The Bank of England should take note of the money supply and abandon QT bond sales

On the surface this has been a quiet week for the Bank of England along the lines of the Norges Bank of Norway which has just voted to keep interest-rates at 4.5%. But as I pointed out yesterday its QE and now QT efforts have left it singing along with Coldplay.

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

Plus there has been another development which turns the screw on it and it comes from an unusual source which is former Governor Mervyn King. Former Governors tend not to bite the hand which gave them a generous RPI linked pension plus the title of Baron King of Lothbury and Most Noble Order of the Garter. But as the Financial Times points out he has drawn his sword.

The Bank of England’s failure to forestall the post-pandemic surge in inflation was the result of collective amnesia in the economics profession about the role of money supply, according to a former governor.

He is of course correct about this and then he gently debunks the claim by Ben Bernanke that there was no group think at the Bank of England.

Lord Mervyn King, who led the UK’s central bank between 2003 and 2013, said on Thursday it was “troubling” that when prices began to rise in 2020 and 2021, there had been “no dissenting voices to challenge the view that inflation was transitory” among policymakers on either side of the Atlantic.

He then built up steam on the money supply issue whilst taking a swipe at academia as well.

“Too much money chasing too few goods is and always has been a recipe for inflation,” he said, calling it “foolish” for central banks to rely on forecasting models that ignored the role of money entirely.
“The academic economics profession has essentially jettisoned the idea that one might ask what the growth of broad money [a measure of the amount of money circulating in the economy] was telling us,” King said, adding that this consensus had “led to the problems we are now too familiar with”.

As an aside this raises another issue which has troubled me. These days students pay ( well borrow) a lot of money to get an economics degree and this is not matched in any way by much of the teaching. Also I see he was quite damning of the Bernanke Review as you can see below where he is accusing it of missing the main issues.

“The mistakes of 2020 and 2021 were not the result of presentation. The Bank might have used fan charts, the Fed used dot plots. It didn’t make any difference. They both made the same misjudgement,” said King. “What really matters are judgments about the state of the economy and the way monetary policy works.”

QT Bond Sales

These have been somewhere between a shambles and a disaster for the Bank of England. I did not mention them in yesterday’s post to avoid double-counting but another consequence of the rise in interest-rates is that the Bank of England is effectively capitalising its losses at the bottom of the market. You do not have to know much about markets to realise that buying at the top ( indeed creating the top) and then selling at the bottom is a bad idea.

Thus this from Bloomberg overnight rather caught my eye.

Demand for cash from the Bank of England jumped to a record £12.2 billion ($15.3 billion) on Thursday, the latest in a string of increases that may spur policy makers to ease financial conditions through the bond market within months, analysts say.
The BOE will opt to end its weekly bond sales later this year, which will act in tandem with interest-rate cuts to loosen monetary policy, according to Deutsche Bank AG and NatWest Markets.

Actually until recently many at the Bank of England will have welcomed the extra demand for cash as it tightened policy.

The clamor has already driven up a short term money market rate to 5.35%, above the BOE’s benchmark rate. That has the effect of tightening financial conditions, just as the Monetary Policy Committee is considering easing policy by cutting interest rates.

Frankly I think that they should stop the QT bond sales now. The main reduction in the balance sheet has come when bond holdings mature and making the cost of UK debt higher for subsequent generations is yet another policy error.

The Economy

Whilst the Bank of England is rather enmeshed in its own problems the UK economy looks to be experiencing something of a spring bounce.

The seasonally adjusted S&P Global UK PMI Composite
Output Index* registered 54.1 in April, up from 52.8 in March and in positive territory for the sixth consecutive month. Moreover, the latest reading signalled the fastest expansion of private sector business activity since April 2023.

It has been as so often for the UK economy services driven.

Stronger output growth was driven by a robust and
accelerated upturn in the service economy. Manufacturing
production meanwhile returned to contraction, although
the decline was only marginal. There was a similar pattern
for order books, with service providers reporting a faster rise while goods producers experienced a renewed downturn.

I am not sure where S&P are going with this though as the previous lower readings were supposed to give this level of growth.

The latest survey results are consistent
with the UK economy growing at a quarterly rate of 0.4% and therefore pulling further out of last year’s shallow recession.

Even what seems a minor statement like “shallow recession” will produce itchy shirt collars at the Bank of England. After all their forecast was for a deep recession with economic output falling by 2%

Comment

As you can see the Bank of England has dug several holes for itself with its policies. One could reasonably argue that over the past few years it has made the UK’s economic performance worse rather than better. It fed then ignored an inflationary boom and in return for an orgy of QE bond buying and interest-rate cuts we got very little economic growth. In an way I think that this from the Office for National Statistics earlier rather sums up the state of play.

Public service productivity in Quarter 4 2023 is estimated to be 6.8% below its pre-coronavirus (COVID-19) pandemic peak (Quarter 4 2019) but has remained relatively stable since Quarter 2 (Apr to June) 2021 through the post-pandemic period.

But fortunately the economy looks as though it is recovering in spite of their meddling. Although that does rely on the PMI release to some extent other numbers have been consistent with it.

 

The ECB will be cutting its balance sheet as it cuts interest-rates under present plans.

We can start our look at the Euro area economy with a reflection via the Dine series of books. For those unaware in Dune it is the future which is known and the past which is uncertain. I thought of this as I read the latest HCOB PMI update last week.

“The eurozone got off to a good start in the second quarter. The Composite HCOB Flash PMI took a significant step into
expansionary territory. This was propelled by the services sector, where activity has gathered further steam. Considering various factors including the HCOB PMIs, our GDP forecast suggests a 0.3% expansion in the second quarter, matching the growth rate seen in the first quarter, both measured against the preceding quarter.”

The estimate for the first quarter caught my eye because we had been told 47.9 in January or a decent rate of contraction, 49.2 in February for a minor contraction and 50.3 in March for an even more minor expansion. Some argue that in range of 48-52 the PMI numbers mostly just say a form of stagnation and you can take that two ways. One is that with economic growth at this rate being a bit more than 1% they have a point. Or for these times 1% actually feels okay. But my main point is that the PMI series has just rather rewritten its own history.

This matters as we know that the ECB follows it with President Lagarde and and Dr.Schnabel in the van of those who regularly mention it. Also in an unusual occurrence it shows President Lagarde as being correct in that the survey would show some better news. Although the most recent ECB statement changed its mind.

The economy remained weak in the first quarter.

Also her most recent speech has a curious reflection on things.

But history tells us that ideas can only drive growth if we first create the right conditions that allow them to reach their full potential – and if we are committed to breaking the bottlenecks that stand in their way.

The issue of “bottlenecks” reminds me that every press conference from her predecessor Mario Draghi called for reform. This type of theme continues here.

Most advanced economies, however, have seen productivity decelerate for some time.

Regular readers will recall us looking at a rather downbeat analysis of this from Dr.Isabel Schnabel which is now apparently morphing into this according to President Lagarde.

Developments in recent years suggest that the case for optimism was stronger.

Eh?

The good news for global productivity growth is that we see these new ideas flourishing across major economies, a direct legacy from the common ties that were crafted during the era of globalisation. And Europe, in contrast to what some may believe, is actually well placed to benefit from these ideas.

Those who see this being driven by the big US tech companies may be wondering how all the European attacks on them leave the European Union well placed? They may well be simply adding most of this to US GDP.

One study finds that generative AI alone has the potential to add up to almost USD 4.5 trillion annually to the global economy, roughly 4% of global GDP.^[10

Maybe it was a bit of a Freudian slip to measure it in US Dollars….

According to President Lagarde Europe is the world leader.

According to one study, Europe draws in more AI talent than the United States, with over 120,000 active AI roles, and last year, Europe accounted for one-third of total early-stage capital invested in AI and machine learning across the two economies.

I have had a look at the source quoted for this and it also refers to the UK so the definition of “Europe” used by President Lagarde seems to be rather flexible.

Money Supply

Friday’s update brought some minor improvements.

• Annual growth rate of broad monetary aggregate M3 increased to 0.9% in March 2024 from 0.4% in February

If you take that literally the rate of inflation looks set to fall further if we look ahead 18/24 months or so. The catch is that these numbers have been suggesting low inflation (good) but also low economic growth for a while now.

• Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, was -6.7% in March, compared with -7.8% in February

There may be more of a change here than it may immediately look because the -113 billion Euros of January were replaced with 10 billion Euros in March. The numbers may not be accurate to 10 billion but there looks to have been quite a change for the better. Although that does rather collide with planned ECB policy.

The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

So until the end of June we have a “the spice must flow” type of situation. But then any narrow money growth will face a monthly headwind of 7.5 billion Euros and at the end of the year reinvestments will stop meaning a faster pace of reduction. In monetary terms this will be picked up by the M1 numbers as cash is withdrawn. It will also influence the broader measures. This will be added to the existing contraction.

 In addition to that, given the APP gradual runoff, we also reduce our balance sheet by an average of about EUR 30 billion per month.

This gives us a really awkward situation. We have some hopes of economic improvement via a change in the narrow money supply and the ECB may stamp on it just as it is cutting interest-rates!

 but in June we know that we will get a lot more data and a lot more information and we will also have new projections, which will incorporate and be informed by all that will be published before the projection is completed.

For all the rhetoric about being “data dependent” we are being guided towards a June rate cut which will coincide with a further restriction in the money supply via more QT. Iy would be sensible to reverse course on the latter but President Lagarde was adamant.

That process is ongoing and will continue to happen as anticipated, as predicted and as determined by the maturity of those bonds that come to runoff, and then we will move to the reduction of the PEPP reinvestment, from the 1^st of July until the end of December. That’s the plan, but there is no further discussion on that.

Comment

The possible improvement in Euro area growth will not make much difference to the ECB and no doubt some wags will spot that inflation in terms of the ECB towers remains below target this morning.

Germany Hesse CPI (YoY) (Apr) $EUR Actual: 1.9% Previous: 1.6% ( @PiQSuite)

But if we switch to Quantitative Tightening we see that many central banks have got themselves into quite a mess. The US with the best performing economy as loosened the QT strings although it is not the Federal Reserve’s fault as Treasury Secretary Yellen has issued lots of short-dated debt. Whereas the ECB is trimming its sails and intends to add to it with a much worse economic performance. So I would not be surprised if the ECB abandons some of this. Better to be embarrassed than to actually be a fool.

Although it does beg a question of when the ECB can reduce its QE bond holdings?

Podcast

This week’s podcast has turned out to be rather timely as we see the Yen plunge and now intervention today.

 

 

What have the interest-rate rises in India actually achieved?

This morning we have heard from the Reserve Bank of India but before we get to it here is something I spotted on Tuesday.

India’s manufacturing sector ended the current fiscal year
with a stellar performance. The HSBC India PMI® climbed
to a 16-year high on the back of the strongest increases in
output and new orders since October 2020, parallel to the
second-sharpest upturn in input inventories in the history
of the survey. ( S&P Global)

As you can see a very strong performance is being recorded by manufacturing in India. When many countries are pleased to get any growth ( and make 50) India has got quite close to 60. I have to confess it leaves me wondering about the impact of cheap Russian oil? Plus whether there are some Russian orders in there.

Plus there was rise in inflation at the start of the chain.

There was a mild pick-up in cost pressures during March, but customer retention remained a priority for goods producers who raised their charges to the least extent in over a year.

The Reserve Bank of India

The Monetary Policy Statement points out how strong the Indian economy has been.

Real GDP growth for Q3:2023-24 was placed at 8.4 per cent, outpacing consensus forecasts by a wide margin, underpinned by strong investment and an improvement in private consumption.

Manufacturing does get a mention but so do quite a few other areas.

On the supply side, gross value added (GVA) expanded by 6.9 per cent in 2023-24, with manufacturing and services sectors turning out to be the key drivers.

For monetary policy we also need to look forwards although care is needed with the forecasts below because the same group were just wrong.

Professional forecasters polled in the March 2024
round of the Reserve Bank’s survey expected real GDP
growth at 6.0 per cent in Q4:2023-24, 6.7 per cent in
H1:2024-25, and 6.6-6.8 per cent in H2.

Things look bright for the Indian economy.

Overall, the outlook for growth is improving on
the back of domestic drivers of demand, although
persisting uncertainties on the global front pose
risks to the outlook.

The RBI settles on an expected growth rate of 7% and I have to confess if we add in domestic demand being a driver it makes me think of the old fashioned concept of an economy overheating. That is reinforced by another factor associated with it.

double digit credit growth,

This made me look further and here it was on page 73.

Bank credit growth remained robust in H2:2023-24
with improving economic activity. Growth in nonfood bank credit increased to 16.3 per cent (y-o-y) as at end-March 2024 from 15.4 per cent as at end-March 2023.

India usually has high numbers but even the RBI indicator showed a pick-up.

The growth in adjusted non-food credit (i.e., non-food bank credit plus nonSLR investments by banks) accelerated to 15.5 per cent in Q4:2023-24 from 13.9 per cent in Q4:2022-23

I can take that further by looking at the money supply figures which are really rather different to what we have become used to.Many countries have seen decelerations and declines. Whereas India has seen an acceleration from 8.8% in March 2023 to 11.2% this March.

Overheating usually involves the government as well.

Despite record market borrowing by the
Central Government during 2023-24,

It does plan a trim of sorts this year.

The Interim Union Budget for 2024-25 has
budgeted gross market borrowing of `14.1 lakh crore
during 2024-25 (net market borrowing of `11.8 lakh
crore).

What I mean by that is the gross number is lower but the net one is the same.

Inflation

We can start with a reflection on past analysis of this area for India. The price of onions in particular and vegetables generally.

Perishable items (non-durable with a 7-day recall7
), which include vegetables, spices, fruits and other food items such as milk, meat and fish and prepared meals, contributed most to goods inflation variability.

We are back to the impact of the monsoons. But looking deeper we have only seen a minor decline in inflation so far.

Headline CPI inflation moderated to 5.3 per cent in
October 2023-February 2024 from an average of 5.5
per cent in H1:2023-24

It was 5.1% in January and February but progress is slow and volatile due to the food price impact. We can stay with that theme as we look at the measure central bankers love.

Core inflation (i.e., CPI
excluding food and fuel) has, however, been on a
steadily declining path. In February 2024, it fell to
3.4 per cent, among the lowest prints in the current
CPI series (2012=100), driven by both core goods
and services components

There is a particular problem in India with this as you are excluding so much of the index.

Food and beverages (weight of 45.9 per cent in
the CPI basket) inflation

Plus so much of the population in a country with many that are poor. That is before we get to the reality that the recent inflationary burst was driven by energy and then food prices.

A warning sign is flashing from the oil price too. This morning Brent Crude Oil futures are above US $90 per barrel.

Taking into account these factors, the baseline assumption for crude price (Indian basket) is retained at US$ 85 per barrel.

Policy Decision

After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a 5 to 1 majority to keep the policy repo rate unchanged at 6.50 per cent. …….The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Governor Dias also told us this about inflation.

The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis.

Comment

There is a fair bit to consider here.There were grounds for a rise in interest-rates as we consider the money supply growth in spite of this.

With the cumulative rate hike of 250 basis points (bps) undertaken during May 2022-February 2023 working its way through the economy,

I see some suggesting that interest-rate cuts are on their way but there are issues with that.

INDIAN RUPEE WEAKENS PAST 83.45 AGAINST U.S. DOLLAR TO HIT RECORD LOW ( @PIQSuite )

A weaker Rupee makes oil even more expensive which as India imports so much poses another question even with cheaper Russian imports.

Plus there are other factors to consider as we note another round of demonetisation.

The growth in currency in circulation (CiC) decelerated to 4.1 per cent from 7.8 per cent a year ago, reflecting the
withdrawal of `2000 banknotes.

Perhaps they willbe replaced by e-Rupees.

#RBI will soon allow to deposit cash through Cash Deposit Machines using #UPI. RBI is making Central Bank Digital Currency Retail, accessible to non-bank payment system operators. This will also facilitate testing the resiliency of CBDC platform to handle multi-channel transactions. ( All India Radio News)

 

The UK Public Finances continue to improve as debt interest falls

Today our focus remains on the UK but not for the reason that you might think. I am not expecting an interest-rate change from the Bank of England today although the cat has been put amongst the central banking pigeons with this announcement.

The Swiss National Bank is lowering the SNB policy rate by 0.25 percentage points to 1.5%.
The change applies from tomorrow, 22 March 2024.

So someone was willing to move before the US Federal Reserve and I think one reason for that comes from the currency position.

With its decision, the SNB is taking into account the reduced inflationary pressure as well as
the appreciation of the Swiss franc in real terms over the past year.

As an aside it means that what were the “Currency Twins” have very different policies this week with the Japanese raising interest-rates and the Swiss cutting them.

Returning to the UK we have some more improving data on the public finances.

Public sector net borrowing excluding public sector banks (borrowing) was £8.4 billion in February 2024, £3.4 billion less than in February 2023.

I mean that on two counts and the most obvious is the fall compared to last year. But also we spent a period where monthly borrowing was not only in the double-digits but comfortably so and we now look to have left that trend.

Monthly Data

Looking at the numbers we see that receipts were pretty strong.

Central government’s receipts were £86.4 billion in February 2024, £7.2 billion more than in February 2023.

In terms of what areas were strong we see that Income Tax was.

with increases in Income Tax, Corporation Tax and Value Added Tax (VAT) receipts of £3.5 billion, £1.9 billion and, £0.6 billion, respectively

In spite of the fact that the Self Assessment numbers were not.

SA Income Tax receipts in February increased by £0.8 billion to £3.9 billion, bringing the total for January and February 2024 to £25.5 billion, £0.4 billion more than in the same two months in 2023.

One interesting nuance is that Capital Gains Tax has been weaker in the self-assessment numbers.

SA Capital Gains Tax receipts in February increased by £0.2 billion to £2.2 billion, bringing the total for January and February 2024 to £13.6 billion, £1.2 billion less than in the same two months in 2023.

On the other side of the coin government spending is more under control.

Central government’s total expenditure was £89.6 billion in February 2024, £2.9 billion more than in February 2023.

There is a nuance as there is still an impact from the previous inflation surge.

net social benefits paid by central government increased by £5.9 billion to £25.0 billion, largely because of inflation-linked benefits uprating and around £2 billion in cost-of-living payments……..central government departmental spending on goods and services increased by £3.2 billion to £34.0 billion, as inflation increased running costs.

But on the other side of the coin the past energy subsidies have fallen heavily.

subsidies paid by central government reduced by £4.9 billion to £2.2 billion………payments recorded under central government “other current grants” reduced by £2.3 billion to £1.5 billion, largely because of the cost of the previous year’s Energy Bills Support Scheme

Also debt interest continues its decline.

interest payable on central government debt reduced by £1.1 billion to £6.8 billion, largely because the interest payable on index-linked gilts rises and falls with the Retail Prices Index

The decline in inflation as measured by the Retail Prices Index is the main player here.

Capital uplift in February 2024 was £2.5 billion reflecting the 0.5% increase in the RPI between November and December 2023.

That compares with £5.2 billion in February 2022 and £3.4 billion in February last year. Looking ahead we know that better numbers are coming via the three month lag used here. So the larger monthly fall in January that in 2023 and the smaller rise in February compared to the previous year will be in future numbers.

The Financial Year so far

We are now seeing numbers below that of the previous year.

Borrowing in the financial year-to-February 2024 was £106.8 billion, £4.6 billion less than in the same eleven-month period a year ago, and the lowest for four years in nominal terms.

That comes in spite of an upwards revision of £1.8 billion to the local government numbers. Rather awkwardly due to beneficial revisions in the meantime we are doing a lot better than we thought at the time.

Since our Public sector finances, UK: March 2023 bulletin published on 25 April 2023, we have reduced our estimate of borrowing for the 12 months to March 2023 (financial year ending (FYE) 2023) by £11.2 billion, from £139.2 billion to £128.0 billion.

Bank of England QE

This appears in these numbers in a rather confusing fashion.

This was partially offset by a £22.5 billion Bank of England (BoE) surplus and balanced by remaining subsectors.

As what HM Treasury has paid is public-sector neutral.

The borrowing of both of these subsectors is affected by payments totalling £44.4 billion made by central government to the BoE over the last eleven months under the Asset Purchase Facility Fund (APF) indemnity agreement.

National Debt

This too has been made more complex by the activities of the Bank of England.

Debt was provisionally estimated at around 97.1% of the UK’s annual gross domestic product (GDP) at the end of February 2024, 2.3 percentage points more than at the end of February 2023, and remains at levels last seen in the early 1960s.

If you take out its activities then the debt is quite a bit lower.

Excluding the Bank of England, debt was £2,423.5 billion, or around 88.5% of GDP, £236.0 billion (or 8.6 percentage points) lower than the wider measure.

The main issue to my mind is over the Term Funding Scheme  This is presently £150 billion and has been declining by at least £6 billion per quarter in the last year. So it flatters the debt numbers when in fact it was never really borrowing as one would usually understand it in the first place. One could say put in a 10% margin as security but I think that is it.

Comment

The UK public finances have seen several months now where they have turned for the better. This morning has brought some further news which should reinforce this.

The survey data are indicative
of first quarter GDP rising 0.25% to thereby signal a
reassuringly solid rebound from the technical recession
seen in the second half of 2023. ( S&P PMI)

There is some spurious accuracy in them using a second decimal place but any growth is welcome and the data so far suggests around 0.3% GDP growth for the first quarter of 2024. I rather suspect the Bank of England will follow the US Federal Reserve in hinting at interest-rate cuts later in the year as well.

There is a possible challenge to this if National Insurance is scrapped as the government has tried to hint at. To be fair this looks like a brain fart from a Chancellor splashing around but only time will tell.

Finally you may have spotted that I have not mentioned that the first rule of OBR Cub is that the OBR is always wrong and it is because of this.

On 6 March 2024, the Office for Budget Responsibility (OBR) published its latest outlook for the economy and public sector finances. The statistics in this bulletin do not yet fully reflect these updated forecasts,

Perhaps they have got on the phone to the Office for National Statistics and asked them not to publish the forecasts next to the out turns.

 

What will we learn from Chair Powell about US interest-rates today?

Today the main economic agenda will be set in the United States. I am not referring to last night’s primaries but rather the role of the US Federal Reserve in setting interest-rates which start a game of follow the leader. You could say we will have an example of the latter earlier as the Bank of Canada will announce its decision on interest-rates at around the same time. This means that when Federal Reserve Chair Jerome Powell gives testimony to Congress on Capitol Hill his words will have an impact around the globe.

The disciplining factor is the US Dollar in its role as the setter of commodity prices. So if you diverge from US monetary policy you see your currency weaken and you get more inflation via higher commodity prices. A nuance here is that it looked at the turn of the year that we might be on the way out of that situation in the sense that the first interest-rate cut was expected this month. As investors put on New Year trades in the bond market the ten-year yield went below 3.8% as compared to the present Federal Reserve interest-rate range from 5.25% to 5.5%. But now that euphoria is gone and the yield is 4.17%. So singed fingers for the over excited but it means that the US Dollar is still a disciplining factor. For example the ECB will no doubt give a variety of reasons for holding interest-rates unchanged tomorrow but the primary one is that it is afraid of a Euro decline if it cuts interest-rate first.

It’s the economy stupid!

The famous quote from Bill Clinton began to echo again as it emerged that US GDP had been on the march.

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the fourth quarter of 2023…..Measured from the fourth quarter of 2022 to the fourth quarter of 2023, real GDP increased 3.1 percent during the period, compared with an increase of 0.7 percent from the fourth quarter of 2021 to the fourth quarter of 2022. ( US BEA)

There is a link to it being Budget Day in the UK because I have regularly pointed out that Budget’s in the past have assumed 3% annual GDP growth because that makes pretty much any fiscal policy look good. The UK has been nowhere near that but as you can see above the US managed it last year. There is an additional kicker in that the numbers were very different to the leading indicator provided by the Conference Board which had suggested a recession was on its way as 2023 moved into 2024.

If we look ahead that does not appear to be in the offing either.

 Strong growth in the final quarter of 2023 and the continued resilience of the US labour market in January have meant economists polled by Bloomberg now expect gross domestic product to expand by 2 per cent this year, about twice the pace they expected at the end of 2023. ( Financial Times)

Yesterday the S&P PMI report was perhaps even more bullish.

“A further robust expansion of service sector activity in
February follows news of faster manufacturing output
growth. The goods and services producing sectors are
collectively reporting the sharpest growth since last
June, hinting at a further quarter of solid GDP growth.”

So not the surge seen in later summer but the US economy appears to be growing solidly. The latest Atlanta Fed report did show a dip, but most other economies would love to be debating between 2% and 3%.

Inflation

There is a slightly different story here.

From the same month one year ago, the PCE price index for January increased 2.4 percent. Prices for services increased 3.9 percent and prices for goods decreased 0.5 percent. Food prices increased 1.4 percent and energy prices decreased 4.9 percent. Excluding food and energy, the PCE price index increased 2.8 percent from one year ago.

The annual numbers have declined steadily from the peak around 7% and in isolation interest-rates would not be at these levels in response to it. You could argue that the monthly rises of 0.3% for the headline and 0.4% for the core are more concerning but looking back we are trending lower as the last three months of 2023 saw the headline rise by only 0.1%.

There are obviously concerns about events in the Red Sea triggering inflation plus there was this in the PMI survey.

A concern is that alongside this faster growth, the
survey has seen price pressures revive. Although average
prices are still rising at one of the slowest rates seen
over the past four years, the rate of inflation picked up
for goods and services alike in February.

But even so there is scope for cuts except with the economy strong the urgency has weakened.

Boom! Boom! Boom!

Another factor here is US fiscal policy which is expansionary and stimulatory.

In CBO’s projections, the federal budget deficit grows from $1.6 trillion in fiscal year 2024 to $2.6 trillion in 2034. Deficits also expand in relation to the size of the economy, from 5.6 percent of gross domestic product (GDP) in 2024, when the collection of certain postponed tax payments temporarily boosts revenues, to 6.1 percent of GDP in 2025.

I counsel caution about the exact numbers as the Congressional Budget Office like the UK OBR has plenty of errors on its record. But what would be considered large deficits are present policy and any rise in bond yields or slowing of the economy would make the numbers look worse quite quickly.Oh and take care with their debt numbers as they exclude the holdings of the US Federal Reserve.

Federal debt held by the public increases each year in CBO’s projections, swelling to an all-time record of 116 percent of GDP in 2034. In the two decades that follow, growing deficits cause debt to soar to 172 percent of GDP by 2054.

There are other signs of what might be called boom time as well.

#Bitcoin hit a fresh all time high of $69,210 before reversing lower less than 2 minutes later. The new all time high came with a massive volume spike, with $87 BILLION traded over the last 24 hours. This volume spike marks a 61% jump in volume and since then, prices are down ~$5,000. ( @KobiessiLetter)

This is a boom signal in two respects. Firstly the new high and secondly the trading volumes and price moves which indicate quite a party is going on.

We can also note the US stock market which fell yesterday but has been hitting new highs with the breadth often based on just 7 companies.

Comment

As you can see the Federal Reserve has received good news in terms of the US economy. Growth has been strong and with such growth you might have expected inflation to be higher. That does pose a problem for interest-rates though. On the one hand they look to high for inflation prospects particularly if you allow for a falling money supply. On the other they will fear what will happen to asset prices if they start to cut interest-rates. But then again the RRP ( Reverse Repo) which has been oiling the economic wheels looks set to run out in May/June.

On that road what looks good starts to get really rather awkward because what they need to do is look ahead rather than be imprisoned by what is happening now. Also internationally it creates a problem as the Euro area for example needs lower interest-rates but is being forced to wait. But I think it is also true that we need to have a think about not only what is the impact of higher interest-rates but how long it will take to happen?

 

 

It is going to be a tough week ahead for the ECB and Euro area economy

Next week the ECB meets to decide on interest-rates and we can begin our analysis with this morning’s inflation release for the Euro area.

Euro area annual inflation is expected to be 2.6% in February 2024, down from 2.8% in January according to a flash estimate from Eurostat, the statistical office of the European Union.

As you can see it has edged closer to the target of 2% ( literally 1.97% for those who recall former ECB President Trichet). If we look back we that there was a large drop last October when it fell to 2.9% and since then has been in the range 2.4% to 2.9%. In terms of reasoning much of this has been due to the unwinding of past energy subsidies as happened in Germany in January and this month in Belgium.

The main price increases this month were related to natural gas, for which inflation went from -51.9% last month to -3.6% in February. “Compared to last month, natural gas prices are up 44.6%,” the agency noted. Electricity inflation increased to -12.2% from -31.7% in January and electricity prices are up 7.7%. “These increases are due to the ending of the basic electricity and natural gas package.” ( Brussels Times)

So we can start with a bit of an itchy shirt collar for the ECB as this does not really justify its 4% Deposit Rate. If we look into the detail I think that is confirmed.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in February (4.0%, compared with 5.6% in January), followed by services (3.9%, compared with 4.0% in January), non-energy industrial goods (1.6%, compared with 2.0% in January) and energy (-3.7%, compared with -6.1% in January).

Food prices for example only rose by 0.1% in February which was why the annual rate dropped so much for its category. So hopefully we are beginning to see the impact of lower food commodity prices feed into the consumer inflation measures.

The FAO Food Price Index* (FFPI) stood at 118.0 points in January 2024, down 1.2 points (1.0 percent) from its revised December level, as decreases in the price indices for cereals and meat more than offset an increase in the sugar price index, while those for dairy and vegetable oils only registered slight adjustments. The index stood 13.7 points (10.4 percent) below its corresponding value one year ago.  ( UN)

Not everything has fallen as this from Eurostat earlier this week shows.

In January 2024, the price of olive oil in the EU was 50% higher than in January 2023.

The price of olive oil skyrocketed in the second half of 2023 with a 37% increase in August (compared with August 2022). This trend accelerated in September (+44%) and October (+50%).

Also there is bad news for chocoholics in the offing from the rise in cocoa prices. In fact according to Bloomberg we have a case of hello darkness my old friend.

When Mars Inc. made a quiet tweak to its popular Galaxy chocolate bar last year, shaving 10 grams off the standard product size and repackaging the leaner treat without lowering the price, UK shoppers were surprised—but cocoa traders weren’t.

Yes more shrinkflation is around and Bloomberg is really out of touch if it thinks shoppers have not seen it before.

Economic Growth

There has been more awkward news for the ECB from this area today and I am sure many eyes will have been waiting for the German numbers.

HCOB Germany Manufacturing PMI at 42.5 (January: 45.5). 4-month low.
HCOB Germany Manufacturing PMI Output Index at 42.3 (January: 45.7). 4-month low.
Fastest rate of factory job losses since August 2020; Supplier delivery times continue to improve.

So things started badly there with the detail of the PMI telling us this.

“All hope has been dashed – for the moment. After a steady increase of the PMI over the last half a year, the index plunged to its lowest point since last October. The drop was the result of a broad-based deterioration of indicators like the accelerated fall in new orders, the faster downturn in output and the more aggressive trimming of jobs. The widespread nature of the downturn offers little hope for a turnaround in the near future.”

We have been expecting a type of deindustrialisation due to high energy prices but I am not sure the Eurocrats did. As we look wider it is nice to see a better phase for Greece.

The strongest performances were seen in the periphery of
the eurozone, with Greece and Ireland recording their best expansions for 24 and 20 months.

But the overall number at 46.5 suggests what Taylor Swift would call “Trouble,Trouble,Trouble”.

“The eurozone’s one-year industrial recession is not coming to an end. Output has declined again at the same pace as the previous month, mainly due to the heavyweights Germany and France. Spain, by contrast, is the first of the leading four euro countries to re-enter growth territory. On a slightly more positive note, the decline in new orders in the Eurozone has softened somewhat, offering a glimmer of hope for a potential demand recovery in the future.“

ECB President Lagarde

Christine Lagarde spoke to the European Parliament earlier this week and told them this.

However, there are increasing signs of a bottoming-out and some forward-looking indicators point to a pick-up later this year.

As we know she looks at the PMIs this has not had a particularly good day. Actually she was then back in line with the PMI report with the last bit of her view on employment.

Despite the sluggish economy, the labour market has remained resilient. Unemployment stood at a historical low of 6.4% in December amid robust demand for labour, which is, however, showing some signs of weakening.

As so often from her that is not very consistent. I also wonder if any at the Parliament reminded her that she called inflation a “hump” and that interest-rates would not rise. Before it soared into double-digits in annual terms and she rushed to raise them to 4%..

Returning to the economic growth issue she seems determined to force more Euro area deindustrialisation.

As energy security becomes imperative, Europe will need to boost the roll-out of renewables by increasing investment in clean energy and green technologies, such as green hydrogen and smart energy grids.

That has another consequence because the ECB has been telling Euro area governments to tighten fiscal policy to help the fight against inflation.But now there seems suddenly to be plenty of fiscal space.

The European Commission estimates that an extra €620 billion per year will be needed to finance Europe’s environmental and climate objectives, while an additional €125 billion will be required for the digital transition.^[1] But making these investments, as well as addressing shortcomings in the functioning of the financial system, requires further progress on deepening our Economic and Monetary Union, something you highlight in your draft resolution.

Comment

We came into 2024 with financial markets full of optimism for interest-rate cuts this month. Now we are here they have if not vanished been put on the back burner by the ECB when the economic situation is worse and the inflation one calmer. Thus it is going to be a difficult meeting as the ECB tries to explain why it wants to be as slow to cut interest-rates as it was to raise them.

In an interview (transcript here) on the margins of a EUROFI conference, Kazāks, who heads Latvijas Banka, readily acknowledged that authorities saw ‘very clearly that there are disinflationary processes at work and that monetary policy transmission is effective.’

‘We are in a relatively good situation’, he continued. ‘But can we already say that we are done? No, not yet.’ ( Reuters)

Meanwhile the anti-corruption programme seems to require further work.

On Thursday (Feb 29), Politico revealed that Vazil Hudák, the EIB Vice President who signed a EUR 200 million loan for the airport operator in December 2018, joined the Budapest airport’s board of directors mere three months after leaving the Bank and during his cooling-off period mandated by the Bank’s code of conduct. 

 

 

The economy of Germany is seeing something of a depression

Some mornings the economic news sets something of its own agenda and today has been an example of that since this was released earlier.

HCOB Flash Germany Manufacturing PMI Output Index(4) at 42.1 (Jan: 45.7). 4-month low.

That provided quite a bit of food for thought as we had come into 2024 thinking that things were improving as for example natural gas prices have been falling.For example it reinforces my article on Monday about German deindustrialisation. Also it is the stated position of the ECB that “things can only get better” to quote D’Ream.

However, some forward-looking survey indicators point to a pick-up in the year ahead.

That was from the 15th of this month at the European Parliament where Christine Lagarde repeated almost word for word what she had said at the policy press conference at the end of last month. Indeed back at the press conference she went further.

I don’t know exactly what PMI numbers you’re referring to because the most recent PMI numbers are actually a little indication that things are coming in place for recovery in 2024. So if you have other PMI numbers that I’m not aware of, then let me know. But you know, when I look at the composite PMI output, it’s higher than it was the month before. If I look at PMI future output, it’s north of 50. So maybe you have better information

There was something of a swerve in the second last sentence because even if a PMI is higher than last time if it is below 50 it shows another contraction, just one at a slower rate. Indeed this morning’s update for Germany is the weakest of this phase.

The headline HCOB Flash Germany Composite PMI Output Index registered below the 50.0 no-change threshold for the
eighth month in a row in February. At 46.1, down from January’s 47.0, its latest reading indicated the fastest rate of contraction since October last year.

As the German economy shrank by 0.3% at the end of 2023 then such a number suggests more of the same and perhaps worse. Regular readers will know I take these numbers as a broad brush lacking precision but they will also know that the ECB has more faith in them. Indeed President Lagarde illustrated that by the detail she identified above. In fact it was not only manufacturing which weakened.

The decline in manufacturing production reaccelerated midway through the opening quarter, with the
respective seasonally adjusted output index retreating sharply from January’s eight-month high of 45.7 to 42.1. Business activity also fell in the service sector, although the rate of contraction was only modest and slowed from the previous month (index at 48.2).

In fact her argument that things will get better had trouble with this part of the update.

As was the case with output, new business in the German private sector declined at the quickest pace for four months in February. Reports from surveyed firms highlighted general reluctance among customers amid economic uncertainty and tight financial conditions. New orders fell across both monitored sectors, but particularly sharply in manufacturing where the rate of contraction accelerated markedly from the previous month to the fastest since last November. There was a further broad-based
decrease in new export business.

As you can see it seems unlikely that there will be much of a change in the first quarter and into the start of the second one. Presumably President Lagarde will now be pointing to this.

Driven by a further strengthening of service sector optimism, overall business expectations improved to a ten-month high in February. The result did, however, mask a deterioration in manufacturing sentiment, which turned pessimistic for the first time since last November and kept overall business confidence still below its long-run trend.

The fundamental problem with this is that the ECB has just experienced a catastrophic failure via insisting that inflation expectations were a better guide than rising inflation and as Kelis put it.

Might trick me once
I won’t let you trick me twice
Might trick me once
I won’t let you trick me twice, no

Indeed the release does address the optimism issue directly.

“Looking ahead to 2024, the outlook for the German economy isn’t exactly bright. Although the HCOB Flash Composite
PMI’s expectations for future output are still above 50, they’re significantly lower than its long-term average.”

German Bundesbank

We can look at the situation via Monday’s monthly report from the Bundesbank which told us this.

Some headwinds will probably persist into early 2024 as well and economic output may decline again somewhat in the first quarter.

Having told us this then that means a recession.

German economic output contracted in the final quarter of 2023, according to the February Monthly Report.

But then apparently not according to them.

While this would mean the ongoing period of weakness in the German economy following the start of the Russian war of aggression against Ukraine would continue, there is still no evidence of a recession in the sense of a persistent, broad-based and distinct drop in economic output and no such recession is expected either, the economists write.

That makes them look to be in denial because if GDP went -0.1% and then -0.1% maybe you could argue it is marginal. But -0.3% and then as we stand looking at something that may well be similar that is much more clear cut.

Moving onto the detail they too had concerns about manufacturing.

Order intake has been weak for some time now, and is likely to be a notable factor increasingly impacting on industrial output. Surveys by the ifo Institute show that the share of manufacturing firms reporting a shortage of orders has risen steadily since April 2023, reaching 37% at the end of the period under review.

So an industrial revival looks to be some way off and then they blame themselves for it.

In addition, investment was dampened by higher financing costs and the end of the environmental bonus. Higher interest rates and unfavourable weather conditions featuring high levels of precipitation also weighed on construction output and construction investment.

Comment

We have a new type of reality here. Those who have followed the Euro area since its start will know of the argument that ECB monetary policy was set for Germany. That meant that some suffered and contributed to the Euro area crisis in the early part of the last decade as the Greek economy and the housing markets of Spain and Ireland saw boom and then bust. Now monetary policy with an interest-rate of 4% is nit being set for Germany which may be in something of a depressionary period or as the Bundesbank puts it.

 Fourth-quarter real gross domestic product (GDP) fell by a seasonally adjusted 0.3% on the quarter according to the Federal Statistical Office’s flash estimate, after virtually stagnating in the first three quarters of 2023.

So Germany on a stand alone basis would be looking for interest-rate cuts and that is before we get to issues like the problems of some of its banks in the commercial property arena.

Contagion to the Aareal Bank in Germany is spreading

Still surprised that this is not getting more attention outside of Germany ( @AndreasSteno)

So we now seem to have ECB interest-rates set for the rest of the Euro area rather than Germany which is quite a change. Also the ECB has its own issues at the moment.

After years of profits, in 2023 we posted a loss of €1.3 billion due to interest rate rises needed to combat inflation. Our mandate is to maintain price stability, not to make profits. We can effectively operate and fulfil our mandate regardless of losses.

The Bank of England has driven UK GDP into a recession

After a couple of days of pretty good economic news for the UK we have stumbled this morning, because this is rather disappointing.

UK gross domestic product (GDP) is estimated to have fallen by 0.3% in Quarter 4 (Oct to Dec) 2023, following an unrevised fall of 0.1% in the previous quarter.

So we have fallen into a recession as it turned out that the whole quarter was worse than we had been previously told.

Monthly GDP is estimated to have fallen by 0.1% in December 2023, following a growth of 0.2% in November (revised down from 0.3% growth) and a fall of 0.5% in October (revised down from a 0.3% fall).

As you can see the driving force of the contraction came in October which according to the monthly data saw a sharp decline of 0.5%. Looking into the detail of the revisions it was Services at -0.2% worse than we thought which mostly did it, although all the main sectors were revised lower.

Quarterly Details

As you can see all the main sectors fell in the latest quarter.

In Quarter 4 2023 services, production, and construction contributed negatively to growth. Across Quarter 4, 12 out of 20 of the sub-sectors experienced a contraction, up from 10 sub-sectors in the previous quarter.

Usually it is the Service sector which is the main influence on the numbers but this time around it was the large falls in production and construction that made this quarter under perform its predecessor.

The services sector is estimated to have fallen by 0.2% in the fourth quarter of 2023, following a fall of 0.2% in Quarter 3 2023. The production sector is estimated to have fallen by 1.0%, following growth of 0.1% in the previous quarter. Construction output fell 1.3% in Quarter 4 2023, following growth of 0.1% in Quarter 3 2023.

Looking deeper into the Service sector we see that it was in decline for most of last year.

We now estimate that services output decreased for three consecutive quarters, with a fall of 0.2% in the latest quarter

The weak retail sales numbers particularly for December were an influence.

The largest contributor to the fall in total services was a 0.6% fall in the wholesale and retail trade; repair of motor vehicles and motorcycles sub-sector. This was largely because of a 1.3% fall in wholesale trade, except of motor vehicles and motorcycles and a 0.9% fall in retail trade, except of motor vehicles and motorcycles.

Although the largest percentage decline was here.

The fall in Quarter 4 2023 was mainly driven by a 3.4% fall in other personal services, where we have seen particular weakness in hairdressing and other beauty treatment over the Christmas period compared with usual.

In addition we seem unable to escape the consequences of measuring education output in the way we do.

Education also contributed negatively to the fall in services in Quarter 4 2023, with a decline of 0.8% partially attributed to a drop in school attendance.

The Consumer sector was weak as well.

Overall, consumer-facing services fell by 0.7% in Quarter 4 2023 and this was largely driven by falls in food and beverage service activities and retail trade, except of motor vehicles and motorcycles.

Not everything fell and there is an intriguing  hint about the housing sector below.

The largest positive contribution to services growth was from administrative and support service activities, which increased by 0.6%, driven by growth of 6.9% in rental and leasing activities.

Production

This had a really rough quarter which essentially was an October plunge.

The production sector is estimated to have decreased by 1.0% in the latest quarter after growth of 0.1% in Quarter 3 2023 (unrevised from our previous publication). This reflects a 1.4% fall in October, despite growth in November (0.5%) and December (0.6%).

My first thought is of higher energy costs hitting as winter approaches which does coincide with higher wholesale Has prices back then. I am afraid that manufacturing was a bit of a tale of woe.

Manufacturing output is estimated to have fallen by 0.9% in Quarter 4 2023 after four consecutive quarters of growth. The largest negative contributors are a 7.0% decline in the manufacture of machinery and equipment n.e.c and a 4.7% fall in the manufacture of rubber and plastics products, and other non-metallic mineral products. However, there were some positive movements in manufacturing, as shown in Figure 5. In particular, the manufacture of transport equipment grew by 1.8%.

Furthermore the numbers below show how incompetent our energy policy has been. Just at the time we need every scrap of energy production we can get our hands on.

Elsewhere in the production sector, there was a 3.0% fall in mining and quarrying, which fell for the sixth consecutive quarter and a 2.6% fall in electricity, gas, steam and air conditioning supply.

The government has been doing something of a U-Turn in this area but the lead times are rather long for any new production.

Construction

Regular readers will know that these numbers are very unreliable due to the size of frequency of revisions here. But for those interested here they are.

Construction output is shown to have fallen by 1.3% in Quarter 4 2023 following growth of 0.1% (previously estimated to be 0.4%).

With the detail here.

The fall reflects a fall in new work of 5.0%, though there was growth of 4.0% in repair and maintenance. Within new work, private housing sees its fifth consecutive quarterly decline, falling 8.0% in the latest quarter.

So much for the official claims of more new house building.

Bank of England

This is a simply awful GDP report for the Bank of England which has ignored the warning signals being provided by the money supply data. This is what it told us earlier this month.

UK GDP is expected to have been flat in 2023 Q4.

Them being wrong is quite common although not usually by this much but there is a much deeper issue here. I pointed out yesterday that inflation has undershot their expectations and now economic growth has too. So the overall picture confirms what the money supply data has been telling us, which is that interest-rates are too high. Furthermore a couple of them seem to be smoking something very strong.

Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%.

Returning to Governor Bailey this from only yesterday looks even more out of touch now.

The Bank of England’s governor has said UK inflation remaining unchanged is “encouraging”, but he hinted it would not mean earlier interest rate cuts.

Andrew Bailey said inflation, which measures how prices rise over time, staying at 4% last month “pretty much leaves us where we were” ( BBC)

My issue with the policy is back to a regular point of mine which is the timing of all of this. The dithering calling inflation Transitory combined with mostly penny-packet rises means that the impact of the rises is arriving well after the inflation peak rather than with it or even better ahead of it. As an example the first interest-rate rise was of 0.15%. How miniscule does that seem now?

Plus there have been the QT bond sales driving UK bond yields higher in another clear mistake.

Comment

It has not been a good day for GDP releases as we woke up to news that Japan had also fallen into recession and in fact a deeper one than us ( totaling -0.9%). But the UK one is a consequence of establishment policy as in addition to the interest-rate rises as the Bank of England raised interest-rates to deal with past failures we also saw tax increases from Chancellor Jeremy Hunt.

Now we see that our fiscal policy looks set to tighten into a slowing economy as well which compounds the problem.

I wrote that on the 17th of November 2022 and I was pointing out the policy errors of the Bank of England back then too.

Those who follow my work will know that I have argued for some time that the Bank of England is in the process of making quite a mistake. It is that by delaying raising interest-rates for a year with its “Transitory” rhetoric it is now making the slow down worse.

Or as Bananarama and the Fun Boy Three put 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
It ain’t what you do, it’s the way that you do it
And that’s what gets results

The number for 2023 as a whole rather sums it up.

 Real GDP is estimated to have increased by 0.1% in 2023

 

The ECB has created an interest-rate dilemma for itself

The members of the ECB Governing Council will be meeting up today as they prepare for tomorrow’s interest-rate announcement. They have a problem in the sense that they are too early. I do not mean in the year but in this cycle and let me highlight that from this morning’s HCOB PMI business survey.

Business activity in the euro area fell at the slowest rate for six months in January, according to provisional PMI® survey data, albeit with downturns persisting in both manufacturing and service sectors amid further falls in new business. The overall contraction of new orders was nevertheless the smallest recorded since last June, helping stabilise employment levels and lift business optimism about the year ahead to an eight-month high.

It is not exactly auspicious to open with “fell at the slowest rate for six months” is it? If we look at the improvement in the numbers it is marginal and well within the error range.

HCOB Flash Eurozone Composite PMI Output Index
(1) at 47.9 (December: 47.6). 6-month high.

This leaves the Euro area as having experienced a recession at the end of 2023 and continuing to contract at the opening of 2024. At least according to the PMI survey and whilst I have doubts about the PMIs the ECB is much keener. I can recall both President Lagarde and Isabel Schabel referring to it in recent times.

The reading nevertheless suggests that the eurozone’s deepest contraction since 2013 (if early pandemic months are excluded) has persisted into the
new year.

Also we have a nuance in that the services sector might be weakening now.

Although services activity fell for a sixth straight month, the pace of decline gathering momentum slightly to register the steepest fall since last October, new business placed at service providers fell at the slowest rate since last July, providing a further hint of a cooling in the demand downturn.

The initial fall was via manufacturing and its fall has slowed but more services weakness would be a concern.

Adding to all of this was the consumer confidence figures released yesterday.

In January 2024, DG ECFIN’s flash estimate of the consumer confidence indicator remained broadly stable in the EU (0.2 percentage points (pps.) down compared to
December 2023), while it dropped by 1.0 pp. in the euro area . At -16.2 (EU) and -16.1 (euro area) points, consumer confidence is scoring well below long-term average.

-16.1 is not as bad as it looks at the average is around -11 but we see that any revival is not about to come from the consumer sector. At this point the Governing Council might be thinking who put interest-rates at 4%? Or to be more specific how did they get their timing so wrong as the main interest-rate effect is coming well after the inflation surge.

Leadership Problems

Politico saw a survey of ECB staff which did not make good reading for President Lagarde.

FRANKFURT — On the global stage, European Central Bank President Christine Lagarde still exudes the air of an international rockstar of finance, but back home her records just won’t sell.

Most participants in a trade union survey of ECB staff, seen by POLITICO, said they don’t think she’s the right person to head the ECB now, with 50.6 percent of respondents ranking her overall performance in the first half of her eight-year term as “very poor” or “poor.”

What was it about inflation soaring to double-digits whilst she made videos calling it a transitory hump that might have done that? There was further detail as to the state of play here.

Comments in the survey, which included responses from 1,159 of the ECB’s roughly 4,500 staff, point to widespread unhappiness about her wading too deeply into politics and using the ECB to boost her personal agenda, which hasn’t helped the central bank’s reputation.

Some of you may recall that President Lagarde claimed that she would lead a new collabarative policy at the ECB when she began her role. The media welcome extended to the Financial Times representative at the press conference praising her own brooch allowing her to describe herself as a wise owl. However the ECB staff have an alternative view.

“Christine Lagarde is generally reported as being an autocratic leader who does not necessarily act according to the values she proclaims,” IPSO said in its summary of the comments compiled in a report. It highlighted unhappiness at perceived double standards, for example in claims that staff are encouraged to speak up but are then rebuked if they openly share concerns.

Form this below we can see that the attempt at rebuking has begun.

An anecdote about executive board member Frank Elderson included in the report hints at why: After the launch of the survey, Elderson called the IPSO board to his office. “He challenged our legitimacy to ask questions regarding the personal performance of the President, as well as the asking of an assessment of the monetary policy side,” the report said.

Fiscal Policy

This is not formally part of the ECB mandate although this does not stop it giving advice to Euro area governments. Plus there was the famous letter from Governor Trichet to the Irish government back in the day which was of the “or else…..” variety. But all the QE bond buying made the ECB part of fiscal policy by subsidising borrowing costs.

These days it has moved onto bond spreads, but that too has fiscal consequences.

As long as the Euro zone doesn’t allow markets to set yields, high debt countries like Spain (ES), France (FR) and Italy (IT) will run big deficits, because – basically – they’re getting a subsidy to do so. The way to stop this is to get ECB out of the spread management business. ( Robin Brooks )

It is accompanied by a chart showing that in the year to the third quarter of 2023 Italy borrowed around 7% of GDP via its fiscal deficit. As I type this the UK ten-year yield is nearly 0.2% above the Italian one which makes me wonder about the implicit yield subsidy. However, there is a catch to this because with the level of the Italian national debt how does the ECB get out of this game? Should Italian yields rise then questions about its solvency would return.

Comment

The situation here is ordinarily one that would lead to the ECB cutting interest-rates tomorrow.If we switch to the money supply where broad money has been falling at an annual rate of  around 1% that is actually below the levels that accompanied the ECB moving to negative interest-rates.

But this raises a timing issue on two counts. The first is that this group of people raised interest-rates as recently as September. I pointed out it was a mistake at the time.

Although there was a curiosity because really they should be looking at 2025 now and they did this with that.

a downward revision for 2025.

On which basis they did not need to raise interest-rates. But I seemed alone in making that point. (15th September)

They cannot now cut interest-rates without making that increase look rather foolish. So they will choose their own reputation over reality.

Next up on the timing issue comes the value of the Euro. Whilst we have mostly moved out of the “King Dollar” phase it might undermine the Euro and thereby raise inflation to move before it does. So as Colonel Abrams put it.

I’m trapped
Like a fool I’m in a cage.
I can’t get out
You see I’m trapped

Strong UK GDP numbers for November raise hopes of avoiding a recession

This morning has brought some better economic news for the UK from the Office for National Statistics.

Monthly GDP is estimated to have grown by 0.3% in November 2023,

So on an initial level we had some growth and that does fit with the surveys that we received.

The S&P Global/CIPS Flash Composite Purchasing Managers’ Index (PMI) came in at 50.1 in November, up from October’s 48.7. As such, the index rose above the 50.0 no-change threshold, signaling an improvement in private sector operating conditions from the previous month. ( Focus Economics)

Looking ahead that is hopeful because the UK Composite PMI improved to 52.1 in December. The numbers do not correlate exactly so I am thinking of the broad sweep of reported improvement.

Services

If we now switch to the breakdown we see a familiar pattern

On the month, services output is estimated to have grown by 0.4% in November 2023

The numbers are usually driven by the services sector. In particular there was this.

The main contributor to the 0.4% monthly growth in services in November 2023 was information and communication, which saw growth of 1.5% on the month…. Five of the six industries within information and communication grew in November 2023, with the largest contributions for November coming from publishing activities (mainly attributed to the publishing of computer games) and telecommunications.

The next sector was a little unusual for these times as retail trade picked up.

Wholesale and retail trade; repair of motor vehicles and motorcycles grew by 0.5% in November 2023 following 0.2% growth in October 2023. This was mainly attributed to 1.3% growth in retail trade, excluding motor vehicles and motor cycles.

The professional sector also grew overall although there was a mixed pattern within it.

Professional, scientific, and technical activities grew by 0.6% in November 2023 following a fall of 0.7% in October 2023. The growth in November was mainly attributed to legal activities and advertising and market research growing by 1.7% and 2.4%, respectively.

These growths were partially offset by a monthly fall of 0.2% in financial and insurance activities and a fall of 0.2% in education in November 2023.

We also got a further breakdown for the consumer sector.

Output in consumer-facing services grew by 0.6% in November 2023,

We have already looked at the growth in retail trade, but apparently holidays and the like were off the list.

The largest negative contribution to consumer-facing services in November 2023 came from travel agency, tour operator and other reservation service and related activities, which fell by 3.6% in November 2023.

Production

This came to the party in November too.

On the month, production output is estimated to have grown by 0.3% in November 2023, attributed to growth in manufacturing output.

As you can see the manufacturing growth was particularly welcome after a period of decline.

Monthly manufacturing output rose by 0.4% in November 2023 following four consecutive monthly falls; there were increases in 9 of its 13 sub-sectors during November 2023.

Although some of it was the erratic nature of the pharmaceutical sector which as we have looked at many times does not fit a monthly schedule.

The largest contributing manufacturing sub-sectors to the monthly rise in November 2023 were “manufacture of basic pharmaceutical products and pharmaceutical preparations” and “manufacture of food products, beverages and tobacco”, which increased by 4.8% and 1.4%, respectively.

For completeness the construction numbers are below although it is an especially erratic series and care is needed.

In November 2023, monthly construction output is estimated to have decreased 0.2% in volume terms.

A Deeper Perspective

Some November growth was welcome because it meant that the economy was larger than a year before.

Monthly GDP grew by 0.2% in November 2023 compared with the same month last year. For comparison, monthly GDP fell by 0.1% in between October 2022 and October 2023 (revised down from a 0.3% growth in our previous publication).

There were some downwards revisions with the quarterly release so the annual growth we though we had disappeared. They combined with the weak October number mean that the rolling quarterly figure was poor.

Real gross domestic product (GDP) is estimated to have fallen by 0.2% in the three months to November 2023, compared with the three months to August 2023.

Looking Ahead

The situation for December looks positive. I have already pointed out the improvement in the December PMI and to that we can add these.

All to play for regarding output growth in Q4 given decent signs of activity in retail, hospitality & manufacturing sector. ( Simon French)

Looking further ahead to this year we have seen falls in mortgage rates with more arriving this week according to the Financial Times.

Barclays and Santander have announced cuts to their mortgage rates, adding to momentum for cheaper UK home loan deals after HSBC and Halifax reduced rates last week.  Santander led its announcement with a sub-4 per cent deal available to new and existing customers with a deposit of at least 40 per cent on a five-year fixed rate mortgage. It said its residential fixed rates would fall by up to 0.82 percentage points from Wednesday. Barclays will from Wednesday offer a two-year fix at 4.17 per cent, down from 4.62 per cent, for borrowers with a 40 per cent deposit. Its rates will fall by up to 0.5 percentage points across its residential range,

The situation with regard to energy prices is also positive but with a nuance. Even the military action last night against the Houthis has not affected gas prices much ( 1.5%). The overall picture for the continuous futures contract is of large falls since the peak in late October and the price has halved since then. The nuance is the structure of UK domestic energy pricing where we will not see the effect of that until April with January seeing a 5% rise. Sometimes you really couldn’t make it up….

Comment

Whilst the economic picture looks like it is improving the reality is that we have not seen much economic growth in recent times. That is something that seems to be a theme of the these days. What I want to look at now is do the monthly GDP numbers help or hinder us in trying to figure out what is going on in the UK economy. In some ways it is a nice to have but the graph below shows a clear problem.

If you look at the GDP line we were supposedly great in January and June but awful in March and July.That makes very little sense which is added to by us going -0.3% in October and then 0.3% in November. If we look deeper into the last 2 months there are various numbers which look curious.

November 2023 was information and communication, which saw growth of 1.5% on the month, following a 0.9% fall in October 2023. Five of the six industries within information and communication grew in November 2023, after all falling in October 2023,

As you can see there is a wild swing which makes little sense in terms of its size. Another way of looking at this is via one of the main ( services) surveys.

In November 2023, the turnover response rate for the MBS element of the services sector was 82.1%. …….For context, the average turnover response rate for the service sector in 2022 now stands at 97.0%.

That extra 15% may tell a different story to what is originally reported.