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…..

What can we expect next from the economy of France?

During the Euro area slow down France has mostly been able to avoid the limelight. This is because it has at least managed some economic growth at a time when Germany not always has. It may not be stellar growth but at least there has been some.

In Q2 2019, GDP in volume terms grew at the same pace as in the previous quarter: +0.3% (revised by +0.1% from the first estimate).

However  there are questions going forwards which plugs into the general Euro area problem which got a further nudge on Monday.

The IHS Markit Eurozone Composite PMI® fell to
50.4 in September according to the ‘flash’ estimate,
down from 51.9 in August to signal the weakest
expansion of output across manufacturing and
services since June 2013………The survey data indicate that GDP looks set to rise by just 0.1% in the third quarter, with momentum weakening as the quarter closed.

As you can see growth is fading and may now have stopped if the PMI is any guide and this was reflected in the words of the Governor of the Bank of France in Paris yesterday.

For the past ten years, there is little doubt that ECB monetary policy under Mario Draghi’s Presidency has made a decisive contribution not only to safeguarding the euro in 2012, but also to the significant recovery of the euro area since 2013. Over this period, more than 10 million jobs have been created. Our unconventional measures are estimated to add almost 2 percentage points of growth and of inflation between 2016 and 2020.

It is revealing that no mention is made of growth right now as he concentrates on what he considers to be past glories. He has rounded the numbers up too as they are 1.5% and 1.9% respectively. Let me give him credit for one thing though which is this although I would like him to say this to the wider public as well.

Since I am talking to an audience of researchers I should of course emphasise that such numbers are subject to uncertainty.

Also raising inflation in the current environment of weak wage growth is likely to make people worse and not better off.

France

The situation here was better than the Euro area average but still slowed.

At 51.3 in September, the IHS Markit Flash France
Composite Output Index fell from 52.9 in August,
and pointed to the softest expansion in private sector
activity for four months.

Actually manufacturing is doing okay in grim times with readings of 49.7 and 50.3 suggesting flatlining. The real fear here was that the larger services sector is now being sucked lower by it.

However, with services firms registering their
slowest rise in activity since May, fears of negative
spill over effects from the manufacturing sector are
coming to fruition. Any intensification of such effects
would likely dampen economic growth going
forward.

This leaves me mulling the record of Markit in France as several years ago it was criticised for being too pessimistic by the French government and more recently seems to have swung the other way.

What about fiscal policy?

This did get a mention in the speech by the Governor of the Bank of France yesterday.

Failing that, a second answer is for fiscal policy to step in. Fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long-term growth.

The problem with that argument is that even the French run IMF could not avoid pointing out this in July.

France’s public debt has been consistently rising over the last four decades, increasing by 80 percent of GDP since the 1980s to reach close to 100 percent of GDP at end-2018. This reflects the inability of successive governments to take full advantage of good times to reverse the spending increases undertaken during downturns.

Actually some of the IMF suggestions look rather chilling and perhaps in Orwellian language.

rationalizing spending on medical products and hospital services; improving the allocation of resources in education

Also and somewhat typically the IMF has missed one change in the situation which is that at present France is being paid to borrow. It’s ten-year yield went negative at the beginning of July and has mostly been there since. As I type this it is -0.32%. It still has to pay a little for longer terms ( the thirty-year is 0.48%) but as you can see not much.

So the situation is that France does have quite a lot of relatively expensive debt from the past but could borrow now very cheaply if it chose to do so.

Banks

Whilst he s referring to macroprudential policy it is hard not to have a wry smile at this from the Governor of the Bank of France.

 To start with, as of today, our toolkit is very much bank-centric.

Especially when he add this.

We are making some progress to extend macroprudential policy beyond the banking sector.

Returning to the banks they are just like elsewhere.

PARIS (Reuters) – Societe Generale (SOGN.PA) plans to cut 530 jobs in France by 2023, CGT union said in a statement.

Of course BNP Paribas has been taking some brokerage business and employees from Deutsche Bank although it has not be a complete success according to financemagnate.com.

Deutsche’s clients will receive letters explaining how the transfer will work. However, some of them have already moved to competitors such as Barclays, which has won roughly $20 billion in prime brokerage balances.

In a way the French banks have used Deutsche Bank as a shield. But many of the same questions are in existence here. How are they going to make sustained profits in a world of not much economic growth and negative interest-rates?

Unemployment

This is the real achilles heel of the French economy. From Insee

The ILO unemployment rate decreased by 0.2 points on average in Q2 2019, after a 0.1 points fall in the first quarter. It stood at 8.5% of the labour force in France (excluding Mayotte), 0.6 points below its Q2 2018 level and its lowest level since early 2009.

Whilst the falls are welcome it is the level of unemployment and the fact it is only now approaching the pre credit crunch levels which are the issue as well as this.

Over the quarter, the employment rate among the youth diminished (−0.3 points),

Whilst the unemployment rate for youth fell by 0.6% to 18.6% it is still high and the falling employment rate is not the best portent for the future.

Comment

So far the economy of France has managed to bumble on and unlike the UK and Germany avoided any quarterly contractions in economic output. If you look at this morning’s official survey then apparently the only way is up baby.

In September 2019, households’ confidence in the economic situation has increased for the ninth consecutive month. At 104, the synthetic index remains above its long-term average (100), reaching its highest level since January 2018.

Perhaps the fall in unemployment has helped and a small rise in real wages. The latter are hard to interpret as a change at the opening of the year distorted the numbers.

firms might pay a special bonus for purchasing power (PEPA) in the first quarter of 2019, to employees earning less than 3 times the minimal wage.

According to the official survey published yesterday businesses are becoming more optimistic too.

In September 2019, the business climate has gained one point, compared to August. The composite indicator, compiled from the answers of business managers in the main sectors, stands at 106, above its long-term mean (100)

So there you have it everything except for the official surveys points downwards. In their defence the official surveys have been around for a long time. So let me leave you with some trolling by the Bank of France monthly review.

French economic growth has settled into a fairly stable pace since mid-2018 of between 1.2% and 1.4% year-on-year . France has thus demonstrated greater resilience than other euro area economies, particularly Germany, where year-on-year growth only amounted to 0.4% in mid-2019. This growth rate should continue over the coming quarters: based on Banque de France business surveys published on 9 September, we expect quarter-on-quarter GDP growth in the third quarter of 2019 of 0.3%.

Rethinking The Dollar

I did an interview for this website. Apologies if you have any issues with the sound as the technology failed us a little and we had to switch from my laptop to my tablet.

 

 

 

 

Germany has become a weak link for the Euro area economy

This morning has focused our minds again on what has been one of the economic developments of the past eighteen months or so. This is the turn in the trajectory of the German economy which has gone from being what the Shangri-Las would call the leader of the pack to not only a laggard but maybe contracting. So let us get straight to the news,

The German economy contracted in September,
latest flash PMI data showed, as the downturn in
manufacturing deepened and service sector growth
lost momentum. Job creation meanwhile stalled as
firms reported weakening demand and pessimism
towards the outlook for activity. ( Markit PMI )

Manufacturing

If we start with this area then we have to address the fact that things were already really bad so that gives a perspective on the state of play. If we thought the worst was behind us then how about this?

September’s IHS Markit Flash Germany
Manufacturing PMI read 41.4, signalling the
sharpest decline in business conditions across the
goods-producing sector since the depths of the
global financial crisis in mid-2009. ( Markit)

The only time I can recall a series weaker than this was the Greek manufacturing sector which I recall going into the mid-30s back in the day as the economy collapsed, or if you prefer was rescued. I am sure that some there are having a grim smile at this turn of events although of course it will have side-effects for my subject of Friday.

The survey also tries to look ahead but that raises little hope and even adds to the gloom.

The survey showed a sustained decline in underlying
demand, with total inflows of new business falling
for the third month running and at the quickest rate
for seven years. Slumping manufacturing orders led
the decline, recording the steepest drop in more than
a decade in September,

If we switch to the official data we were told this earlier this month.

In July 2019, production in industry was down by 0.6% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In June 2019, the corrected figure shows an decrease of 1.1% (primary -1.5%) from May 2019.

As you can see there June was not as bad as thought only for the number to fall again in July meaning we can get some perspective from this.

-4.2% on the same month a year earlier (price and calendar adjusted)

This means that the index for industrial production is at 101.2 where 2015 = 100 which shows little growth and if we drop construction out of the numbers it falls to 99.5. So in broad terms what Talking Heads would call a road to nowhere. More specifically the seasonally and calendar adjusted figures peaked at 107.2 in May of 2018.

Also we see that the PMI numbers we looked at above are pretty consistent with the official orders data.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in July 2019 a seasonally and calendar adjusted 2.7% on the previous month…….

-5.6% on the same month a year earlier (price and calendar adjusted).

Services

This has been doing much better than the manufacturing sector. But we already know from the numbers above that it has not pulled the manufacturing sector higher so the troubling question is whether it pulled the service sector down?

Growth of business activity in the service sector
slowed sharply since August to one of the weakest
rates seen over the past three years……..Flash Germany Services PMI Activity Index at
52.5 (Aug: 54.8). 9-month low.

Sadly the answer is yes.

though notably there was also a drop in service sector new business – the first recorded since December 2014.

You may not be surprised to learn that much of the trouble is coming from abroad.

Lower demand from abroad also remained a key factor, with both manufacturers and service providers reporting notable decreases in new export orders during the month.

Bringing everything together brought a new development for the Markit PMI series.

“Another month, another set of gloomy PMI figures
for Germany, this time showing the headline
Composite Output Index at its lowest since October
2012 and firmly in contraction territory.
“The economy is limping towards the final quarter of
the year and, on its current trajectory, might not see
any growth before the end of 2019″

That is significant for them as they have been over optimistic for Germany throughout this phase. They have recorded growth when the official data has showed a contraction. Also if we look back to the opening of last year they gave us numbers in the high 50s showing very strong growth whereas as I pointed out on the 20th of last month the reality was this.

Actually back then we did not know how bad things were because the GDP numbers were wrong as the Bundesbank announced yesterday…….In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%).

In some ways it is harsh to point this out because the official data series was wrong too but the PMIs were also more optimistic than what we thought the numbers were then, and sadly were overall simply misleading.

Bonds

There has been an impact here this morning as Germany’s bond market has resumed its rally. The picture had been weaker for a while in an example of buy the rumour and sell the fact on ECB ( European Central Bank ) action. But today the ten-year yield has fallen to -0.58% and the whole curve has gone negative again with the thirty-year at -0.12%.So Germany is being paid to borrow at every maturity.

Comment

There are more than a few questions here and the Ivory Tower of the ECB has been instructed to look into the situation. From a Working Paper released this morning.

In the period from January 2018 to June 2019 the year-on-year growth rate of euro area industrial production (excluding construction) fell by 6.3 percentage points overall, from 3.9% to -2.4%. This is by far the largest fall recorded among major economies in that period……Among the largest euro area countries, the biggest declines were recorded by Germany (10.9 percentage points), the Netherlands (5.7 percentage points) and Italy (5.5 percentage points).

In a broad sweep what has been a long-running success for the Euro area which has been German production leading to the trade surplus has stalled and hit the brakes. Or as Markit put it.

The automotive sector was once again highlighted as a particular source of weakness.

As to the ECB it is looking rather impotent here. It has made its move with even lower interest-rates ( -0.5%) and more bond buying or QE but it was doing that when the German economy turned down at the opening of 2018. Also the hype about the new TLTRO and the issue of tiering for The Precious collapsed as the take-up was a mere 3.4 billion Euros.

Of course Germany could respond with fiscal policy. Here the outlook is bright as it has and is running a fiscal surplus and it would be paid to borrow. Yet it shows little or no sign of doing so. From time to time a kite is flown like the current one about more spending on renewable energy but then the wind stops blowing and the kite falls to the ground.

Meanwhile this morning’s monthly report from the Bundesbank seems rather extraordinary.

Moreover, from today’s vantage point, only a slight decline in GDP is to be expected overall, even including the second quarter. “Such a decline should currently be seen as part of a cyclical return to normality as the German economy emerges from a period of overheating,” according to the experts.

Podcast

 

 

 

 

 

 

What is the UK economic situation and outlook?

The UK is an example of so much going on in some areas albeit with so far no result but apparently not much in others. The latter category includes the real economy if the latest set of Markit PMI business surveys are any guide.

UK service providers indicated that business activity growth lost momentum during August and remained subdued in comparison to the trends seen over much of the past decade. The latest survey also revealed slower increases in new work and staffing levels, which was often linked to sluggish underlying economic conditions.

The slowing of the services sector added to contracting manufacturing and construction sectors to give us this overall result.

At 49.7 in August, the seasonally adjusted All Sector Output
Index dropped from 50.3 in July and registered below the
50.0 no-change mark for the second time in the past three
months……….t, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.

There are two elements of context here. The first is that this survey is not accurate enough to tell to 0.1% or to say 49.7 is any different to unchanged. Also we now that as a sentiment index it had a bit of a shocker during the last period of political turmoil in late summer 2016. Thus our conclusion is that the economy is weak and struggling but contracting? We do not yet know.

Car Registrations

There was some interesting news here summarised by Samuel Tombs of Pantheon.

Good news – car registrations were strong in August. The 1.7% y/y drop is consistent with a big seasonally-adjusted m/m% rise, as sales in Aug 2018 jumped ahead of new emissions testing rules. This points to car sales boosting q/q% GDP growth by a non-trivial 0.05pp in Q3.

So whilst the numbers were down on last year they were a solid improvement on July.

A Fiscal Boost

In perhaps the least surprising development this year the Chancellor Sajid Javid announced this yesterday.

The Chancellor has announced an increase in spending on public services for next year. Day-to-day spending on public services will grow by 4.1%, or around £13.8 billion, between 2019−20 and 2020−21 in real terms. This represents of a top-up of £11.7 billion to the provisional spending plans Mr Javid inherited from his predecessor, alongside a £1.7 billion top up to existing capital spending plans for 2020−21, meaning that total spending will be £13.4 billion higher next year than was planned in the spring. ( IFS )

If we switch to GDP as our measure then the planned increases were of the order of 0.6%. As we borrowed 1.1% of GDP in the fiscal year to March that points at 1.7% although as we were already spending more maybe more towards 2% of GDP. That is a little awkward for the Institute of Fiscal Studies which told us over the weekend the fiscal rules would be broken. Mind you as nobody else cares about them it is not that big a deal. Also the IFS seems quite keen on fantasies.

Making major spending decisions without the latest economic and fiscal forecasts is a risky move for the Chancellor. On the basis of forecasts from the spring, extra borrowing to fund today’s announcements could – just – be accommodated within the government’s fiscal targets. But the next set of forecasts from the OBR, due later this year, are likely to reflect a deterioration in the near-term outlook for the UK economy and public finances.

Just as a reminder the first rule of OBR club is that the OBR is always wrong. How has the IFS not spotted this? Mind you their head Paul Johnson was enthusiastically plugging the RPI news yesterday hoping that his 2015 Inflation Review might get pulled out the recycling bin and that it might have 17% of it made up of fantasy rents.

After all that I am not sure we can trust their view on austerity but for what it;s worth here it is.

This is enough to reverse around two thirds of the real cuts to day-to-day spending on public services – at least on average – since 2010, and around one third of the cuts to per capita spending.

Bank of England

Governor Carney was giving evidence to Parliament yesterday and it included this.

The negative impact of a no-deal Brexit will not be as severe as originally thought because of improved planning by the government, businesses and the financial sector, the Bank of England has said.

Governor Mark Carney told the Treasury select committee that the Bank now believes GDP will fall by 5.5% in the worst-case scenario following a no-deal Brexit – less than the 8% contraction it predicted in last November.

The Bank’s revised assessment of the possible scenarios also says unemployment could increase by 7% and inflation may peak at 5.25% if the UK leaves the European Union without a deal. ( Sky News )

Who could possibly have though that people and businesses would plan ahead? Of course when your own Forward Guidance has been so woeful maybe you have something of a block on that sort of thing. Also if I was Governor Carney I would have avoided all mention of a 7% Unemployment Rate after the 2013 Forward Guidance debacle on that subject.

Perhaps this is why some want to delay Brexit because in 2/3 years time at the current rate of progress the Bank of England will be forecasting growth from a No-Deal.

Also although he does not put it like that in the quote below is a confession that I am right about how falls in the Pound £ impact inflation.

It is likely that food bills will rise in the event of a no-deal Brexit, that is almost exclusively because of the exchange rate impact. Movements are quickly translated onto the shop shelf, and domestic prices, imperfect substitutes, also increase. That impact has lessened because of the new tariff regime the government has put in place.

Another goal I have slipped past their legion of Ivory Tower economists.

There was something else that was really odd from him via Bloomberg.

Mark Carney says there’s almost no chance of the Bank of England intervening in the foreign-exchange market to control swings in the pound

So why has the UK been building up its foreign exchange reserves then? They are now £66.8 billion.

Comment

The UK economy has been remarkably resilient in 2019 so far. We have had all sorts of Brexit and non-Brexit plans, the trade war and much else. Somehow we have got by. Financial markets are in flux as no sooner had the Financial Times started to cheer the way the UK Pound £ fell below US $1.20 it reversed and is now above US $1.23.

The FT has a problem because 1% moves lower in the UK Pound £ are a plunge and yet the 9% fall in the 2068 Index-Linked Gilt yesterday was described like this by economics editor Chris Giles.

Price of the 2068 index-linked gilt dropped today, but complete stability in market and prices still higher than a month ago – – showing those who claimed changing the RPI would kill the market to have exagerated wildly

I will ignore the second straw(wo)man bit and simply point out it has now fallen 13%. The losers will not be the “Gnomes of Zurich” as Chris claimed at the Royal Statistical Society but the ordinary pensioner looking for safety. It gives us a new definition for “complete stability” in my financial lexicon for these times.

The Investing Channel