Can the Portuguese economic and house price boom continue?

It has been a little while since we looked at the western outpost of the Euro area which is Portugal. The good news is that it has now completed some five years of economic growth which in historical terms is a lengthy period for it. Albeit that rather ominously that length of growth ran straight into the credit crunch last time around. According to Portugal Statistics here is the current state of play.

In comparison with the second quarter of 2018, GDP increased 0.3% in real terms (0.6% in the previous quarter). The contribution of net external demand to the GDP quarter-on-quarter change rate became negative, after being null in the previous quarter, reflecting a decrease of Exports of Goods and Services more intense than that of Imports of Goods and Services. The positive domestic demand contribution increased in the third quarter, reflecting the higher growth of private consumption and Investment.

Firstly it has been nice to see Portugal have a better run as it badly needed it. For the last two quarters it has managed to grow faster than the Euro area average which it does not do often. However we do note that whilst it has done better than average it too was affected by the third quarter slow down too as the quarterly growth rate halved. This impacted on the annual rate.

The Portuguese Gross Domestic Product (GDP) increased by 2.1% in volume in the third quarter 2018, compared with
the same period of 2017 (2.4% in the previous quarter). Domestic demand registered a less intense positive
contribution to GDP year-on-year change rate, due to the deceleration of private consumption, as Investment presented a slightly more intense growth. Net external demand presented a negative contribution similar to that observed in the two previous quarters.

So still good in Portuguese terms as we note that a familiar issue which is trade being picked up on our radar screens. This matters on two counts firstly because the Euro area “internal competitiveness” austerity model was something which should be picked up in the trade balance. Secondly it is an old problem area for Portugal that has regularly led it into the arms of the International Monetary Fund or IMF.

Trade

As you can see the growth rates are very good but 2018 has seen export growth overtaken by import growth.

In the 3rd quarter 2018, exports and imports of goods increased by 6.1% and by 7.3% respectively, vis-à-vis the
same period of the previous year. In the 2nd quarter exports and imports recorded variations of +10.8% and +9.5% respectively. In accumulated terms, from January to September 2018, exports increased by 6.7% and imports grew by 7.8%.

Cars

The automotive sector is an important one for Portugal.

The auto sector – including car and component production – is a core sector of the Portuguese economy. It represents 4% of total GDP, is represented in 29 000 companies, is responsible for 124 000 direct jobs and a business volume of 23, 7 thousand millions of euros and 21,6 % of the total fiscal revenues in Portugal. ( Portugal IN)

A fair bit of this is Volkswagen and this from The Portugal News on the 30th of August was very upbeat.

AutoEuropa has produced over 139,000 vehicles this year, surpassing its previous record of 138,890 in 1998, the company announced on an internal communication………According to the company’s data, in 2017” AutoEuropa’s sales weight on Portugal’s goods export was 3.4%……..AutoEuropa expects to double its sales in 2018 compared to 2017, meaning that Portugal’s goods export would grow 3.4%, and the weight on the exports would increase to 6.6%.

As you can see it has been driving both export and GDP growth and has been a success story for Portugal. Switching back to the trade figures we see that transport sector exports grew by 15.3% in the third quarter. This means that the overall picture conforms to this from FT Alphaville in April.

Portuguese earnings from selling goods to the rest of the world — particularly manufactures related to the Iberian motor vehicle supply chain — grew by more than 40 per cent from 2008 through 2017:

Thus we have an actual success for the internal devaluation model so well done to Portugal. Of course the car market even with all the help is only a certain size and it is not all gravy as some of this has been from other Euro area countries. Also we await the news from the last part of 2018 as we have seen car production slowing and temporary factory shut downs due to a reduction in demand from Asia and the Trump Tariffs.An example of this has just flashed across the newswires.

*VW GROUP OCT. DELIVERIES FALL 10% Y/Y; 846,300 VEHICLES…… *VW GROUP OCT. CHINA SALES FALL 8.3% Y/Y; 365,100 VEHICLES ( @mhewson_CMC )

Looking further ahead there is the issue that car production may move even further south as more and more producers look at places like Morocco.

Unemployment

This has been a success too no doubt driven by the developments above and helped by the tourism boom.

The unemployment rate for the 3 rd quarter of 2018 stood at 6.7%, corresponding to the lowest value of the data series
started in the 1st quarter of 2011. This value is equal to the one from the previous quarter and lower in 1.8 percentage
points (p.p.) from the same quarter of 2017.

The full picture is given here.

These reductions were also observed in the
correspondent rates, having the unemployment rate
dropped from 17.5% to 6.7% and the labour
underutilisation rate from 26.4% to 13.1%

The attempt to measure underemployment is welcome as is its drop although it is still high which is true of the number below.

The youth (15 to 24 years old) unemployment rate increased to 20.0%, the second lowest value of the data series started in the 1st quarter of 2011.

Comment

So far today we have charted some welcome progress but there are still issues of which number one was highlighted by the official data on Thursday.

In 2017, the resident population in Portugal was estimated at 10,291,027 people, which accounted for a 18,546 decline
from the previous year………. Despite the positive net
migration in 2017, the population’s downward trend observed since 2010 continued in 2017, although in the last four years at a slower pace.

There are simply fewer births than deaths and for a while many left. This mattered more than it may seem because the emigrants were often those with skills who could leave. Some have returned but many have not and for example I passed some of Little Portugal in Stockwell a couple of weekends ago with its Portuguese restaurants and delicatessens.

The five better years have coincided with the post “Whatever it takes to save the Euro” period and as we looked at on Friday there are now issues for what the ECB does next? Portugal has benefited in terms of a government bond yield of less than 2% for the tern-year benchmark as opposed to the 17/18% at the peak of the crisis. No doubt it has also helped some businesses borrow more cheaply although of course there is also this.

In the 2nd quarter of 2018 (last 12 months), the median house price of dwellings sales in Portugal was 969 €/m2
, an increase of +2% compared to the previous quarter and of +8.15% compared to the same period in the previous year.

Also the Golden Visa programme which has brought in Madonna for more than a holiday and Michael Fassbender for example is no doubt at play here.

The city of Porto (+24.7%), Lisboa (+23.4%), Amadora (+15.8%), Braga (+12.3%), Funchal (+10.4%) and Vila Nova de Gaia (+10.3%) scored the most significant growth rates, compared to the same period in the previous year.

Or as @WEAYL points out.

Housing in Lisbon (€3,381/m2) now more expensive than Madrid (€3,317/m2)

Actually if we look for the source which is JornalEconomico it points towards a familiar problem.

Buying a home as the first option is a wish of the Iberian families. It is not only in Portugal that acquiring housing is the dream of most people, also in Spain this is the first choice of families.

Although they should not be worried as apparently there is no inflation.

In October, the Portuguese HICP annual rate was 0.8% (1.8% in the previous month) while the monthly rate was
-0.5% (1.5% in September and 0.5% in October 2017).

So it is much more expensive but wages are under the influence of the “internal devaluation” model. As to a full perspective the previous peak of 45.76 billion Euros for GDP was finally passed in the second quarter with its 45.88 billion.

 

 

 

 

Will the Spanish economic boom be derailed by separatism?

There is a truism that political problems invariably follow economic ones. If that is true in Spain at the moment then there has been quite a lag as it was several years ago now that the consequences of the Euro area crisis reached a crescendo. If we look back we see the economy as measured by GDP peaked at 103.7 in 2008 and then fell to 100 in the (benchmark) 2010 as the credit crunch hit. But then the Euro area crisis hit as GDP fell to 96.1 in 2012 and 94.5 in 2013 and the latter year saw the unemployment rate rise above 26%. So that was the nadir in economic terms as a recovery began and saw GDP rise again to 95.8 in 2014 and then 99.1 in 2015 followed by 102.3 in 2016.  So we see that in essence there has been something of a lost decade as earlier this year the output of 2007 was passed as well as a recent strong recovery. If economics was the driver one might have expected political issues to arise in say 2014.

What about now?

At the end of last week the Bank of Spain published its latest projections for the economy. Firstly it is nice to see that they have fallen in line with my argument that the lower oil price provided a boost to the Spanish economy mostly via consumption.

In particular, compared with the expansionary fiscal policy stance of the period 2015‑16 and the declines in oil prices observed between mid‑2014 and 2016 Q1

Of course that is a clear contradiction of the official inflation target of 2% per annum being good for the economy but I doubt many will point that out. You may note that they try to cover off the consumption rise as a response to the crunch.

Moreover, the expansionary effect resulting, in recent years, from certain spending (on consumer durables) and investment decisions being taken after their postponement during the most acute phases of the crisis is expected to gradually peter out.

Factoring in everything it expects this.

Indeed it is estimated that, in 2017 Q3, GDP growth could have decelerated somewhat, as anticipated in the June projections. As a result of all the above, it is estimated that, after growing by 3.1% this year, GDP will grow by 2.5% in 2018 and by 2.2% in 2019.

A driver of the economic growth seen so far has been export success.

Accordingly, for example in 2016, GDP growth was more reliant on the external component than had been estimated to date.

Also there are hopes that this will continue.

The data on the Spanish economy’s external markets in the most recent period have been more favourable than was expected a few months ago.

Although there is a worry which will be familiar to readers of my work.

owing to the exchange rate appreciation effect,

Oh and there is a thank you Mario Draghi in there as well!

by the continuing favourable financial conditions.

What could go wrong? Well……

Turning to the risks surrounding these GDP growth projections, on the domestic front, the political tension in Catalonia could potentially affect agents’ confidence and their spending decisions and financing conditions

This issue is currently playing out in the banking sector where some are fearful of no longer being backed by the Bank of Spain and hence ECB. Banco Sabadell has just announced it will have a board meeting this afternoon to consider moving its corporate address to Alicante in response. Of course if you wanted custom in Catalonia this is not the way to go about it as we mull the words of the Alan Parsons Project.

I just can’t seem to get it right
Damned if I do
I’m damned if I don’t

What about the business surveys?

Firstly the Euro area background is the best it has been for some time.

The final September PMI numbers round off an impressive third quarter for which the surveys point to GDP rising 0.7%.
The economy enters the fourth quarter with business energized by inflows of new orders growing at the fastest rate for over six years and expectations of future growth reviving after a summer lull.

However that sort of economic growth has been something of a normal situation for Spain in recent times. Let us look at the detail for it.

New orders rose across the service sector for the fiftieth month running, with the latest expansion the strongest since August 2015. Where an increase in new business was recorded, this was attributed by panellists to improving economic conditions.

From this there was a very welcome side-effect.

Responding to higher workloads, service providers increased their staffing levels solidly in September

If we move to the economy overall then we see this.

Taken alongside faster growth in the manufacturing sector, these figures point to a positive end to the third quarter of the year. Over the quarter as a whole, we look to have seen only a slight slowdown from Q2, suggesting a further robust GDP reading is likely. IHS Markit currently forecasts growth of 0.7% for Q3.”

Today’s Euro area survey on retail sales does not reach Spain but yesterday’s retail sales release shows they are struggling relatively with annual growth in August at 1.7% but retail sales are erratic.

Population and Demographics

There has also been some better news on this front as highlighted by this below.

The resident population in Spain grew in 2016 for the first time since 2011. It stood at 46,528,966 inhabitants on January 1, 2017, with an increase of 88,867 people.

This matters because the decline in population exacerbated a problem highlighted by Edward Hugh back in 2015. One of his worries was the ratio of births to deaths which had been shifting unfavourably and was -259 last year. This led to this and the emphasis is mine.

Furthermore, INE projections suggest the over-65s will make up more than 30% of the population by 2050 (almost 13 million people) and the number of over-eighties will exceed 4 million, thus representing more than 30% of the total 65+ population.
International studies have produced even more pessimistic estimates and the United Nations projects that Spain will be the world’s oldest country in 2050, with 40% of its population aged over 60. At the present time the oldest countries in Europe are Germany and Italy, but Spain is catching up fast.

Comment

Spain is an example of what is called a V shaped economic recovery as it has bounced strongly as opposed to the much sadder state of play in Greece which has seen an L shaped or if you prefer little bounce-back at all. If you were using economics to predict secessionist trouble you would be wrong about 100 times out of 100 using it. However if we move to what caused trouble in Greece when it had its recent political crisis we see that the driving force was the monetary system of which a signal is that the ECB is still providing over 32 billion Euros of Emergency Liquidity Assistance to it.

So as we stand the impact on the Spanish economy is small as businesses may be affected but moves if they physically happen will boost GDP and shift mostly from one region to another. However if there is any large movement of funds then all this changes as eyes will turn to the banking system at a point when people are wondering if and not when the Bank of Spain will step in? After all would it help a bank that is no longer in Spain? There are rumours that UK banks could have gone to the ECB if they had back in the day thought ahead about their locations. But imagine the scenario if a bank in Catalonia tries to go to the ECB when there is doubt over whether it was in the European Union?

Personally I would expect, after a suitable delay, the ECB would step in but the price would be high as Greece has found out from the years of the Troika which have been so bad they change their name to the institutions.

Tomorrow

I have a morning appointment with my knee specialist so I intend to post an article but it could easily be somewhat later than usual.

 

 

 

 

Abenomics does not address the economic problems facing Japan

At the moment Japan must be looking at the UK with some bemusement. That is because it has been a country with political instability with a merry-go-round of Prime Ministers and yet an axis has shifted. We are now in a type of flux whereas Prime Minister Shinzo Abe has been in power since November 2012. This means that his economics policy of Abenomics has had a decent run in terms of time and yet again we see someone who has taken the Matrix style blue pill and declared it a success. Let me hand you over to Matt O’Brien of the Washington Post.

Its unemployment rate has fallen to a 22-year low of 2.8 percent — yes, you read that right — due in large part to all the yen it has created the past four years.

The former which we have looked at before is a success and it is the flip side of this.

Maybe the best way to tell isn’t its super-low unemployment rate, but rather its super-high employment rate. That, as you can see below, has shot up since the start of Abenomics to an all-time high of 83.5 percent, making our own 78.3  ( He means the US ) percent rate look downright measly in comparison.

Again a success in itself as the quantity measures in the labour market are as strong as anywhere. But then we get an enormous leap of what I can only call faith.

It can’t be the fiscal or structural parts of Abenomics, because they’ve barely been tried……..All their money-printing seems to have given businesses the confidence — and the cheaper currency — they needed to expand a little more.

Thus we see a conclusion that the money printing has led to higher employment. Some would argue that with a fiscal deficit of 4.8% of GDP in 2015 and 4.5% last year with a debt to GDP ratio that fiscal stimulus had been tried rather a lot. Also there seems to be any lack of a causal relationship as the phrase “seems to have” suggests. Let us finish with some hyperbole.

And all it would have taken was printing a few trillion yen, which actually isn’t that high a price to pay.

Numbers may not be a strength for Matt as we remind ourselves of this from the 6th of this month.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets,

Taking the red pill

Dissent in Japan is mostly considered to be non-Japanese so this from the Nikkei Asian Review ( NAR ) is interesting. First the ground is described.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013,

Okay so what has happened since then?

But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.

If we return to the case made by Matt O’Brien above the fact that estimates of the potential growth rate have fallen seems to be missing doesn’t it? That is awkward for business supposedly being more confident in response to a promise to print money to infinity and maybe beyond. The tectonic plates on which supporters of QE stand would be on their own Ring of Fire if there are further suggestions that it reduces potential economic growth. I have been a critic of QE style policies and note that this below suggests yet another problem with the claimed transmission mechanism.

But while tax cuts helped boost businesses, many are merely hoarding their cash. Total internal reserves held by Japanese corporations have grown some 40% under Abe to 390 trillion yen. No solutions are in sight.

The NAR seems to agree with me about the trajectory of fiscal policy as well.

In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas.

Also the NAR fires a lot of criticism at the so-called third arrow of Abenomics which is reform in Japan.

The debate on compensation for unfairly dismissed employees has stalled. While Tokyo opened the door for foreign workers with exceptional skills or those in certain sectors such as cleaning, it has shied away from a comprehensive discussion on immigration. Momentum to tackle regulatory barriers is fading.

It points out that if Abe wished to reform the labour market politically he is in what might be called a “strong and stable” position due to the way his party the LDP controls both the upper and lower houses in parliament.

The economy

There was some disappointment last week as the economic growth figures for the first quarter took a downwards revision.

The expansion in real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, was revised to an annualized 1.0 percent growth from the previously estimated 2.2 percent expansion, the Cabinet Office said. ( The Japan Times ).

The good part of that was that it meant that Japan had grown for five quarters in a row which it had not done for over a decade. There were two bad parts though in that as well as being in the economic growth dog kennel with the UK there was an implication for the Abenomics plan of boosting inflation to 2% per annum.

In  nominal terms, or unadjusted for price changes, the economy shrank an annualized 1.2 percent, the biggest contraction since 2.2 percent registered in the July-September period of 2012.

Also the period of Abenomics was supposed to see a rise in inflation and more particularly a rise in wages. As the Japan Times reminds us the labour market is tight.

Moreover, there were 148 job positions open for every 100 people looking for work, the highest ratio in 43 years.

But wage growth is at best anemic.

But the labor ministry reported that in 2016, wages across the board — regardless of whether we’re talking full-time or part-time employment, regular or nonregular employees — only rose by 0.4 percent

Why? Well as we observe in some many countries official definitions of being in a job miss changes in the real world.

a larger portion of the workforce is in part-time and non regular jobs, which traditionally pay less.

Comment

There have been some extraordinary claims made for the success of monetary easing and QE. In my opinion we see a clear divorce between the financial and real economy. If we look at the financial economy in the era of Abenomics we see booming equity markets ( the Nikkei 225 has risen from 9000 or so to ~20,000), a lower currency ( versus the US Dollar it has gone from 80 to 110) and booming bond markets with a ten-year yield of 0%. But the real economy has not seen the boom in wages promised nor any great turn in the rate of GDP growth. Ironically it has been the recent fall in inflation that seems to have given GDP an upwards push rather than the claimed surge to 2% per annum.

Meanwhile the real challenge is adapting to this.

The annual number of babies born in Japan slipped below 1 million in 2016 for the first time since records began, with the estimated figure for the year coming in at 981,000, according to government figures. ( Japan Times)

The reminds us of the demographic changes underway highlighted by the fact that the figures for the 6 months to May showed the population falling by another 245,000. Exactly how will QE fix those?