UK Retail Sales surge in June

The Covid-19 pandemic has brought about all sorts of economic events. Yesterday evening I went for a stroll in Battersea Park and it was quite noticeable how the number of people going for a picnic there has increased. We do not know how permanent that will be but I suspect at least some of it will be as people discover that the same bottle of wine is so much cheaper than at a wine bar or pub. Oh yes and some seem to forget the food part of the picnic! I can see that BBC Breakfast have put their own spin on it.

9-year-old Sky had this message on #BBCBreakfast for people dropping litter in parks and open spaces

Yes more people have created more litter. Kudos to @PolemicPaine who pointed out ahead of a flurry of such media reports that it would happen. Some people’s behaviour is bad but in recent years the cleanliness of Battersea Park has improved a lot and thank you to the workers there.

Retail Sales

These are the numbers which were likely to be harbingers of change in the trajectory of the UK economy. So this morning’s news was rather welcome.

In June 2020, the volume of retail sales increased by 13.9% when compared with May 2020 as non-food and fuel stores continue their recovery from the sharp falls experienced since the start of the coronavirus (COVID-19) pandemic.

That was quite a surge and means this.

The two monthly increases in the volume of retail sales in May and June 2020 have brought total sales to a similar level as before the coronavirus pandemic; however, there is a mixed picture in different store types.

There is another way of looking at this.

In June, total retail sales continued to increase to reach similar levels as before the pandemic, with a fall of just 0.6% when compared with February.

So is it in modern language, like well over? Not quite as the text is a little reticent in pointing this out but volumes were some 1.6% lower than last June. Whilst growth had been slowing we usually have some so perhaps 3% lower than we might usually expect. However these are strong numbers in the circumstances and will have come as an especial shock to readers of the Financial Times with the economics editor reporting this. I have highlighted the bit which applies to June.

The latest numbers on card payments and bank account transactions from Fable Data show that in the week to July 19, total spending in the UK was 25 per cent down on the same week in 2019, a deterioration from a 13 per cent decline four weeks earlier.

As you can see whilst consumption is a larger category than Retail Sales there is quite a difference in the numbers here. According to the report by the economics editor of the FT a bad June was followed by a woeful July.

The latest indications from unofficial data on spending patterns in the UK suggests the economic recovery that began in late April has stalled — and possibly even moved backwards in July. Separate figures from the Bank of England’s payment system and from card payments collected by Fable Data show a worse picture for spending in mid-July than at the start of the month.

More on this later.

The Breakdown

Whilst the overall picture is pretty much back to February there have been some ch-ch-changes in the pattern.

In June, while non-food stores and fuel sales show strong monthly growths in the volume of sales at 45.5% and 21.5% respectively, levels have still not recovered from the sharp falls experienced in March and April.

My personal fuel sales shot up as I bought some diesel and went to visit an aunt and my mother;s house at the end of June but on a more serious level traffic in Battersea picked up noticeably. This is in spite of the official effort to discourage driving just after telling people to drive! Anyway switching sectors this is interesting.

Following this peak, sales returned to a level higher than before the pandemic. In June 2020, despite a small monthly decline of 0.1% in volume sales, food stores remained 5.3% higher than in February 2020.

I say that because of this.

Feedback from food retailers had suggested that consumers were panic buying in preparation for the impending lockdown.

If they were we would expect a dip going ahead. On a personal level I did put some extra stuff in my freezer in case I had to quarantine ( it was 7 days then) and bought some more tinned food. But collectively the other side of that has not been seen so far. Maybe it is because the June numbers do not see the opening of restaurants and the like which began on July 4th.

I doubt anyone is going to be surprised by this.

Non-store retailing has reached a new high level in June 2020, with continued growth during the pandemic and a 53.6% increase in volume sales when compared with February 2020.

Let me now give you the two polar opposites starting with the bad.

Textile, clothing and footwear stores show the sharpest decline in total sales at negative 34.9%. This was because of a combination of a large fall within stores at negative 50.8% along with a slower uptake in online sales, with a 26.8% increase from February.

Now the up,up and away.

Household goods stores, as the only store type to show an increase since the start of the pandemic, has a large uptake in online sales, increasing by 103.2%. In addition, household goods stores saw the smallest decline in store sales when compared with other non-food stores, at negative 15.2%.

I am glad to see my friend who has been painting his garage door and some windows pop up in the figures.

In June, electrical household appliances, hardware, paints and glass, and furniture stores all returned to similar levels as before the pandemic.

Comment

This is welcome news for the UK economy and it provides another piece of evidence for one of my themes. For newer readers I argued back in January 2015 that lower prices boost the economy ( the opposite of the Bank of England view) and we see that lower prices in retail have led us to getting right back to where we started from. I am sure that some PhD’s at the Bank of England are being instructed to sufficiently torture the numbers to disprove this already.

Actually the Bank of England is in disarray as in response to the FT data above one of its members seems to have switched to analysing health.

Jonathan Haskel, an external member of the BoE’s Monetary Policy Committee, said the evidence was beginning to show that household concerns about health were more likely to drive spending than government lockdown rules.

Oh well. Also this made me laugh, after all who provided all the liquidity?

“The need for more equity finance creates a case for authorities to be ambitious in reforming the financial system to remove any biases against the patience that’s needed for many equity investments,” he said.

“Even investors who should have the longest horizons seem to have a fetish for liquidity and an aversion to really illiquid growth capital assets.” he said. ( Reuters)

I do hope somebody pointed out to Alex Brazier, the BoE’s Executive Director for Financial Stability Strategy and Risk that the speech should be given to his own colleagues who have been singing along to Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

Let me finish by pointing out that these retail numbers are imprecise in normal times and will be worse now. So we have seen quite an upwards shift of say around 10%. Moving onto numbers which are even more unreliable there was more good news but regular readers will know to splash some salt around these.

At 57.1 in July, up from 47.7 in June, the headline seasonally
adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered above the 50.0 no-change value for the first time since February.

Where next for the economy of Spain and house prices?

We can pick up on quite a lot of what is happening economically by taking a look at Spain which has been something of a yo-yo in the credit crunch era. It was hit then began to recover then was affected by the Euro area crisis but from around 2014/15 was maybe the clearest case of the Euro boom as it posted GDP (Gross Domestic Product) growth as high as 4.2% in late 2015. Since then in something of a contradiction for the policies of the ECB economic growth has slowed but nonetheless Spain was an outperformer. Indeed such that things were quiet on the usual metrics such as national debt and so on. It shows how a burst of GDP growth can change things.

Of course that was this and we are now in the eye of the economic storm of the Covid-19 pandemic. At the end of last month Spain’s official statisticians fired an opening salvo on the state of play.

The Spanish GDP registered a variation of ─5.2% in the first quarter of 2020 with respect to the previous quarter in terms of volume. This rate was 5.6 points lower than that
recorded for the fourth quarter…….. Year-on-year GDP variation of GDP stood at ─4.1%, compared with 1.8% in the previous quarter.

To be fair to them they had doubts about the numbers but felt they had a duty to at least produce some.

Today

Markit INS offered us some thoughts earlier.

Record falls in both manufacturing and service sector output ensured that the Spanish private sector overall experienced a considerable and unprecedented contraction of economic activity during April. After accounting for seasonal factors, the Composite Output Index* recorded a new low of 9.2, down from 26.7 in March.

A single-digit PMI still comes as a bit of a shock as we recall that Greece in its crisis only fell to around 30 on this measure. Here is some more detail from their report.

The sharp contraction was driven by rapid reductions in
demand and new business as widespread government
restrictions on non-essential economic activity – both
at home and abroad – weighed heavily on company
performance. There was a record reduction in composite
new business and overall workloads – as measured by
backlogs of work – during April.

We can spin that round to an estimated impact on GDP.

Allowing for a likely shift in the traditionally strong linear relationship between GDP and PMI data, we estimate the economy is currently contracting at a quarterly rate of around 7%.

They then confess to something I have pointed out before about the way they treat the Euro area.

Whilst startling enough, this figure may well prove
to be conservative, with the depth of the downturn
undoubtedly greater than anything we have ever seen
before.

For our purposes we see that a double-digit fall in GDP seems likely and even this morning’s forecasts from the European Commission are on that road.

For the year as whole, GDP is forecast to
decline by almost 9½%.

I do like the 1/2% as if any forecast is that accurate right now! One element in the detail that especially concerns me is the labour market because it had been something of a laggard in the Spanish boom phase.

The unemployment rate is expected to rise rapidly, amplifying the shock to the economy, although job losses should be partly reabsorbed as activity picks up again. However, the recovery in the labour market is expected to be slower amid high uncertainty, weak corporate balance-sheet positions, and the disproportionate impact of the
crisis on labour intensive sectors, such as retail and
hospitality.

This was the state of play at the end of March.

The unemployment rate increased 63 hundredths and stood at 14.41%. In the last 12 months, this rate decreased by 0.29 hundredths.

Actually if we note the change in the inactivity rate then the real answer was more like 16%. As Elton John would say.

It’s sad, so sad (so sad)
It’s a sad, sad situation.

This bit is like licking your finger and putting it out the window to see how fast your spaceship is travelling.

This, together with a strong positive
carry-over from the last quarters of 2020, would bring annual GDP growth to 7% in 2021, leaving
output in 2021 about 3% below its 2019 level.

Perhaps the European Commission is worried about the effect on its own income which depends on economic output in the member states and does not want to frighten the horses.

ECB

I have already pointed out that Euro area monetary policy has been out of kilter with Spain. In fact the ECB got out the punch bowl when the Spanish economy was really booming in 2015 as an annual economic growth rate of 4.2% was combined with an official interest-rate of -0.2% and then -0.3%. Oh Well! As Fleetwood Mac would say.

One area that will have benefited is the Spanish government via the way that the QE bond buying of the ECB has reduced sovereign bond yields. Thus Spain can borrow very cheaply as it has a ten-year yield of 0.86% which reflects the 271 billion Euro purchased by the ECB. This will have oiled the public expenditure wheels although this gets very little publicity as the official bodies which tend to be copied and pasted by the media have no interest in pointing it out.

Yesterday though there was something to get Lyndsey Buckingham singing.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

This was when we learnt a couple of things from the German Constitutional Court. Firstly it would appear that judges everywhere were a quite ridiculous garb. Next that they discovered something they had previously overlooked was an issue and posed questions for the ECB QE programme or at least the Bundesbank version of it. This did affect Spain as whilst it still borrows cheaply yields have risen this week.

Comment

The first context is one of sadness as the Spanish economy recovery not only grinds to a halt but engages reverse gear and at quite a rate. As an aside I wonder what those who use “output gap” style analysis are doing now? I would say they would be hoping we have forgotten that but it is like an antibiotic resistant bacteria that keeps coming back. As to 2021 I find it amazing that we have forecasts when we do not even know where we are now!

Switching to the Bank of Spain ( which operates QE in Spain on behalf of the ECB) it must be having a wry smile. I expect a Euro area version of Yes Prime Minister to play out where the German Constitutional Court ends up taking so long to act that by the the new PEPP programme is over. There is a deeper issue though about the fact that the ECB has found itself trapped in a spiders web of QE and negative interest-rates from which it has been unable to escape from.

Also an important area for Spain which will have benefited from the NIRP policy is this.

The annual rate of the Housing Price Index (HPI) in the fourth quarter of 2019 decreased one
percentage point, standing at 3.6%. This was the lowest since the first quarter of 2015.

Let me leave that as a question. What do readers think will happen next?

The Investing Channel

 

The economy of China is not seeing a V-Shaped recovery

This morning has seen a does of economic news from the epicentre of the current pandemic and hence crisis which is China. This is keenly awaited as we see how the economy responds to the pandemic. Sadly we seem already to be charging into what might be described as Fake News so let us take a look.

BEIJING, March 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector firmed up to 52 in March from 35.7 in February, the National Bureau of Statistics (NBS) said Tuesday.
A reading above 50 indicates expansion, while a reading below reflects contraction.
The rebound came as the country’s arduous efforts in coordinating epidemic control and economic and social development have generally filtered through, NBS senior statistician Zhao Qinghe said.

Okay now first we need to remind ourselves that this is a sentiment indicator not an actual output number although tucked away we do get some clearer  guidance.

With positive changes taking place in domestic epidemic control and prevention, 96.6 percent of China’s large and medium-sized enterprises have resumed production, up 17.7 percentage points from one month ago, NBS survey showed.
A sub-index for production, rallied 26.3 points from one month earlier to 54.1, hinting at reviving production activities.

Below we seem some sectors which we would expect to pick-up and in fact are probably flat-out. Let’s face it demand for some protective equipment may never have been as high as this.

Meanwhile, the PMI for high-tech manufacturing, equipment manufacturing and consumer goods all stood in expansion zone, signaling quickened restoration in the sectors, according to Zhao.

The twitter feed of Xinhua News also continues with the line that things are in some cases back to normal.

As the outbreak of the novel #coronavirus has been basically contained in China, the construction of Xiongan, often billed as China’s “city of the future,” has resumed in an orderly manner.

I am sure some of you have already spotted the difference between “basically contained” and contained already. But the theme is of an economic recovery.

China’s March composite PMI rose significantly to 53, up 24.1 points from February.

This has been reported as being quite a rebound as the two tweet below highlight.

Wow! Impressive V-shape recovery in #China’s Manufacturing #PMI. Up to 52 from 35.7. ( @jsblokland) 

 

So far, data seems to support China’s prospects of a V-shaped economic recovery…. Strong PMI rebound.

The second tweet is from the editor of The Spectator Fraser Nelson.

A V-shaped recovery means that you are very quickly back to where you started. This was what was promised for Greece back in the day which is of course a troubling harbinger. After all the Greek economy promptly collapsed.

The National Bureau of Statistics

It published an explainer which tells a rather different story.

The purchasing manager index is a chain index, which reflects the economic changes in this month compared with the previous month. The magnitude of the change has a great relationship with the base of the previous month.

There was more.

the manufacturing PMI, non-manufacturing business activity index, and the comprehensive PMI output index fell sharply in February, and the base rose from the previous month. These data indicate that the production and operation status of enterprises in March has significantly changed from February.

This gets reinforced here.

Taking the production index as an example, according to the answer of the enterprise purchasing manager to the question “The production volume of the main products of this month has changed from last month”,

So as you can see the situation is likely to be as follows the reading of 52 is an improvement on the 35.7 of February. so for example might be 38 or 39 if we try to impose some sort of absolute moniker in this. Accordingly there has been an improvement but V-shaped?

The mire sanguine view I have expressed is much more in line with this from the South China Morning Post today.

China’s economic situation could get worse before it gets better, amid a second wave of demand shock that is set to hit both domestic and foreign trade, a Chinese government official has warned.Addressing a press conference in Beijing on Monday, the day after President Xi Jinping toured businesses in Zhejiang province, vice-minister of industry and information technology Xin Guobin delivered a candid and downbeat assessment of the economy, in a subtle break from recent optimistic rhetoric about economic recovery.

What is behind his thinking?

“With the further spread of the international epidemic, China’s foreign trade situation may further deteriorate,” Xin said. “Overseas and domestic demand are both slumping, having a significant impact on some export-oriented companies. These companies might face a struggle to survive.”

We also get a clue as to what “barely contained” in terms of the Corona Virus means.

After bringing the domestic epidemic under control, China gave the green light earlier this month for over 600 cinemas, thousands of tourism attractions and half the country’s restaurants to reopen.

But in sudden U-turn last Friday, the National Film Bureau ordered all cinemas to shut down again, without explaining why or when they might hope to reopen.

Shanghai municipal authorities also ordered a number of famous tourist attractions to close over the weekend, including the Oriental Pearl Tower and Shanghai Ocean Aquarium.

Is it back?

Hong Kong

We have looked at Hong Kong before because it had its economic troubles before this pandemic struck. However in terms of today’s subject it does give us something of a clue to what is happening in China and if so today’s Retail Sales numbers speak for themselves.

After netting out the effect of price changes over the same period, the provisional estimate of the volume of total retail sales in February 2020 decreased by 46.7% compared with a year earlier. The revised estimate of the volume of total retail sales in January 2020 decreased by 23.1% compared with a year earlier. For the first two months of 2020 taken together, the provisional estimate of the total retail sales decreased by 33.9% in volume compared with the same period in 2019.

It is not to say that some areas have not seen a boost.

 On the other hand, the value of sales of commodities in supermarkets increased by 11.1% in the first two months of 2020 over the same period a year earlier.  This was followed by sales of fuels (+6.5% in value).

The first part is no surprise but unless people were fleeing the place ( or perhaps preparing to) I am unsure about the second part.

For the other areas of retail sales it was basically the tale of woe you might expect.

Analysed by broad type of retail outlet in descending order of the provisional estimate of the value of sales and comparing the combined total sales for January and February 2020 with the same period a year earlier, the value of sales of food, alcoholic drinks and tobacco decreased by 9.3%. This was followed by sales of jewellery, watches and clocks, and valuable gifts (-58.6% in value); other consumer goods, not elsewhere classified (-21.9%); electrical goods and other consumer durable goods, not elsewhere classified (-25.1%); medicines and cosmetics (-42.7%); commodities in department stores (-41.4%); wearing apparel (-49.9%); motor vehicles and parts (-24.2%); footwear, allied products and other clothing accessories (-43.1%); furniture and fixtures (-19.6%); Chinese drugs and herbs (-23.7%); books, newspapers, stationery and gifts (-35.0%); and optical shops (-28.6%).

Comment

These are highly charged times both in terms of the pandemic and the subsequent economic outlook. As you can see the reports of China bouncing back are in fact beyond optimistic. Indeed even Xhinua News made the point.

However, Zhao said the single-month rise does not necessarily mean the production has been back to pre-outbreak levels, noting that more data should be observed. The upturn of economy, Zhao said, only comes when the PMI moves up for at least three consecutive months.

So today’s song lyrics come from Brian Ferry ( although originally written by Bob Dylan).

It’s a hard and it’s a hard and it’s a hard and it’s a hard
And it’s a hard rain’s a gonna fall

Italy faces yet more economic hardship

Italy is the country in Europe that is being most affected by the Corona Virus and according to the Football Italia website is dealing with it in Italian fashion.

In yet another change of plan, it’s reported tomorrow’s Juventus-Milan Coppa Italia semi-final will be called off due to the Corona virus outbreak.

In fact that may just be the start of it.

News agency ANSA claim the Government is considering a suspension of all sporting events in Italy for a month due to the Coronavirus outbreak, as another 27 people died over the last 24 hours.

Thus the sad human cost is being added to by disruption elsewhere which reminds us that only last week we noted that tourism represents about 13% of the Italian economy. Again sticking with recent news there cannot be much demand for Italian cars from China right now.

China has also suffered its biggest monthly drop in car sales ever, in another sign of economic pain.

New auto sales slumped by 80% year-on-year in February, the China Passenger Car Association reports. ( The Guardian )

Actually that,believe it or not is a minor improvement on what it might have been.

Astonishingly, that’s an improvement on the 92% slump recorded in the first two weeks of February. It underlines just how much economic activity has been wiped out by Beijing’s efforts to contain the coronavirus.

Backing this up was a services PMI reading of 26.5 in China and if I recall correctly even Greece only went into the low thirties.

GDP

The outlook here looks grim according to the Confederation of Italian industry.

ITALY‘S BUSINESS LOBBY CONFINDUSTRIA SEES ITALIAN GDP FALLING IN Q1, CONTRACTING MORE STRONGLY IN Q2 DUE TO CORONAVIRUS OUTBREAK ( @DeltaOne )

This comes on the back of this morning’s final report on the last quarter of 2019.

In the fourth quarter of 2019, gross domestic product (GDP), expressed in chain-linked values ​​with reference year 2015, adjusted for calendar effects and seasonally adjusted, decreased by 0.3% compared to the previous quarter and increased by 0.1 % against the fourth quarter of 2018.

That is actually an improvement for the annual picture as it was previously 0% but the follow through for this year is not exactly optimistic.

The carry-over annual GDP growth for 2020 is equal to -0.2%.

That was not the only piece of bad news as the detail of the numbers is even worse than it initially appeared.

Compared to previous quarter, final consumption expenditure decreased by 0.2 per cent, gross fixed capital formation by 0.1 per cent and imports by 1.7 per cent, whereas exports increased by 0.3 per cent.

There is a small positive in exports rising in a trade war but the domestic numbers especially the fall in imports are really rather poor. If you crunch the numbers then the lower level of imports boosted GDP by 0.5% on a quarterly basis.

The long-term chart provided with the data is also rather chilling. It shows an Italian quarterly economic output which peaked at around 453 billion Euros in early 2008 which then fell to around 420 billion. So far so bad, but then it gets worse as Italy has just recorded 430.1 billion so nowhere near a recovery. All these are numbers chain-linked to 2015.

Markit Business Survey

This feels like something from a place far, far away but this is what they have reported this morning.

Italian services firms recorded a further increase in business activity during February, extending the current sequence of growth to nine months. Moreover, the expansion was the quickest since October last year, as order book volumes rose at the fastest rate for four months. Signs of improved demand led firms to take on more staff and job creation accelerated to a moderate pace.

They go further with this.

The Composite Output Index* posted 50.7 in February, up
from 50.4 in January, to signal a back-to-back expansion in
Italian private sector output. The reading signalled a modest monthly increase in business activity.

Mind you even they seem rather unsure about it all.

“Nonetheless, Italian private sector growth remains
historically subdued”

You mean a number which has been “historically subdued” is now a sort of historically subdued squared?

ECB

This is rather stuck between a rock and a hard place. It has already cut interest-rates to -0.5% and is doing some 20 billion Euros of QE bond buying a month. Thus it has little scope to respond which is presumably why there are reports it did not discuss monetary policy on its emergency conference call yesterday. In spite of that there are expectations of a cut to -0.6% at its meeting next week.

Has it come to this? ( The Streets)

As you can see this would be an example of to coin a phrase fiddling while Rome Burns. Does anybody seriously believe a 0.1% interest-rate cut would really make any difference when we have had so many much larger cuts already? Indeed if they do as CNBC has just suggested they will look even sillier as why did they not join the US Federal Reserve yesterday?

ECB and BOE expected to take immediate policy action on coronavirus impact.

Those in charge of the Euro area must so regret leaving the ECB in the hands of two politicians. No doubt it seemed clever at the time with Mario Draghi essentially setting policy for them. But now things have changed.

Fiscal Policy

This is the new toy for central bankers and there is a new Euro area vibe for this.

French Finance Minister Bruno Le Maire says the euro-area must prepare fiscal stimulus to use if the economic situation deteriorates due to the coronavirus outbreak ( Bloomberg)

That is a case of suggesting what you are doing because as we have previously noted France had a fiscal stimulus of around 1% of GDP last year. But of course back when she was the French Finance Minister Christine Lagarde was an enthusiast “shock and awe” for exactly the reverse being applied to Greece and others.

The ECB has already oiled the wheels for some fiscal expansionism by the way its QE bond buying has reduced bond yields. It could expand its monthly purchases again but would run into “trouble,trouble,trouble” in Germany and the Netherlands, pretty quickly.

Comment

If we return to a purely Italian perspective we see some of the policy elements are already in play. For example the ten-year yield is a mere 0.94% although things get more awkward as the period over which it has fallen has also seen a fall in economic growth. The fiscal policy change below is relatively minor.

Italy is planning to hike its 2020 budget deficit target to 2.4% of its GDP from 2.2% to provide the economy with the funds it needs to battle the impact of coronavirus outbreak, Reuters reported on Monday, citing senior officials familiar with the matter.

By contrast according to CNBC the Corona Virus situation continues to deteriorate.

Italy is now the worst-affected country from the coronavirus outside Asia, overtaking Iran in terms of the number of deaths and infections from the virus.

The death toll in Italy jumped to 79 on Tuesday, up from an official total of 52 on Monday. As of Wednesday morning, there are 2,502 cases of the virus in Italy, according to Italian media reports that are updated ahead of the daily official count, published by Italy’s Civil Protection Agency every evening.

Now what about a regular topic the Italian banks? From Axa.

and banks such as Unicredit and Intesa have offered “payment holidays” to some of their affected borrowers.

The ECB could be the next central bank to start buying equities

It feels like quite a week already and yet it is only Monday morning! As rumours circulated and fears grew after some pretty shocking data out of China on Sunday the Bank of Japan was limbering up for some open mouth action. Below is the statement from Governor Kuroda.

Global financial and capital markets have been unstable recently with growing uncertainties about the outlook for economic activity due to the spread of the novel coronavirus.
The Bank of Japan will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.

Actually most people were becoming much clearer about the economic impact of the Corona Virus which I will come to in a moment. You see in the language of central bankers “uncertainties” means exactly the reverse of the common usage and means they now fear a sharp downturn too. This will be a particular issue for Japan which saw its economy shrink by 1.6% in the final quarter of last year.

But there was a chaser to this cocktail which is the clear hint of what in foreign exchange markets the Bank of Japan calls “bold action” or intervention. This not only added to this from Chair Powell of the US Federal Reserve on Friday but came with more.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

As an aside if the fundamentals of the US economy were strong the statement would not be required would it?

The Kuroda Put Option

The problem for the Bank of Japan is that it was providing so much liquidity anyway as Reuters summarises.

Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and pledges to cap long-term borrowing costs around zero. It also buys government bonds and risky assets, such as ETFs, as part of its massive stimulus program.

The Reuters journalist is a bit shy at the end because the Bank of Japan has been buying equity ETFs for some time as well as smaller commercial property purchases. I have been watching and all last week apart from the public holiday on Monday they bought 70.4 billion Yen each day.

Regular readers will be aware that the Bank of Japan buys on down days in the equity market and that the clip size is as above. Or if you prefer Japan actually has an explicit Plunge Protection Team or PPT and it was active last week. This morning though Governor Kuroda went beyond open mouth operations.

BoJ Bought Japan Stock ETFs On Monday – RTRS Market Sources BoJ Normally Does Not Buy ETFs On Day TOPIX Index Is Up In Morning ( @LiveSquawk )

As you can see they have changed tactics from buying on falls to singing along with Endor.

Don’t you know pump it up
You’ve got to pump it up
Don’t you know pump it up
You’ve got to pump it up

Also there was this.

BANK OF JAPAN BOUGHT RECORD TOTAL 101.4B YEN OF ETFS TODAY ( @russian_market )

Actually about a billion was commercial property but the principle is that the Bank of Japan has increased its operations considerably as well as buying on an up day. So the Nikkei 225 index ended up 201 points at 21,344 as The Tokyo Whale felt hungry.

Coordinated action

The Bank of England has also been indulging in some open mouth operations today.

“The Bank continues to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.

The Bank is working closely with HM Treasury and the FCA – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability.” ( The Guardian)

The rumours are that interest-rate cuts will vary from 1% from the Federal Reserve to 0.5% at places like the Bank of England to 0.1% at the ECB and Swiss National Bank. The latter are more constrained because they already have negative interest-rates and frankly cutting by 0.1% just seems silly ( which I guess means that they might….)

There have already been market responses to this. For example the US ten-year Treasury Bond yield has fallen below 1.1%. The ten-year at 0.75% is a full percent below the upper end of the official US interest-rate. So the hints of interest-rate cuts are in full flow as we see Treasuries go to places we were assured by some they could not go. Oh and you can have some full number-crunching as you get your head around reports that expectations of an interest-rate cut in Australia are now over 100%

The Real Economy

China

If we switch now to hat got this central banking party started it was this. From the South China Morning Post on Saturday.

Chinese manufacturing activity plunged to an all-time low in February, with the first official data published amid the coronavirus outbreak confirming fears over the impact on the Chinese economy.

The official manufacturing purchasing managers’ index (PMI) slowed to 35.7, the National Bureau of Statistics (NBS) said on Saturday, having slipped to 50.0 in January when the full impact of the corona virus was not yet evident.

The only brief flicker of humour came from this.

Analysts polled by Bloomberg had expected the February reading to come in at 45.0.

Although you might think that manufacturing would be affected the most there was worse to come.

China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also dropped, to 29.6 from 54.1 in January. This was also the lowest on record, below the previous low of 49.7 in November 2011, according to the NBS. Analysts polled by Bloomberg had expected the February reading to come in at 50.5.

To give you an idea of scale Greece saw its PMI ( it only has a manufacturing one) fell into the mid-30s as its economic depression began. So we are now facing not only a decline in economic growth in China but actual falls. This is reinforced by stories that factories are being asked to keep machines running even if there are no workers to properly operate them to conceal the size of the slow down.

Comment

The problem for central banks is that they are already so heavily deployed on what is called extraordinary monetary policy measures. Thus their ammunition locker is depleted and in truth what they have does not work well with a supply shock anyway as I explain in the podcast below. So we can expect them to act anyway but look for new tools and the next one is already being deployed by two central banks. I have covered the Bank of Japan so step forwards the Swiss National Bank.

Total sight deposits at the SNB rose by CHF3.51bn last week… ( @nghrbi)

Adding that to last weeks foreign exchange intervention suggests it has another 1 billion Swiss Francs to invest in (mostly US) equities.

Who might be next? Well the Euro is being strong in this phase partly I think because of the fact it has less scope for interest-rate cuts and partly because of its trade surplus. Could it copy the Swiss and intervene to weaken the Euro and investing some of the Euros into equities? It would be a “soft” way of joining the party. Once the principle is established then it can expand its activities following the model it has established with other policies.

As for other central banks they will be waiting for interest-rates to hit 0% I think. After all then the money created to buy the shares will be “free money” and what can go wrong?

Podcast

 

The Bank of England has got itself in a pickle

Today is a Bank of England day of a different sort and it comes from this spoken by ones of its policymakers Gertjan Vlieghe on the 13th of this month.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

At this time this combined with a speech a day before by Bank of England Governor Mark Carney revved up expectations of a Bank Rate cut next week. What Gertjan was doing was reflecting something of a shift in the reaction function of the Bank of England for which we can look at a speech given by the absent-minded professor Ben Broadbent back in early October 2016.

But human instinct in this area isn’t always so rational. We’re prone to over-interpret noisy events, seeing
structure and determination when, very often, there isn’t any

Indeed as he tries to make the policy error he had just made look reasonable. The link is that the Bank of England panicked in response to the Markit PMIs back then. Not only did it cut it’s official interest-rate to 0.25% and add an extra £60 billion of QE it gave Forward Guidance of a further interest-rate cut to 0.1%. In case you are wondering why 0.1%? That is as low as it thinks it can go ( lower bound) because it is terrified of what a zero interest-rate would do to the creaky IT infrastructure of the UK banking sector.

In another link to the present the absent-minded professor told us this.

It’s also that many economic indicators are in general very noisy, even at the best of times.
Retail sales, for example, are estimated to have fallen by 0.2% between July and August. Is this meaningful?
Not really. The index is extremely volatile – the average monthly change in retail sales volumes is over a
percentage point – and poorly correlated with quarterly GDP, even with consumption growth specifically.

So Deputy-Governor Broadbent would apparently overlook the weak retail sales data the UK saw in December. Indeed relying on PMI data back then got him spinning around more than Kylie Minogue, and the emphasis is mine.

All that said, there’s little doubt that the economy has performed better than surveys suggested immediately
after the referendum and, although we aimed off those significantly, somewhat more strongly than our nearterm forecasts as well.

That is a laugh out loud moment as we note that they planned to cut interest-rates as much as they could and as another example were so enthusiastic about Corporate Bond QE they had to buy bonds from foreign companies such as Maersk to make up the numbers ( £10 billion).

It just got better as we were advised not to do what Ben and his colleagues just had done.

Why might that be? Well, again, one shouldn’t rush to judgement here.

Let us move on after noting that using the PMI data misled the Bank of England back then and that apparently Ben Broadbent struggles with the past as well as the present and future.

And even after the event, it may not be clear
why a particular out-turn has differed from the central prediction, in one direction or the other.

What were the numbers?

The numbers may well have had Governor Carney spilling his morning espresso ( no milk as it is bad for climate change) in surprise.

January data from the IHS Markit / CIPS Flash UK Composite PMI® highlighted a decisive change of direction for the private sector economy at the start of 2020. Business activity expanded for the first time in five months, driven by the sharpest increase in new work since September 2018.

For these times that is like the “Boom! Boom! Boom!” of the Black-Eyed Peas. Or as you can see below what may well be a Boris Bounce.

The latest reading was the highest for almost one-and-a-half years and signalled a moderate expansion of business activity across the UK private sector economy. There were widespread reports that reduced political uncertainty following the general election had a positive impact on business and consumer spending decisions at the start of the year.

Looking into the detail we see first something familiar which is service sector strength and something welcome which is an improvement in the manufacturing sector.

Service providers experienced solid increases in business
activity and incoming new work in January. Meanwhile,
the performance of the manufacturing sector stabilised in
comparison to the end of 2019, but still trailed behind the
service economy amid ongoing weakness in export markets.

This was backed up by a suggestion that the positive labour market data we looked at on Tuesday may well be continuing.

Employment numbers increased for the second month running in January, with marginal growth seen in both the manufacturing and service sectors. Additional staff hiring was supported by a sustained rebound in output growth projections for the next 12 months, with business optimism reaching its highest level since June 2015.

The latter bit seems especially hopeful but of course may turn out to be Hopium.

Maybe manufacturing has returned to stagnation which is far from ideal but much better than where we were.

Manufacturing production meanwhile fell at a much slower
pace than in December, with the latest reduction only marginal and the smallest since the current phase of decline began in June 2019.

Putting it all together we are told this.

“The survey is indicative of GDP rising at a quarterly rate of approximately 0.2% in January, representing a welcome
revival of growth after the malaise seen in the closing months of 2019. Hiring has also picked up.”

Comment

The situation is now not a little confused. The Bank of England has gone out of its way to warm financial markets up for an interest-rate cut leading to speculation about next week. For example the benchmark ten-year Gilt yield which as recently as the 10th of this month was 0.8% is now 0.59%. This new trend  has had real world effects as Henry Pryor pointed out earlier.

A 95% LTV two-year fix at 2.77% and a 90% LTV five-year fix at 2.33% are currently the lowest available on the market. @Yorkshire_BS  launches record-low first-time buyer rates.

Yet we have seen the UK economic data show signs of improvement as for example this week both the labour market numbers and the tax receipt data for December suggested this. Against that was the weak retail sales number for December but as I pointed out earlier the Bank of England has previously stated it is an erratic indicator.

So we are left with the PMI business survey which has come in a fair bit stronger both in absolute and relative terms. As it happens we are now doing around 2 points better than my subject of yesterday the Euro area and according to the PMI have some growth. This has caught expectations on the hop and left a Bank of England which has guided us to it in a pickle because I believe they have wanted to cut interest-rates for a while. It seems the UK Gilt market thinks so too because nearly 2 hours have passed since the PMI number and it has not fallen as you might expect.

There are two undercuts to this. Firstly I would not base a policy decision on a PMI business survey. They have been rather unreliable for the UK as the summer of 2016 showed and also as one is supposed to be looking up to two years ahead then January 2020 matters but not that much. Next comes the issue that an interest-rate cut from 0.75% to 0.5% will do little good in my opinion and may even make things worse. After all we have had lots of interest-rate cuts but looking at where we are suggests they have not achieved much.

What are the economic prospects for the Euro area?

As we progress into 2020 there has been a flurry of information on the Euro area economy. However there has been quite a bit of dissatisfaction with the usual indicators so statistics offices have been looking  at alternatives and here is the German effort.

The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 0.6% in December 2019 compared with the previous month.

As a conceptual plan this can be added to the way that their colleagues in Italy are now analysing output on Twitter and therefore may now think world war three has begun. Returning to the numbers the German truck data reminds us that the Euro areas largest economy is struggling. That was reinforced this morning by some more conventional economic data.

Germany exported goods to the value of 112.9 billion euros and imported goods to the value of 94.6 billion euros in November 2019. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports decreased by 2.9% and imports by 1.6% in November 2019 on the same month a year earlier. Compared with October 2019, exports were down 2.3% and imports 0.5% after calendar and seasonal adjustment.

We get a reminder that what was one if the causes of economic imbalance before the credit crunch has if anything grown as we note the size of Germany’s trade surplus.  It is something that each month provides support for the level of the Euro. Switching to economic trends we see that compared to a year before the larger export volume has fallen by more than import volume. This was even higher on a monthly basis as we note that the gap between the two widened. But both numbers indicate a contractionary influence on the German economy and hence GDP ( Gross Domestic Product).

Production

Today’s data opened with a flicker of positive news.

In November 2019, production in industry was up by 1.1% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In October 2019, the corrected figure shows a decrease of 1.0% (primary -1.7%) from September 2019.

However this still meant this.

-2.6% on the same month a year earlier (price and calendar adjusted)

There is a particular significance in the upwards revision to October as some felt that the original numbers virtually guaranteed a contraction in GDP in the last quarter of 2019. In terms of a breakdown the better November figures relied on investment.

In November 2019, production in industry excluding energy and construction was up by 1.0%. Within industry, the production of capital goods increased by 2.4% and the production of consumer goods by 0.5%. The production of intermediate goods showed a decrease by 0.5%.

Only time will tell if the investment was wise. The orders data released yesterday was not especially hopeful.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2019 a seasonally and calendar adjusted 1.3% on the previous month.

Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.

-6.5% on the same month a year earlier (price and calendar adjusted)

Perhaps the investment was for the domestic economy as we look into the detail.

Domestic orders increased by 1.6% and foreign orders fell 3.1% in November 2019 on the previous month. New orders from the euro area were down 3.3%, new orders from other countries decreased 2.8% compared to October 2019.

But if we widen our outlook from Germany to the wider Euro area we see that it was the source of the strongest monthly slowing.

In a broad sweep orders for production rose from 2013 to December 2017 with the series peaking at 117.1 ( 2015=100) but we have been falling since and have now gone back to 2015 at 100.3.

The Labour Market

By contrast there is more to cheer from this area.

The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in November 2019, stable compared with
October 2019 and down from 7.9% in November 2018. This remains the lowest rate recorded in the euro area
since July 2008.

In terms of the broad trend the Euro area is now pretty much back to where it was before the credit crunch and is a long way from the peak of above 12% seen around 2013. But there are catches and nuances to this of which a major one is this.

In November 2019, the unemployment rate in the United States was 3.5%, down from 3.6% in October 2019 and
from 3.7% in November 2018.

That is quite a gap and whilst there may be issues around how the numbers are calculated that still leaves quite a gap. Also unemployment is a lagging indicator but it may be showing signs of turning.

Compared with October 2019, the number of persons unemployed increased by
34 000 in the EU28 and decreased by 10 000 in the euro area. Compared with November 2018, unemployment fell
by 768 000 in the EU28 and by 624 000 in the euro area.

The rate of decline has plainly slowed and if we look at Germany again we wait to see what the next move is.

Adjusted for seasonal and irregular effects, the number of unemployed remained unchanged from the previous month, standing at 1.36 million people as well. The adjusted unemployment rate was 3.1% in November, without any changes since May 2019.

Looking Ahead

There was some hope for 2020 reflected in the Markit PMI business surveys.

Business optimism about the year ahead has also improved
to its best since last May, suggesting the mood
among business has steadily improved in recent
months.

However the actual data was suggested a low base to start from.

Another month of subdued business activity in
December rounded off the eurozone’s worst quarter
since 2013. The PMI data suggest the euro area
will struggle to have grown by more than 0.1% in
the closing three months of 2019.

There is a nuance in that France continues to do better than Germany meaning that in their turf war France is in a relative ascendancy. In its monthly review the Italian statistics office has found some cheer for the year ahead.

The sectoral divide between falling industrial production and resilient turnover in services persists. However, business survey indicators convey first signals of optimism in manufacturing. Economic growth is projected to slightly increase its pace to moderate growth rates of 0.3% over the forecast horizon.

Comment

The problem for the ECB is that its monetary taps are pretty much fully open and money supply growth is fairly strong but as Markit puts it.

At face value, the weak performance is
disappointing given additional stimulus from the
ECB, with the drag from the ongoing plight of the
manufacturing sector a major concern.

It is having an impact but is not enough so far.

However, policymakers will be encouraged by the resilient
performance of the more domestically-focused
service sector, where growth accelerated in
December to its highest since August.

This brings us back to the opening theme of this year which has been central bankers both past and present singing along with the band Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To blockbuster

Hence their move towards fiscal policy which is quite a cheek in the circumstances.

The conceptual issue is that all the intervention and central planning has left the Euro area struggling for any sustained economic growth and certainly slower growth than before. This is symbolised by Italy which remains a girlfriend in a coma.

The Composite Output Index* posted at 49.3 in December,
down from 49.6 in November, to signal a second consecutive fall in Italian private sector output. Moreover, the decline quickened to a marginal pace.

 

Sweden has a growing unemployment problem

Today is one for some humility and no I am not referring to the UK election. It relates to Sweden and developments there in economic policy and its measurement which have turned out to be extraordinary even for these times. Let me start by taking you back to the 22nd of August when I noted this.

I am less concerned by the contraction than the annual rate. There had been a good first quarter so the best perspective was shown by an annual rate of 1.4%. You see in recent years Sweden has seen annual economic growth peak at 4.5% and at the opening of 2018 it was 3.6%.

We now know that this broad trend continued into the third quarter.

Calendar adjusted and compared with the third quarter of 2018, GDP grew by 1.6 percent.

What was really odd about the situation is that after years of negative interest-rates the Riksbank raised interest-rates at the end of last year to -0.25% and plans this month to get back to 0%. So it has kept interest-rates negative in a boom and waited for a slow down to raise them. But there is more.

The Unemployment Debacle

If we step forwards to October 24th there was another development.

As economic activity has entered a phase of lower growth in
2019, the labour market has also cooled down. Unemployment is deemed to have increased slightly during the year. ( Riksbank)

Actually it looked a bit more than slightly if we switch to Sweden Statistics.

In September 2019, there were 391 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 62 000 compared with September 2018.

The Riksbank at this point was suggesting it would raise to 0% but gave Forward Guidance which was lower! Make of that what you will.

But in late October Sweden Statistics dropped something of a bombshell.

STOCKHOLM (Reuters) – Recent Swedish jobless figures – which that have shown a sharp rise in unemployment and led to calls for the central bank to postpone planned interest rate hikes – are suspect, the country’s Statistics Office said on Thursday………….The problems also led to the unemployment rate being underestimated at the start of the year and then overestimated in more recent months.

The smoothed unemployment rate was lowered from 7.3% to 6.8% in response to this and changed the narrative, assuming of course that they had got it right this time. The headline rate went from 7.1% to 6%.

This morning we got the latest update and here it is.

In November 2019, there were 378 000 unemployed persons aged 15─74, not seasonally adjusted, which is an increase of 63 000 persons compared with the same period a year ago. The unemployment rate increased by 1.0 percentage points and amounted to 6.8 percent.

As you can see eyes will have turned to the headline rate having gone from 6% to 6.8% making us wonder if the new methodology has now started to give similar results to the old one. It had been expected to rise but to say 6.3% not 6.8%. We get some more insight from this.

Among persons aged 15–74, smoothed and seasonally adjusted data shows an increase in both the number of unemployed persons and the unemployment rate, compared with nearby months. There were 384 000 unemployed persons in November 2019, which corresponds to an unemployment rate of 6.9 percent.

A much smaller move but again higher and because it is smoothed we also start to think we are back to where we were as this from Danske Bank makes clear.

Ooops! The very unreliable revised new #LFS data showed a significant bounce back up to 7.3 % seasonally adjusted! This is very close to what our model suggested. Ironically, this is just as bad as the old figures suggested. But perhaps these are wrong too? ( Michael Grahn )

So the new supposedly better data is now giving a similar answer to the old. Just for clarity they are taking out the smoothing or averaging effect and looking to give us a spot answer for November unemployment.

The Wider Economy

One way of looking at the work situation is to look at hours worked.

On average, the number of hours worked amounted to 154.3 million per week in November 2019.

But that is lower than under the old system.

On average, the number of hours worked amounted to 156.5 million per week in September 2019…..On average, the number of hours worked amounted to 156.2 million per week in August 2019.

This is really awkward as under the new system Sweden has just under an extra half a million employees but the total number of house worked has fallen. Make of that what you will.

If switch to production we saw a by now familiar beat hammered out earlier this month.

Production in the industry sector decreased by 3.0 percent in October in calendar adjusted figures compared with the same period of the previous year. The industry for machinery and equipment n.e.c. decreased by 6.8 percent in fixed prices and accounted for the largest contribution, -0.2* percentage points, to the development in total private sector production.

Monthly output was up by 0.2% seasonally adjusted but as you can see was well below last year’s. This means Sweden is relying on services for any growth.

Production in the service sector increased by 1.1 percent in October in calendar adjusted figures compared with the same period of the previous year. Trade activities increased by 3.6 percent in fixed prices and contributed the most, 0.5 percentage points, to the development in total private sector production.

So Sweden has maybe some growth which will get a boost from construction.

Production in the construction sector increased by 2.1 percent in October in calendar adjusted figures compared with the same period of the previous year. This sector increased by 2.1 percent in fixed prices, not calendar-adjusted.

If we switch to private-sector surveys then Swedbank tells us this.

The purchasing managers’ index for the private service sector (Services PMI) dropped in November for the third month in a row to 47.9 from 49.4 in October. The
decrease in the index means that service sector activity is continuing to decline in the fourth quarter to levels that have not been seen in six years and that are
contributing to lower hiring needs in service companies,

So maybe the service sector growth has gone as well. The overall measure speaks for itself.

Silf/Swedbank’s PMI Composite index dropped for the third straight month to 47.2 in November from 48.5 in October, reinforcing the view that private sector activity is
slowing in the fourth quarter. Since November of last year the composite index has fallen 7.6 points

Comment

There are two clear issues in this. Of which the first is the insane way in which the Riksbank kept interest-rates negative in a boom and now is raising them in a slowing.

Updated GDP tracker after Nov LFS dropped to a new low since 2012, just 0.26% yoy. ( Michael Grahn of Danske )

Some signals suggest that this may now be a decline or contraction. But whatever the detail the Swedish economy has slowed and will not be helped much by the slower Euro area and UK economies. An interest-rate rise could be at the worst moment and fail the Bananarama critique.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

Next is the issue of lies, damned lies and statistics. I am sure Sweden’s statisticians are doing their best but making mistakes like they have about unemployment is a pretty basic fail. It reminds us that these are surveys and not actual counts and adds to the mess Japan made of wages growth. So we know a lot less than we think we do and this poses yet another problem for the central bankers who seem to want to control everything these days.

Let me end with the thought that UK readers should vote and Rest In Peace to Marie Fredriksson of Roxette.

She’s got the look (She’s got the look) She’s got the look (She’s got the look)
What in the world can make a brown-eyed girl turn blue
When everything I’ll ever do I’ll do for you
And I go la la la la la she’s got the look

 

 

 

 

Italy faces yet more economic hard times

This morning has brought more signs of the economic malaise that is affecting Italy, a subject which just goes on and on and on. Here is the statistics office.

In 2019, GDP is expected to increase by 0.2 percent in real terms. The domestic demand will provide a contribution of 0.8 percentage points while foreign demand will account for a positive 0.2 percentage point and inventories will provide a negative contribution (-0.8 percentage points).

That is a reduction of 0.1% on the previous forecast. In one way I doubt their forecasts are accurate to 0.1% but then in another way counting 0.1% growth is their job in Italy. The breakdown is odd though. As the net foreign demand may be small but any growth is welcome at a time of a time war but with domestic demand growing why are inventories being chopped?

So annual economic growth has gone 1.7% in 2017 and 0.8% last year and will now be 0.2% if they are correct. They do manage a little optimism for next year.

In 2020, GDP is estimated to increase by 0.6 percent in real terms driven by the contribution of domestic demand (+0.7
percentage points) associated to a positive contribution of the foreign demand (+0.1 p.p.) and a negative contribution of inventories (-0.2 p.p.).

So the main change here is that the decline in inventories slows. If we switch to a positive we are reminded that Italy’s trade position looks pretty good for these times.

In 2019, exports will increase by 1.7 percent and imports will grow by 1.3 percent, both are expected
to slighty accelerate in 2020 (+1.8% and +1.7% respectively)

Looking at domestic demand it will be supported by wages growth and by this.

Labour market conditions will improve over the forecasting period but at moderate pace. Employment
growth is expected to stabilise at 0,7 percent in 2019 and in 2020. At the same time, the rate of
unemployment will decrease at 10.0 percent in the current year and at 9.9 percent in 2020.

They mean 10% this year and 9.9% next although there is a catch with that.

The number of unemployed persons declined (-1.7%, -44 thousand in the last month); the decrease was the result of a remarkable drop among men and a light increase for women, and involved all age groups, with the exception of over 50 aged people. The unemployment rate dropped to 9.7% (-0.2 percentage points), the youth rate decreased to 27.8% (-0.7 percentage points).

As you can see the unemployment rate was already below what it is supposed to be next year so I struggle to see how that is going to boost domestic demand. Perhaps they are hoping that employment will continue to rise.

In October 2019 the estimate of employed people increased (+0.2%, +46 thousand); the employment rate rose at 59.2% (+0.1 percentage points).

The Markit PMIs

There was very little cheer to be found in the latest private-sector business survey published earlier.

The Composite Output Index* posted at 49.6 in November,
down from 50.8 in October and signalling the first decline in Italian private sector output since May. Despite this, the rate of contraction was marginal.
Underpinning the latest downturn was a marked slowdown
in service sector activity growth during November, whilst
manufacturing output recorded its sixteenth consecutive
month of contraction. The latest decrease was sharp but
eased slightly from October.

I doubt anyone is surprised by the state of play in Italian manufacturing so the issue here is the apparent downturn in the service sector. This leads to fears about December and for the current quarter as a whole. Also the official trade optimism is not found here.

Meanwhile, export sales continue to fall.

Sadly there is little solace to be found if we look at the wider Euro area.

The final eurozone PMI for November came in
slightly ahead of the earlier flash estimate but still
indicates a near-stagnant economy. The survey
data are indicating GDP growth of just 0.1% in the
fourth quarter, with manufacturing continuing to act
as a major drag. Worryingly, the service sector is
also on course for its weakest quarterly expansion
for five years, hinting strongly that the slowdown
continues to spread.

Unicredit

We have looked regularly at the Italian banking sector and its tale of woe. But this is from what is often considered its strongest bank.

After cutting a fifth of its staff and shutting a quarter of its branches in mature markets in recent years, UniCredit said it would make a further 8,000 job cuts and close 500 branches under a new plan to 2023………UniCredit’s announcement triggered anger among unions in Italy, where 5,500 layoffs and up to 450 branch closures are expected given the relative size of the network compared with franchises in Germany, Austria and central and eastern Europe.

Back in January 2012 I described Unicredit as a zombie bank on the business programme on Sky News. It has spent much if not all of the intervening period proving me right. That is in spite of the fact that ECB QE has given it large profits on its holdings of Italian government bonds. Yet someone will apparently gain.

UniCredit promised 8 billion euros ($9 billion) in dividends and share buybacks on Tuesday in a bid to revive its sickly share price, although profit at Italy’s top bank will barely grow despite plans to shed 9% of its staff.

This is quite a mess as there are all sorts of issues with the share buyback era in my opinion.  In the unlikely event of me coming to power I might rule them ultra vires as I think the ordinary shareholder is being manipulated. Beneath this is a deeper point about lack of reform in the Italian banking sector and hence its inability to support the economy. This is of course a chicken and egg situation where a weak economy faces off with a weak banking sector.

Mind you this morning Moodys have taken the opposite view.

The outlook for Italy’s banking system has changed to stable from negative as problem loans will continue to fall, while banks’ funding conditions improve and their capital holds steady, Moody’s Investors Service said in a report published today.

“We expect Italian banks’ problem loans to fall in 2020 for a fifth consecutive year,” said Fabio Iannò, VP-Senior Credit Officer at Moody’s. “However, their problem loan ratio of around 8% remains more than double the European Union average of 3%, according to European Banking Authority data. We also take into account our forecast for weak yet positive Italian GDP growth, and our stable outlook on Italy’s sovereign rating.”

What could go wrong?

Comment

There is a familiar drumbeat and indeed bass line to all of this. In the midst of it I find it really rather amazing that Moodys can take UK banks from stable to negative whilst doing the reverse for Italian ones! As we look for perspective we see that the “Euro boom” and monetary easing by the ECB saw annual economic growth of a mere 1.7% in 2017 which has faded to more or less zero now. We are back once again to the “girlfriend in a coma” theme.

Italy has strengths in that it has a solid trade position and is a net saver yet somehow this never seems to reach the GDP data. Maybe the grey economy provides an answer but year after year it fails to be measured. Of course if politico are correct there is always plenty of trade and turnover here.

Italy’s new coalition government might not last the winter, with tensions reaching a peak this week over EU bailout reform……The 5Stars oppose the planned ESM reform because they say it would make it harder for highly indebted countries, like Italy, to access bailout funds without painful public-debt restructuring.

That reminds me about fiscal policy which is the new go to in the Euro area according to ECB President Christine Lagarde, well except for Italy and Greece.

 

 

 

Where will Christine Lagarde lead the ECB?

We find ourselves in a new era for monetary policy in the Euro area and it comes in two forms. The first is the way that the pause in adding to expansionary monetary policy which lasted for all of ten months is now over. It has been replaced by an extra 20 billion Euros a month of QE bond purchases and tiering of interest-rates for the banking sector. The next is the way that technocrats have been replaced by politicians as we note that not only is the President Christine Lagarde the former Finance Minister of France the Vice-President Luis de Guindos is the former Economy Minister of Spain. So much for the much vaunted independence!

Monetary Policy

In addition to the new deposit rate of -0.5% Mario Draghi’s last policy move was this.

The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP), i.e. the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP), at a monthly pace of €20 billion as from 1 November 2019.

It is the online equivalent of a bit of a mouthful and has had a by now familiar effect in financial markets. Regular readers will recall mt pointing out that the main impact comes before it happens and we have seen that again. If we use the German ten-year yield as our measure we saw it fall below -0.7% in August and September as hopes/expectations of QE rose but the reality of it now sees the yield at -0.3%. So bond markets have retreated after the pre-announcement hype.

As to reducing the deposit rate from -0.4% to -0.5% was hardly going to have much impact so let us move into the tiering which is a way of helping the banks as described by @fwred of Bank Pictet.

reduces the cost of negative rates from €8.7bn to €5.0bn (though it will increase in 2020) – creates €35bn in arbitrage opportunities for Italian banks – no signs of major disruption in repo, so far.

Oh and there will be another liquidity effort or TLTRO-III but that will be in December.

There is of course ebb and flow in financial markets but as we stand things have gone backwards except for the banks.

The Euro

If we switch to that we need to note first that the economics 101 theory that QE leads to currency depreciation has had at best a patchy credit crunch era. But over this phase we see that the Euro has weakened as its trade weighted index was 98.7 in mid-August compared to the 96.9 of yesterday. As ever the issue is complex because for example my home country the UK has seen a better phase for the UK Pound £ moving from 0.93 in early August to 0.86 now if we quote it the financial market way.

The Economy

The economic growth situation has been this.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area in the third quarter of 2019 ( Eurostat)

As you can see annual economic growth has weakened and if we update to this morning we were told this by the Markit PMI business survey.

The IHS Markit Eurozone PMI® Composite
Output Index improved during October, but
remained close to the crucial 50.0 no-change mark.
The index recorded 50.6, up from 50.1 in
September and slightly better than the earlier flash
reading of 50.2, but still signalling a rate of growth
that was amongst the weakest seen in the past six and-a-half years.

As you can see there was a small improvement but that relies on you believing that the measure is accurate to 0.5 in reality. The Markit conclusion was this.

The euro area remained close to stagnation in
October, with falling order books suggesting that
risks are currently tilted towards contraction in the
fourth quarter. While the October PMI is consistent
with quarterly GDP rising by 0.1%, the forward looking data points to a possible decline in economic output in the fourth quarter.

As you can see this is not entirely hopeful because the possible 0.1% GDP growth looks set to disappear raising the risk of a contraction.

I doubt anyone will be surprised to see the sectoral breakdown.

There remained a divergence between the
manufacturing and service sectors during October.
Whereas manufacturing firms recorded a ninth
successive month of declining production, service
sector companies indicated further growth, albeit at
the second-weakest rate since January.

Retail Sales

According to Eurostat there was some good news here.

In September 2019 compared with August 2019, the seasonally adjusted volume of retail trade increased by 0.1% in the euro area (EA19). In September 2019 compared with September 2018, the calendar adjusted retail sales index increased by 3.1% in the euro area .

The geographical position is rather widespread from the 5.2% annual growth of Ireland to the -2.7% of Slovakia. This is an area which has been influenced by the better money supply growth figures of 2019. This has been an awkward area as they have often been a really good indicator but have been swamped this year by the trade and motor industry problems which are outside their orbit. Also the better picture may now be fading.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

In theory it should rally due to the monthly QE but in reality it is far from that simple as M1 growth picked up after the last phase of QE stopped.

Comment

As you can see there are a lot of challenges on the horizon for the ECB just at the time its leadership is most ill-equipped to deal with them. A sign of that was this from President Lagarde back in September.

“The ECB is supporting the development of such a taxonomy,” Lagarde said. “Once it is agreed, in my view it will facilitate the incorporation of environmental considerations in central bank portfolios.” ( Politico EU)

Fans of climate change policies should be upset if they look at the success record of central banks and indeed Madame Lagarde. More prosaically the ECB would be like a bull in a China shop assuming it can define them in the first place.

More recently President Lagarde made what even for her was an extraordinary speech.

There are few who have done so much for Europe, over so long a period, as you, Wolfgang.

This was for the former German Finance Minister Wolfgang Schauble. Was it the ongoing German current account surplus she was cheering or the heading towards a fiscal one as well? Perhaps the punishment regime for Greece?

As to the banks there were some odd rumours circulating yesterday about Deutsche Bank. We know it has a long list of problems but as far as I can tell it was no more bankrupt yesterday than a month ago. Yet there was this.

Mind you perhaps this is why Germany seems to be warming towards a European banking union…..