Some much needed better economic news for France

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

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

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

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

Business surveys

The official measure released earlier told us this.

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

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

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

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

This is being driven by the service sector.

Also things should be improving as we look ahead.

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

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

Economic Growth

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

National Debt

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

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

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

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

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

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

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

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

Prospects

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

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

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

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

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

Right now they think this.

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

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

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

It only has one larger Euro area partner.

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

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

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

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

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

Comment

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

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

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

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

 

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How long before the ECB and Federal Reserve ease monetary policy again?

Yesterday brought something of a change to the financial landscape and it is something that we both expected and to some extent feared. Let me illustrate by combining some tweets from Lisa Abramowicz of Bloomberg.

Biggest one-day drop in 10-year yields in almost a year…..Futures traders are now pricing in a 47% chance of a rate cut by January 2020, up from a 36% chance ahead of today’s 2pm Fed release……….More steepening on the long end of the U.S. yield curve as investors price in more inflation in decades to come, thanks to a dovish Fed. The gap between 30-year & 10-year U.S. yields is now the widest since late 2017.

I will come to the cause of this in a moment but if we stick with the event we see that the ten-year US Treasury Note now yields 2.5%. The Trump tax cuts were supposed to drive this higher as we note that it was 3.24% in early November last year. So this has turned into something of a debacle for the “bond vigilantes” who are supposed to drive bond markets lower and yields higher in fiscal expansions. They have been neutered yet again and it has happened like this if I had you over to the US Federal Reserve and its new apochryphal Chair one Donald Trump.

US Federal Reserve

First we got this on Wednesday night.

The Federal Reserve decided Wednesday to hold interest rates steady and indicated that no more hikes will be coming this year. ( CNBC)

No-one here would have been surprised by the puff of smoke that eliminated two interest-rate increases. Nor by the next bit.

The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019. The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. ( Federal Reserve).

So as you can see what has become called Qualitative Tightening is on its way to fulfilling this description from Taylor Swift.

But we are never ever, ever, ever getting back together
Like, ever

More specifically it is being tapered in May and ended in September as we mull how soon we might see a return of what will no doubt be called QE4.

If we switch to the economic impact of this then the first is that it makes issuing debt cheaper for the US economy as the prices will be higher and yields lower. As President Trump is a fiscal expansionist that suits him. Also companies will be able to borrow more cheaply and mortgage rates will fall especially the fixed-rate ones. Here is Reuters illustrating my point.

Thirty-year mortgage rates averaged 4.28 percent in the week ended March 21, the lowest since 4.22 percent in the week of Feb. 1, 2018. This was below the 4.31 percent a week earlier, the mortgage finance agency said.

The average interest rate on 15-year mortgages fell 0.05 percentage point to 3.71 percent, the lowest since the Feb. 1, 2018 week.

Next week should be lower still.

Euro area

This morning has brought news which has caused a bit of a shock although not to regular readers here who recall this from the 27th of February.

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous.

The money supply numbers have worked really well as a leading indicator and better still are mostly ignored. Perhaps that is why so many were expecting a rebound this morning and instead saw this. From the Markit PMI business survey.

“The downturn in Germany’s manufacturing sector
has become more entrenched, with March’s flash
data showing accelerated declines in output, new
orders and exports……….the performance of the
manufacturing sector, which is now registering the
steepest rate of contraction since 2012.

The reading of 44.7 indicates a severe contraction in March and meant that overall we were told this.

Flash Germany PMI Composite Output Index at 51.5 (52.8 in Feb). 69-month low.

There is a problem with their numbers as we know the German economy shrank in the third quarter of last year and barely grew in the fourth, meaning that there should have been PMI readings below 50, but we do have a clear direction of travel.

If we combine this with a 48.7 Composite PMI from France then you get this.

The IHS Markit Eurozone Composite PMI® fell from
51.9 in February to 51.3 in March, according to the
preliminary ‘flash’ estimate. The March reading was
the third-lowest since November 2014, running only
marginally above the recent lows seen in December
and January.

Or if you prefer it expressed in terms of expected GDP growth.

The survey indicates that GDP likely rose by a modest 0.2% in the opening quarter, with a decline in manufacturing
output in the region of 0.5% being offset by an
expansion of service sector output of approximately
0.3%.

So they have finally caught up with what we have been expecting for a while now. Some care is needed here as the PMI surveys had a good start to the credit crunch era but more recent times have shown problems. The misfire in the UK in July 2016 and the Irish pharmaceutical cliff for example. However, central bankers do not think that and have much more faith in them so we can expect this morning’s release to have rather detonated at the Frankfurt tower of the ECB. It seems financial markets are already rushing to front-run their expected response from @fastFT.

German 10-year bond yield slips below zero for first time since 2016.

In itself a nudge below 0% is no different to any other other basis point drop mathematically but it is symbolic as the rise into positive territory was accompanied by the Euro area economic recovery. Indeed the bond market has rallied since that yield was 0.6% last May meaning that it has been much more on the case than mainstream economists which also warms the cockles of one former bond market trader.

More conceptually we are left wonder is the return to something last seen in October 2016 was sung about by Muse.

And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole

If we now switch to ECB policy it is fairly plain that the announcement of more liquidity for the banks ( LTTRO) will be followed by other easing. But what? The problem with lowering interest-rates is that the Deposit-Rate is already at -0.4%. Some central bankers think that moving different interest-rates by 0.1% or 0.2% would help which conveniently ignores the reality that vastly larger ones overall ( 4%-5%) have not worked.

So that leaves more bond buying or QE and beyond that perhaps purchases of equities and commercial property like in Japan.

Comment

I have been wondering for a while when we would see the return of monetary easing as a flow and this week is starting to look a candidate for the nexus point. It poses all sorts of questions especially for the many countries ( Denmark, Euro area, Japan, Sweden. and Switzerland) which arrive here with interest-rates already negative. It also leaves Mark Carney and the Bank of England in danger of another hand brake turn like in August 2016.

The Committee continues to judge that, were the economy to develop broadly in line with those projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Although of course it could be worse as the Norges Bank of Norway may have had a false start.

Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.0 percent:

But the real problem is that posed by Talking Heads because after the slashing of interest-rates and all the QE well let me hand you over to David Byrne.

And you may ask yourself, well
How did I get here?

 

The Bank of England is not “paralysed” on interest-rates

From time to time we have the opportunity to observe the spinning efforts of the house journal of the Bank of England. So without further ado let me hand you over to the Financial Times.

Bank of England ‘paralysed’ on rates by Brexit uncertainty.

The first thought is which way?But then we get filled in.

Turmoil of EU departure constrains policymakers despite tight labour market.

So up it is then, but of course that brings us to territory which is rather well trodden. You see the Bank of England has raised Bank Rate a mere two times in the last eleven years! Thus the concept of it being paralysed by Brexit prospects is a little hard to take. Whereas on the other side of the coin it was able to cut interest-rates from the 5.75% of the summer of 2007 to the emergency rate of 0.5% very quickly including a reduction of 1.5%. That reduction was twice the current Bank Rate and six times the size of the 0.5% rises. Also we note that the panic rate cut of August 2016 not only happened quickly but means that the net interest-rate increase since the comment below has been a mere 0.25%.

This has implications for the timing, pace and degree of Bank Rate increases.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

That was Governor Mark Carney at Mansion House in June 2014 and we now know that “sooner than markets expect” turned out to be more than four years before Bank Rate rose above the 0.5% it was then. But I do not recall the FT telling us about paralysis then about our “rock star” central banker.

The case for an interest-rate rise

There is one relief as we do not get a mention of the woefully wrong output gap concept. But we do get this.

Unless the UK’s sub-par productivity improves, the BoE has argued, unemployment cannot remain at current lows without wage growth feeding consumer prices. The latest data showed the labour market tightening again with employment at a record high and wage growth back to pre-crisis levels. “If they further home in on labour market trends, it will be a clear steer that they have a bias to tighten,” said David Owen, chief European economist at Jefferies, who thinks market pricing currently underestimates the likelihood of UK interest rates rising.

There are two main issues with the argument presented. The first is the productivity assumption where the Bank of England now assumes it has a cap based on a “speed limit” for the economy of an annual rate of growth of 1.5%. It’s assumptions are more likely to be wrong that right. Next is that wage growth is back to pre-crisis levels which is simply wrong. It is around 1% per annum short in nominal terms and simply nowhere near in real terms.

According to Kallum Pickering at Berenberg the Bank of England has really,really,really,really,really,really ( Carly Rae Jepsen)  wanted to raise interest-rates.

“The BoE would be close to the Fed on rate profile if it weren’t for Brexit . . . The Fed wants to pause, but the BoE has gone slower than otherwise,” he said, adding that barring a hard Brexit, the MPC would need to increase rates for a couple of years to catch up.

Sooner of later someone will turn up with the silliest example of all.

Although the BoE maintains it has plenty of firepower to fight any downturn, some outsiders believe one motive to raise interest rates is to gain space to inject stimulus if needed.

A type of Grand Old Duke of York strategy where you march interest-rates to the top of a hill just so that you can march them down again.

Some Reality

The water gets rather choppy as we find a mention of the inflation target.

Similarly, the BoE is likely to cut its near-term forecast for inflation — already close to target, at 2.1 per cent in December, and set to fall further after a drop in energy prices.

If you were serious about raising interest-rates then the period since February 2017 when inflation went over target would be an opportunity to do so except we only got a reversal of the August 2016 mistake and one other. If you go at that pace when inflation is above target it would be really rather odd to do much more when it is trending lower.

The next issue is the economic outlook where we have been recording economic slow downs in both China and Europe. Some of this is related to the automotive sector which has always affected the UK via Jaguar Land Rover and more recently Nissan. On its own that would make this an odd time to raise interest-rates. If we move to the UK outlook then this mornings Markit Purchasing Manager’s Index or PMI tells us this.

January data indicated a renewed loss of momentum for
the UK service sector, with a decline in incoming new work
reported for the first time since July 2016. Subdued demand
conditions meant that business activity was broadly flat
at the start of 2019, while concerns about the economic
outlook weighed more heavily on staff recruitment. Latest
data pointed to an overall reduction in payroll numbers for
the first time in just over six years.

Some care is needed here as the Markit PMI misfired in July 2016 but we need to recall that the Bank of England relied on it. We know this because that October Deputy Governor Broadbent went out of his way to deny it.

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

So in spite of it being an unreliable indicator at times of uncertainty like now I expect the Bank of England to be watching it like a hawk. If so they will be looking at this bit.

Adjusted for seasonal influences, the All Sector Output Index posted 50.3 in January, down from 51.5 in December. The index has posted above the crucial 50.0 no-change mark in each month since August 2016, but the latest reading signalled the slowest pace of expansion over this period and the second-lowest since December 2012.

If accurate that is in Bank Rate cut territory rather than a raise.

Comment

There is a fair bit to consider here so let us start with the “paralysis” point and let me use the words of the absent-minded professor Ben Broadbent from October 2016.

Before August, the UK’s official interest rate had been held at ½% for over seven years, the longest period of
unchanged rates since 1950. No-one on the current MPC was on the Committee when rates were previously
changed, in early 2009; indeed there are children now at primary school who weren’t even alive at the time.

Oh well as Fleetwood Mac would put it. Next comes the issue of why the Bank of England is encouraging what is effectively false propaganda about raising interest-rates? Personally I believe it is a type of expectations management as they increasingly fear that they will have to cut them again. So we are being guided towards the view that events are out of their control. This is awkward as we note the scale of their interventions ( for example some £435 billion of QE) and the way that positive news is always presented as being the result of their actions. Yet they also claim when convenient that lower interest-rates are nothing to do with them at all.

As to my view I am still of the view that we need higher interest-rates but that now is not the time. The boat sailed in the period 2014-16 when the rhetoric of Forward Guidance was not matched by any action. It is hard not to have a wry smile at us being guided towards a 7% unemployment rate then 6.5% and so on to the current 4%.

Italy may be in a recession but more importantly its depression never ended

The last 24 hours have brought the economic problems and travails of Italy into a little sharper focus. More news has arrived this morning but before we get there I would like to take you back to early last October when the Italian government produced this.

Politics economy, reform action, good management of the PA and dialogue with businesses and citizens will therefore be directed towards achieving GDP growth of
at least 1.5 percent in 2019 and 1.6 percent in 2020, as indicated in new programmatic framework. On a longer horizon, Italy will have to grow faster than the rest of Europe, in order to recover the ground lost in the last
twenty years.

This was part of the presentation over the planned fiscal deficit increase and on the 26th of October I pointed out this.

If we look back we see that GDP growth has been on a quarterly basis 0.3% and then 0.2% so far this year and the Monthly Economic Report tells us this.

The leading indicator is going down slightly suggesting a moderate pace for the next months.

They mean moderate for Italy.So we could easily see 0% growth or even a contraction looking ahead as opposed some of the latest rhetoric suggesting 3%  per year is possible. Perhaps they meant in the next decade as you see that would be an improvement.

Political rhetoric suggesting 3% economic growth is a regular feature of fiscal debates because growth at that rate fixes most fiscal ills. The catch is that in line with the “Girlfriend in a Coma” theme Italy has struggled to maintain a growth rate above 1% for decades now. Also as we look back I recall pointing out that we have seen quarterly economic growth of 0.5% twice, 0.4% twice, then 0.3% twice in a clear trend. So we on here were doubtful to say the least about the fiscal forecasts and were already fearing a contraction.

Yesterday

All Italy’s troubles were not so far away as the statistics office produced this.

In the fourth quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 0.2 per cent with respect to the previous quarter and increased by
0.1 per cent over the same quarter of previous year.

Whilst much of the news concentrates on Italy now being in a recession the real truth is the way that growth of a mere 0.1% over the past year reminds us that it has never broken out of an ongoing depression. If we look at the chart provided we see that in 2008 GDP was a bit over 102 at 2010 prices but now it has fallen below 97. So a decade has passed in fact more like eleven years and the economy has shrunk. Also I see the Financial Times has caught onto a point I have been making for a while.

Brunello Rosa, chief executive of the consultancy Rosa and Roubini, has pointed out that, on a per capita basis, Italy’s real gross domestic product is lower than when the country adopted the euro in 1999. Over the same period Germany’s per capita real GDP has increased by more than 25 per cent, while even recession-ravaged Greece has performed better than Italy on the same basis.

On that basis Italy has been in a depression this century if not before. Indeed if you look at the detail it comes with something that challenges modern economic orthodoxy, so let me explain. In 1999 the Italian population was 56,909,000 whereas now it is just under 60.5 million. Much of the difference has been from net migration which we are so often told brings with it a list of benefits such as a more dynamic economic structure and higher economic growth. Except of course, sadly nothing like that has happened in Italy. As output has struggled it has been divided amongst a larger population and thus per head things have got worse.

Meanwhile this seems unlikely to help much.

Italy’s statistical institute will soon have a new president, the demographer Gian Carlo Blangiardo. He has recommended calculating life expectancy from conception – rather than birth – so as to include unborn babies. ()

Also population statistics in general have taken something of a knock this week.

Pretty interesting – New Zealand just found it has 45,000 fewer people than it thought. In a population of 4.9 million (maybe), that means economists might have to start revising things like productivity and GDP growth per capita. ( Tracy Alloway of Bloomberg).

Can I just say chapeau to whoever described it as Not So Crowded House.

The banks

I regularly point out the struggles of the Italian banks and say that this is a factor as they cannot be supporting the economy via business lending so thank you to the author of the Tweet below who has illustrated this.

As you can see whilst various Italian government’s have stuck their heads in the sand over the problems with so many of the Italian banks there has been a real cost in terms of supporting business and industry. This has become a vicious circle where businesses have also struggled creating more non-performing loans which weakens the banks as we see a doom loop in action.

What about now?

The GDP numbers gave us an idea of the areas involved on the contraction.

The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and fishing
as well as in industry and a substantial stability in services. From the demand side, there is a negative
contribution by the domestic component (gross of change in inventories) and a positive one by the net
export component.

The latter part is a bit awkward for Prime Minister Conte who has taken the politically easy way out and blamed foreigners this morning. As to the industrial picture this morning;s PMI business survey suggests things got worse rather than better last month.

“January’s PMI data signalled another deterioration in Italian manufacturing conditions, with firms struggling in the face of a sixth consecutive monthly fall in new business. Decreases in output, purchasing activity and employment (the first in over four years) were recorded, marking a weak start to 2019.”

The spot number of 47.8 was another decline and is firmly in contraction territory.

Comment

This is as Elton John put it.

It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd

Italy has been in an economic depression for quite some time now but nothing ever seems to get done about it. Going back in time its political leadership were keen to lock it into monetary union with France and Germany but the hoped for convergence has merely led to yet more divergence.

One of the hopes is that the unofficial or what used to be called the black economy is helping out. I hope so in many ways but sadly even that is linked to the corruption problem which never seems to get sorted out either. Oh and whilst many blame the current government some of that is a cheap shot whilst it has had its faults so has pretty much every Italian government.

 

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How long will it be before the Bank of England cuts interest-rates?

This morning has opened with some good news for the UK economy and it has come from the Nationwide Building Society. So let us get straight to it.

Annual house price growth slows to its
weakest pace since February 2013. Prices fell 0.7% in the month of December,after taking account of seasonal factors.

I wish those that own their own house no ill but the index level of 425.7 in December compares with 107.1 when the monthly series first began in January of 1991, so you can see that it has been a case of party on for house prices. If you want a longer-term perspective then the quarterly numbers which began at 100 at the end of 1952 were 11.429.5 and the end of the third quarter of 2018. I think we can call that a boom! Putting it another way the house price to earnings ratio is 5.1 which is not far off the pre credit crunch peak of 5.4.

The actual change is confirmed as being below both the rate of consumer inflation and wage growth later.

UK house price growth slowed noticeably as 2018 drew to a close, with prices just 0.5% higher than December 2017.

Also the Nationwide which claims to be the UK’s second largest mortgage lender is not particularly optimistic looking ahead.

In particular, measures of consumer confidence weakened
in December and surveyors reported a further fall in new
buyer enquiries towards the end of the year. While the
number of properties coming onto the market also slowed,
this doesn’t appear to have been enough to prevent a
modest shift in the balance of demand and supply in favour
of buyers.

Although they then seem to change their mind.

It is likely that the recent slowdown is attributable to the
impact of the uncertain economic outlook on buyer
sentiment, given that it has occurred against a backdrop of
solid employment growth, stronger wage growth and
continued low borrowing costs.

The economic environment is seeing some ch-ch-changes right now but let us first sort out some number-crunching where each UK country has done better than the average.

Amongst the home nations Northern Ireland recorded the
strongest growth in 2018, with prices up 5.8%, though
Wales also recorded a respectable 4% gain. By contrast,
Scotland saw a more modest 0.9% increase, while England
saw the smallest rise of just 0.7% over the year.

They have I think switched from the monthly to the quarterly data here as that average was up by 1.3%.

The UK economy

We have now received the last of the UK Markit Purchasing Manager Index surveys so let us get straight to it.

At 51.6 in December, the seasonally adjusted All Sector
Output Index was up slightly from 51.0 in November.
However, the latest reading pointed to the second-slowest
rate of business activity expansion since July 2016.

I am a little surprised they mention July 2016 so perhaps they are hoping we have short memories and do not recall how it turned into a lesson about being careful about indices driven by sentiment. This was mostly driven by the manufacturing sector which had Markit looking for a scapegoat.

December saw the UK PMI rise to a six-month high,
following short-term boosts to inventory holdings and
inflows of new business as companies stepped up their
preparations for a potentially disruptive Brexit.
Stocks of purchases and finished goods both rose
at near survey-record rates, while stock-piling by
customers at home and abroad took new orders growth
to a ten-month high.

So preparation is bad as presumably would be no preparation. It is especially awkward for their uncertainty theme which was supposed to be reducing output. But let us move onto the main point here which is that the UK is apparently managing some economic growth but not a lot. This matters if we now switch to the wider economic outlook.

The world economy

As I have been typing this the Chinese cavalry have arrived. Reuters.

China’s just cut bank reserve requirement ratios by 100 bps, releasing an estimated RMB1.5t in liquidity by Jan 25. expected this, but argues the central bank can do a lot more – like cutting benchmark guidance lending rates.

Reuters are understandably pleased about finding someone who got something right. But the deeper issue is the economic prognosis behind this which we dipped into on Wednesday and is that the Chinese economy is slowing. For those wondering about what the People’s Bank of China is up to it is expanding the money supply via reducing the reserves banks have to hold which allows them to lend more. So they are acting on the quantity of money rather than the price or interest-rate of it. This relies on the banks then actually lending more. Or more specifically not just lending to those in distress.

Then there is the Euro area which according to the Markit PMIs is doing this.

The eurozone economy moved down another gear
at the end of 2018, with growth down considerably
from the elevated rates at the start of the year.
December saw business activity grow at the
weakest rate since late-2014 as inflows of new
work barely rose……….The data are consistent with eurozone GDP rising by just under 0.3% in the fourth quarter, but with quarterly growth momentum slowing to 0.15% in December.

We need to rake these numbers as a broad sweep rather than going for specific accuracy as, for example, Germany is described as being at a five-year low which requires amnesia about the 0.2% GDP contraction in the third quarter of this year.

Comment

If we switch to our leading indicator for the UK which is money supply growth we see a by now familiar pattern. The two signals of broad money growth have diverged a bit but neither M4 growth at 2.2% in November or M4 lending growth at 3.5% are especially optimistic. That only gets worse once you subtract inflation from it. Or to put it another way in ordinary times we would be in a situation where a bank rate cut would be expected.

What does the Bank of England crystal ball or what is called Forward Guidance in one of Governor Mark Carney’s policy innovations tell us?

The MPC had judged in November that, were the economy to develop broadly in line with its Inflation
Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a
limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

So “I agree with Mark” seems to be the most popular phase which should make taxpayers wonder why we bother with the other 8 salaries? Indeed one of them will be in quite a panic now as back in May Deputy Governor Ramsden told us that 8.8% consumer credit growth was “Weak” so I dread to think what he makes of the current 7.1%. Although @NicTrades has a different view.

that’s China fast!

So that is how a promised Bank Rate rise begins to metamorphose into a Bank Rate cut which will be presented as “unexpected” ( as opposed to on here where we have been watching the journey of travel for nearly a year) and a “surprise”, just like the last time this happened just over 2 years ago.

Let me finish by welcoming the addition of two women to the Financial Policy Committee as there is of course nothing like a Dame.

Dame Colette Bowe and Dame Jayne-Anne Gadhia have been appointed as external members of ‘s Financial Policy Committee (FPC)

So sadly the diversity agenda only adds female members of the establishment to the existing list of male establishment appointees. That went disastrously with the Honorable Charlotte Hogg who proved that even being the daughter of an Earl and a Baroness cannot allow you to avoid family issues, especially when you forget you have a brother.

Weekly Podcast

Including my answer to this question from Rob Wilson.

How can economies such as Italy and Japan endures decades of virtually zero growth and yet the general population don’t seem to be suffering compared to other economies with growth?

 

 

 

 

 

 

Slowing growth and higher inflation is a toxic combination for the Euro area

Sometimes life comes at you fast and the last week will have come at the European Central Bank with an element of ground rush. It was only on the 30th of last month we were looking at this development.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19) and by 0.3% in the EU28 during the third quarter
of 2018,

Which brought to mind this description from the preceding ECB press conference.

Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The underlying strength of the economy continues to support our confidence ……..

There was an issue with broad-based as the Italian economy registered no growth at all and the idea of “underlying strength” did not really go with quarterly growth of a mere 0.2%. But of course one should not place too much emphasis on one GDP reading.

Business Surveys

However this morning has brought us to this from the Markit Purchasing Managers Indices.

Eurozone growth weakens to lowest in over two years

The immediate thought is, lower than 0.2% quarterly growth? Let us look deeper.

Both the manufacturing and service sectors
recorded slower rates of growth during October.
Following on from September, manufacturing
registered the weaker increase in output, posting its
lowest growth in nearly four years. Despite
remaining at a solid level, the service sector saw its
slowest expansion since the start of 2017.

There is a certain sense of irony in the reported slow down being broad-based. The issue with manufacturing is no doubt driven by the automotive sector which has the trade issues to add to the ongoing diesel scandal. That slow down has spread to the services sector. Geographically we see that Germany is in a soft patch and I will come to Italy in a moment. This also stuck out.

France and Spain, in contrast, have
seen more resilient business conditions, though both
are registering much slower growth than earlier in
the year.

Fair enough for Spain as we looked at only last Wednesday, but France had a bad start of 2018 so that is something of a confused message.

Italy

The situation continues to deteriorate here.

Italy’s service sector suffered a drop in
performance during October, with business activity
falling for the first time in over two years. This was
partly due to the weakest expansion in new
business in 44 months.

Although I am not so sure about the perspective?

After a period of solid growth in activity

The reality is that fears of a “triple-dip” for Italy will only be raised by this. Also the issue over the proposed Budget has not gone away as this from @LiveSquawk makes clear.

EU’s Moscovici: Sanctions Can Be Applied If There Is No Compromise On Italy Budget -Policy In Italy That Entails Higher Public Debt Is Not Favourable To Growth.

Commissioner Moscovici is however being trolled by people pointing out that France broke the Euro area fiscal rules when he was finance minister. He ran deficits of 4.8% of GDP, followed by 4.1% and 3,9% which were above the 3% limit and in one instance double what Italy plans. This is of course awkward but not probably for Pierre as his other worldly pronouncements on Greece have indicated a somewhat loose relationship with reality.

Actually the Italian situation has thrown up another challenge to the Euro area orthodoxy.

 

Regular readers will be aware I am no fan of simply projecting the pre credit crunch period forwards but I do think that the Brad Setser point that Italy is nowhere near regaining where it was is relevant. If you think that such a situation is “above potential” then you have a fair bit of explaining to do. Some of this is unfair on the ECB in that it has to look at the whole Euro area as if it was a sovereign nation it would be a situation crying out for some regional policy transfers. Like say from Germany with its fiscal surplus. Anyway I will leave that there and move on.

Ch-ch-changes

This did the rounds on Friday afternoon.

ECB Said To Be Considering Fresh TLTRO – MNI ( @LiveSquawk )

Targeted Long-Term Refinancing Operation in case you were wondering and as to new targets well Reuters gives a nod and a wink.

Euro zone banks took up 739 billion euros at the ECB’s latest round of TLTRO, in March 2017. Of this, so far 14.6 has been repaid, with the rest falling due in 2020 and 2021.

This may prove painful in countries such as Italy, where banks have to repay some 250 billion euros worth of TLTRO money amid rising market rates and an unfavorable political situation.

So the targets of a type of maturity extension would be 2020/1 in terms of time and Italy in terms of geography. More generally we have the issue of oiling the banking wheels. Oh and whilst the Italian amount is rather similar to some measures of how much they have put into Italian bonds there is no direct link in my view.

Housing market

If you give a bank cheap liquidity then this morning’s ECB Publication makes it clear where it tends to go.

The upturn in the euro area housing market is in its fourth year. Measured in terms of annual growth rates, house prices started to pick up at the end of 2013, while the pick-up in residential investment started somewhat later, at the end of 2014. The latest available data (first quarter of 2018) indicate annual growth rates above their long-term averages, for both indicators.

How has this been driven?

 In addition, financing conditions remained favourable, as reflected in composite bank lending rates for house purchase that have declined by more than 130 basis points since 2013 and by easing credit standards. This has given rise to a higher demand for loans for house purchase and a substantial strengthening in new mortgage lending.

Indeed even QE gets a slap on the back.

Private and institutional investors, both domestically and globally based, searching for yield may thus have contributed to additional housing demand.

It is at least something the central planners can influence and watch.

Housing market developments affect investment and consumption decisions and can thus be a major determinant of the broader business cycle. They also have wealth and collateral effects and can thus play a key role in shaping the broader financial cycle. The housing market’s pivotal role in the business and financial cycles makes it a regular subject of monitoring and assessment for monetary policy and financial stability considerations.

 

Comment

The ECB now finds itself between something of a rock and a hard place. If we start with the rock then the question is whether the shift is just a slow down for a bit or something more? The latter would have the ECB shifting very uncomfortably around its board room table as it would be facing it with interest-rates already negative and QE just stopping in flow terms. Let me now bring in the hard place from today’s Markit PMI survey.

Meanwhile, prices data signalled another sharp
increase in company operating expenses. Rising
energy and fuel prices were widely reported to have
underpinned inflation, whilst there was some
evidence of higher labour costs (especially in
Germany).

Whilst there may be some hopeful news for wages tucked in there the main message is of inflationary pressure. Of course central bankers like to ignore energy costs but the ECB will be hoping for further falls in the oil price, otherwise it might find itself in rather a cleft stick. It is easy to forget that its “pumping it up” stage was oiled by falling energy prices.

Yet an alternative would be fiscal policy which hits the problem of it being a bad idea according to the Euro area’s pronouncements on Italy.

 

UK construction has been growing rather than being in recession. Ouch!

This morning brings us more on what has become the troubled construction sector in the UK. Or to be more specific what we have been told by our official statisticians is troubled. Regular readers will be aware that I found some of this bemusing partly due to geographical location as there is an enormous amount of building work going on at Nine Elms around the new US Embassy. The last time I counted there were 32 cranes in the stretch between Battersea Dogs and Cats Home and Vauxhall. Also there have been problems with the official construction data series of which more later going back some years which have led to me cautioning that the numbers may need to be taken with the whole salt-cellar rather than just a pinch of salt.

What happened last week?

I pointed out on Friday that there had been ch-ch-changes.

This has been driven by revised construction estimates, with its output growth revised up by 1.9 percentage points to negative 0.8%

This was the road on which total UK GDP growth was revised up from 0.1% to 0.2%. It takes quite a lot for something which is only 6.1% of total output to do that but as it was originally reported at -3.3% then -2.7% and now -0.8% you can see that the original number was way off. This is a familiar pattern albeit not usually on this scale and does pose a systemic question. After all if you are struggling to measure something which is mostly very tangible such as a building and the associated economic output how can you measure the more intangible outputs of the services sector?

Actually there was more as the reformist wave spread across the data for 2017 as well.

While the 0.8% fall in Quarter 1 marks the largest quarterly decline since Quarter 3 (July to Sept) 2012, it is now estimated that this is the first fall since Quarter 3 2015 – earlier estimates had recorded falling output through much of 2017.

This does alter the narrative as we had been given numbers indicating a recession and at the worst hinting at a possible start of a depression, so it is hard to overstate this. Let us drill down into the detail.

Today’s new construction estimates show a much stronger growth profile throughout 2017, with upward revisions recorded in each quarter except Quarter 3

The major shift numerically is in the first half of 2017  as the first quarter goes from growth of 2.4% to 3.2% and the second from -0.4% to 0.4% . However in terms of impression and mood the last quarter may have hit the hardest as after previous doom it had the gloom of -0.1% whereas in fact it grew by 0.3%, Adding it all up gives us this.

Construction output is now estimated to have increased by 7.1% in 2017, up from 5.7%

What has changed?

Reality is of course unchanged by the way that it has been officially measured has seen these changes.

As part of the wider improvement programme for construction statistics, ONS has introduced significant improvements to the method for imputing data for businesses that have not yet returned their ONS survey responses.

Oh! That rather sends a chill down the spine as in essence we are back to fantasy numbers yet again and yet again they are in the housing sector. I am willing to give them a chance but can we really not get a grip on the actual numbers? Also I note that things in terms of actual measurement seem to be getting worse rather than better and the emphasis is mine.

Quarter 1 2018 is affected to a greater extent than Quarter 1 2017 due to the higher number of imputations in more recent periods due to lower response rates, as well as the inclusion of the bias adjustment.

In addition there has been a change to the seasonal adjustment which I take as an admittal of the problem I have highlighted before with the first quarter of the year which has been a serial underperformer. The combination of the changes has seen the beginning of the last two years revised up by 0.8% in construction terms so maybe this is some help with this issue.

Where are we now?

Let us take Kylie’s advice and Step Back in Time to 2016 about which we were told this.

The value of construction new work in Great Britain continued to rise in 2016, reaching its highest level on record at £99,266 million; driven by continued growth in the private sector.

Just for clarity this is far from all being new work as shown below.

Aside from all new work, all repair and maintenance equated to £52,223 million in 2016. This is an increase of £1,679 million compared with 2015.

There was a common factor in both new and maintenance work in 2016 in that the growth was essentially in the private-sector.

That number represented quite a boom. The nadir for the construction sector had been unsurprisingly in 2009 at the height of the credit crunch impact when output was £65.9 billion. Things got better but then there was something of a double-dip in 2012 when it fell back to £69.7 billion. As you can see from the 2016 number it was then a case off pretty much up,up and away from then.

The numbers above are in current prices rather than the usual deflated version which reminds us again that the deflator has been singing along to Lyndsey Buckingham.

I think I’m in trouble
I think I’m in trouble

Comment

Today’s update and if you like revisionism represents quite a change. Previously 2017 had seen the UK construction industry behave like one of those cartoon characters who are going so fast they do not spot the edge of a cliff but even when they go over it carry on briefly before they drop like a stone. On the road we were in a recession with flashes of a depression. Now we see that it was a year which opened very strongly but then slowed which is very different. Annual growth of 7.1% does not to say the least fit well with a depression scenario.

Now we see that we are being told the same for 2018.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

Sound familiar? Well Kelis would offer this view.

Mght trick me once
I won’t let you trick me twice
No I won’t let you trick me twice

This really is quite a mess and regular readers will be aware it has been going on for some years. There was an attempt at an ongoing fix by “improving” the inflation measure called the deflator. Then there was an attempted “quick-fix” by switching a services company into construction. Plainly they did not work and frankly the idea of having these construction numbers as part of the monthly GDP numbers we get next week is embarassing. They are simply not up to it.

As to where we are now the Agents of the Bank of England offer a view.

Construction output remained little changed on a year ago, and contacts were cautious about the short-term outlook .

So now some 3% lower then? Also the Markit survey has its doubts.

June data revealed a solid expansion of overall
construction activity, underpinned by greater
residential work and a faster upturn in commercial
building

Indeed it was quite upbeat.

There were also positive signs regarding
the near-term outlook for growth, as signalled by the
strongest rise in new orders since May 2017 and the
largest upturn in input buying for two-and-a-half
years.

So apologies for reporting official data which has turned out not to be worth the paper it was printed on. However strategically I think it is correct to follow the official data whilst also expressing doubts about systemic issues. Next week when we get the monthly GDP number we will return to a media bubble analysing each 0.1% which needs to be looked through the lens of a sector which has just been revised by 2,5%.