015 to 2.5% in 2016. The primary surplus as a percentage of GDP, equal to 1.5% in 2016, remained unchanged compared to 2015.

The government debt to GDP ratio was 132.0% at the end of 2016, up by 0.5 percentage points with respect to the end of 2015.

For those who recall the early days of the crisis in Greece the benchmark of a national debt to GDP ratio was set at 120% so as not to embarrass Italy (and Portugal). As you can see it misfired.

Italy has particular reason to be grateful for the QE bond buying of the ECB which has kept its debt costs low otherwise it would be in real trouble right now.

Although on the other side of the coin Italians are savers on a personal or household level.

The gross saving rate of Consumer households (defined as gross saving divided by gross disposable
income, the latter being adjusted for the change in the net equity of households in pension funds reserves)
was 7.5%, compared with 7.7% in the previous quarter and 9.0% in the second quarter of 2016.

Comment

The issue with the Italian economy is that the current improvement is only a thin veneer on the problems of the past. It may awake from the coma but then doesn’t seem to do that much before it goes back to sleep. The current economic forecasts seem to confirm more of the same as we fear what might happen in the next down turn.

One part of the economy that is doing much better is the manufacturing sector according to this morning’s survey released by Markit.

Italy’s manufacturing industry continued to soar in
November as strong external demand, especially
for capital goods, continued to underpin surging
levels of output in the sector.
“Capacity subsequently came under pressure, as
evidenced by the strongest recorded rise in
backlogs of the series history. Companies again
added to their staffing levels as a result.

Let us hope that this carries as we again wonder how much of the economic malaise suffered by Italy is caused by output switching to the unregistered sector.

Me on CoreTV Finance

http://www.corelondon.tv/unsecured-credit-improving/

http://www.corelondon.tv/bitcoin-cryptocurrency-smashing-10000/

The brightest sector in the UK economy appears to be manufacturing

Today has seen a raft of news on the state of play in the UK economy and let us start with what the consumer has been up to. The British Retail Consortium has told us this.

August provided a welcome pick-up in retail sales across channels, with Non-Food returning to growth as shoppers’ attentions turned to homewares, autumn clothing ranges and the new school term.

The BBC gives us a breakdown of the data.

The British Retail Consortium, working with consultancy KPMG, said like-for-like sales rose 1.3% in August, against a 0.9% fall for the same month in 2016.

Actually total sales rose by 2.4% which suggests that there was an opening of retail stores in some form which seems strange with the switch to online ( “from strength to strength”) that is happening. Also there was a dichotomy between the views of consumers about the future and the BRC. Here is the consumer view.

Shopper confidence has been building. 23 per cent expect to be financially better off over the next 12 months, compared with 20 per cent in the election month of June.

So an improvement albeit a small one whereas the BRC itself is much more downbeat.

Purchasing decisions are very much dictated by a shrinking pool of discretionary consumer spend, with the amount of money in people’s pockets set to be dented by inflation and statutory rises in employee pension contributions in a few months’ time.

Data from Barclaycard which claims to cover nearly half of UK credit and debit card transactions put a different spin on things.

Consumer spending growth slowed to 2.9 per cent in August, compared to a 2017 average of 3.8 per cent, as consumers rowed back across the board.

So they have seen growth but maybe not much if we allow for inflation and in the detail I noted that we seem to feel we need a drink!

Pub growth fell to single digits for only the second time this year (9.2 per cent), and spend on cinemas and event tickets flatlined (0.4 per cent) after the 24.3 per cent boost seen in July.

Also I saw this earlier and of course with a lag we tend to follow the United States in such things.

US box office -35 per cent in August, worst in 20 yrs raises Q’s about the future of cinema in the age of digital streaming!?  ( h/t @CompoundIncome )

Car Sales

This have hit a decidedly rough patch however which we have noted by the proliferation of scrappage schemes which add to the definition of “price cuts” in my financial lexicon for these times. From the SMMT.

New car registrations fall -6.4% in August to 76,433……Year-to-date market holds steady, down -2.4%, with 1.64 million cars joining British roads in 2017.

So bad news for sales however not so much for manufacturing as we mostly import the cars we lease. Europe’s trade body gave us an idea of how much last September.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion

So a small drain for UK manufacturers and a larger one for foreign manufacturers so ironically if we continue to export as usual a possible improvement in the trade figures.

UK business surveys

The Markit PMI for services this morning had some odd combinations in it as shown below.

new order volumes increased at the second slowest rate since September 2016….. fragile business confidence

So a slowing but one which caused backlogs and increased employment?

This was highlighted by the steepest rise in backlogs of work since July 2015. Service providers responded to rising workloads and pressures on operating capacity by recruiting additional staff in August.

We have found employment to be a reasonably reliable forward indicator over the last few years or so meaning that the down reported could be an “unexpected” up.

If we move to manufacturing nearly everyone except the official figures are telling us that things are on the up.

All five of the PMI components – output, new orders, employment, suppliers’ delivery times and stocks of purchases – were consistent with a stronger performance for the manufacturing industry during August.

There was also this from another source earlier.

Britain’s manufacturers are enjoying buoyant conditions on the back of export markets going from strength to strength according to a major survey published today by EEF , the manufacturers’ organisation and accountancy and business advisory firm BDO LLP……  Output and orders bounce back to historic highs.

The picture is completed by a weak period for construction and particularly infrastructure spending from the PMI there. Maybe the election was an influence on the public-sector but we cannot say that for ever! However the overall picture suggested is of steady as she goes.

the latest two months’ data put the economy on course for another 0.3% expansion in the third quarter

What about flows of money?

This morning has brought news that suggests at least one company sees UK businesses attractive at current exchange rates. From the Financial Times.

 

Schneider Electric will contribute its own software division to Aveva in exchange for new shares in the UK company. Schneider will own 60 per cent of the enlarged company’s stock, valued at approximately £1.7bn. Existing Aveva shareholders will own the remaining 40 per cent.

However this morning we got official data saying that in the second quarter foreign acquisitions of UK companies had fallen! One area where there may be a change if ( as often happens) similar investors fall into line was this announced by the Norwegian sovereign wealth fund.

 In future, the benchmark index for the bond portfolio should consist of nominal government bonds issued in dollars, euros and pounds……….The benchmark index for bonds currently consists of 23 currencies. Our recommendation is that the number of currencies in the bond index is reduced.

These things take a long time to happen usually and some emerging bond markets will be hit but it seems that there will be a purchase of UK bonds ( as well as Euro and US Treasuries) which will be mostly a currency play.

Comment

On the surface we see that there is an element of “same as it ever was” as  the UK economy continues to grow but slowly. However underneath a fair bit seems to be changing as we see more and more reports of UK manufacturing doing well albeit that we wait to see that reflected in the official data. I have to confess I am unclear why services output is falling as backlogs and employment both rise!

The danger remains of a lower UK Pound £ pushing inflation higher but the main burst of that is fading now and if other sovereign wealth funds match Norway it may see some investing flows. On the other side of the coin even Markit seems to be trolling the Bank of England these days.

the overall level of the PMI remains more consistent with policymakers erring towards stimulus rather than hiking interest rates, suggesting the doves will continue to outnumber the hawks.

 

 

The road to a Bank of England Bank Rate cut

Today sees the production of the UK service-sector Purchasing Manager’s Index for February and this is eagerly awaited. The main reason for this is that the recent data on the UK economy has shown signs of a further slowing in the rate of economic growth. Yesterday’s Economic Review reminded us that whilst 2015 was a relatively good year it was not as good as 2014.

GDP growth for the final quarter of 2015 was unrevised at 0.5%, resulting in a level of GDP 1.9% higher than in the same period in 2014. While growth has continued for the sixth successive year, it moderated somewhat between 2014 and 2015, dropping from 2.9% to 2.2%.

So we were slip-sliding away to quote Paul Simon although the UK ONS did present anew perspective on the credit crunch era.

GDP growth has averaged 2.0% per year since 2009, making growth in 2015 slightly above the recent average.

It hasn’t always felt like that as I recall the fears back in the day that there might be a triple-dip! As time passes revisions tend to mark the numbers higher and such a concept has disappeared. According to the ONS now we have had this.

this continues a six-year period of continuous expansion,

Some care is needed here as there were two quarterly falls in 2012 either side of the Olympics boost.

Also I am reminded of the view that 2% economic growth per year may well represent standing still in the modern era. The GDP per head figures largely support such a view.

A little help from my friends

Regular readers will be aware that I have long criticised the change referred to below which according to analysis presented at the Royal Statistical Society has improved our annual growth rate by something of the order of 0.5% per year. The ONS puts it like this.

The UK shows larger revisions to GDP growth estimates than many other countries over this longer period, but this is mainly due to the switch from RPI- to CPI-based deflation in 2011, a methodological improvement that was not implemented in other countries at the time.

It seems to have slipped their mind to tell us which why it impacted on economic growth! Something to hide?

Something familiar?

This welcome period of UK economic expansion has had two familiar features which have ended up causing trouble in the past.

Much of the growth in the expenditure measure of GDP in recent years has been driven by household consumption and investment

Is investment a euphemism for buying houses? Anyway this tends to be followed by a persistent bugbear.

Net exports have tended to act as a drag on GDP growth, and this trend continued in 2015, with a downward contribution of 0.5 percentage points (against GDP growth for the year of 2.2%).

I was reading a hopeful analysis yesterday from Nordea bank using our effective exchange rate as a predictor. They forecast a boom in UK exports on that basis. Let us hope so but I also note that their chart missed out the 2007/08 devaluation which of course saw a disappointing export response.

Oh and the definition of austerity in my financial lexicon for these times chalks up another victory.

Government consumption made modest, positive contributions to growth in 2014 and 2015 of 0.5 and 0.3 percentage points, respectively, compared with an average of 0.2 percentage points over the past 6 years.

Up is again the new down.

Rebalancing

Only last weekend the man responsible for monetary policies which were supposed to rebalance the UK economy away from services and towards manufacturing returned to the news. Apparently a £8 million pension pot does not buy what it used to even when it is indexed to the Retail Price Index ( the lower CPI being for the likes of us….) and so Baron King of Lothbury has written a book. Having not read it I cannot say if it explains this development.

In Quarter 4 (Oct to Dec) 2015, production and manufacturing were 9.8% and 6.5% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008……….Manufacturing output decreased by 0.2% in December 2015 compared with November 2015.

If we look at Monday’s PMI we see this.

The breadth of the slowdown is especially worrisome. The domestic market is showing signs of weakening while export business continued to fall.

So expansion in January was followed by stagnation in February and it came with an ominous side-effect.

The slowdown was also reflected in the labour market, with job losses registered for the second straight month.

Thus we see that the picture for UK manufacturing remains troubled. There are dangers in relying on such business surveys but the truth is that they are timely and official data is not what it was once perceived to be. As it happens both are playing the same song right now its Dire Straits.

There’s panic on the switchboard tongues are ties in knots
Some come out in sympathy some come out in spots
Some blame the management some the employees
And everybody knows it’s the Industrial Disease

The Service Sector

The pattern here has been of rebalancing towards it as opposed to the away promised by Baron King.

The service industries increased by 0.7% in Quarter 4 2015 (Figure 3), unrevised from the previous estimate, marking the twelfth consecutive quarter of positive growth. This follows a 0.6% increase in Quarter 3 2015.

Putting it another way if we put Q1 of 2008 as 100 it is now at an index level of 111.6 with the 2008/09 dip consigned to history.

Today’s catch is that according to the PMI data even it may be slowing.

The UK’s dominant service sector lost momentum in February…… Growth of both total business activity and new business were the weakest since March 2013, leading firms to raise employment at the slowest pace in two-and-a-half years.

So growth but not as we know it to coin a phrase and it was driven by this.

The weaker increase in services activity mainly reflected a slower expansion in the volume of incoming new business.

In terms of an explanation there are some already blaming Brexit which seems to have replaced the weather these days as the scapegoat. So much so in fact I have been surprised that Arsene Wenger has not brought it into play.

The irony is that even at a PMI of 52.7 we are still rebalancing towards the service sector and if it slows as this survey predicts then there is a kicker to this below.

However, the slowdown in services is arguably the most worrying, as the sector has provided an important support to UK economic growth in recent years, not least due to its sheer size

Comment

There is much to consider here but if the UK service sector is slowing and the PMI survey is correct it adds not only to the construction and manufacturing surveys but also to the signs of slowing in the official data as described above. Now let me remind you of the words of the Bank of England’s most recent recruit Gertjan Vlieghe that I reported on the 24th of February.

I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.

How quickly Gertjan? Perhaps a little more quickly if he looks at GDP per head as opposed to aggregate GDP. Oh and those who remortgaged on the back of Forward Guidance on interest-rate rises from Governor Carney may be wondering what this from that day means.

We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,

Down is the new up and I await the 5.45 pm speech from Andy Haldane on this subject although of course he may have written it some days ago. You see I would expect him to vote for a cut first.

Just to be clear as I hinted at yesterday this would be a bad idea in my opinion but it is looming larger on the horizon.

Number Crunching

The Bank of England Funding for Lending Scheme is still ongoing so let is look at this.

Net lending by FLS Extension participants to SMEs was £0.6bn in the fourth quarter of 2015

At least the number was positive albeit weaker by £200 million than in the previous quarter. How much did this cost?

Of these, ten participants made total drawdowns of £6.6bn during the fourth quarter of 2015. Participants also repaid £0.7bn, taking total outstanding drawings to £69.5bn.

Now if I gave you £10 at ultra low interest-rates you would probably be happy to loan £1 to a small business at a much higher interest-rate. I do hope this is not funding the record low mortgage rates that keep being announced.