Portugal is feeling the economic effects of the pandemic

It has been too long since we took a look at the economic state of play in Portugal, which is a delightful country. For newer readers Portugal was in the bad boys/girls club at the time of the Euro area crisis symbolised by the way that its national debt to economic output ratio ( GDP) went over the 120% level set as a signal by the Euro area. That was a particular irony as that level was set to avoid embarrassing Portugal and indeed Italy. But after that phase Portugal went into favoured child status as its economy improved and it followed Euro area instructions.

But now things are really rather different as the Euro area boom of 2017/18 was in modern language like over before the Covid-19 pandemic arrived. There were even issues for the successful motor sector.

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. The automobile sector is responsible for 11% of total exportations. Portuguese technical skills in this field, the highly competitive set up and running costs and our great logistic infrastructures have been a driving force in this sector. ( PortugalIN)

This is because some of the gains came at the expense of France and Spain and also because if you head south for cheaper production you might carry on doing so and end up in Algeria and Tunisia.

What about now?

Yesterday the Portuguese statistics office updated us on the services sector.

Services turnover index, in nominal terms and adjusted for calendar and seasonal effects, presented a year-on-year
change rate of -15.3% in November (-12.1% in October).
The year-on-year change rates of the indices of employment, wages and salaries and number of hours worked adjusted of calendar effects were -8.4%, -4.1% and -11.4%, respectively (-8.3%, -6.2% and -12.7% in October, by the same order).

There are two main contexts here. The first is the scale of the decline in output and next is the way that hours worked looks to be the best measure of the impact on employment. Also we get a hint of the scale of government aid and furlough as we note that wages/salaries are only 4.1% lower.

The peak for this series was the 121 of January last year ad the nadir was the 74 of April. Whereas the 100 of November means that all the gains since 2015 had faded away, hopefully temporarily.

This morning has brought a reminder of the industrial production data as Eurostat catches up. It shows an average across the Euro area of an annual fall of 0.6% so Portugal under performed here.

The Industrial Production Index (IPI) registered a year-on-year rate of change of -3.6% in November (0.4% in the previous month)……Of the Major Industrial Groupings, only Intermediate goods showed a positive year-on-year rate of change: 1.1%. Energy registered the most
negative rate of change (-10.3%), followed by Investment goods (-8.2%) and Consumer goods (-1.9%).

I guess few will be surprised about what has happened to tourism.

In November 2020, the tourist accommodation sector should have registered 416,000 guests and 950,000 overnight stays, corresponding to year-on-year
rates of change of -76.3% and -76.7% respectively (-59.7% and -63.3% in October, in the same order).

 

Prospects

Portugal does not feature regularly in the PMI business surveys but this from the statistics office on Monday offered some clues for prospects.

The perspectives of the exporting enterprises of goods point to a nominal increase of 4.9% in exports in 2021 vis-à-vis
the previous year. Although these figures represent an improvement compared to the perspectives indicated by
enterprises for 2020 according to the preceding forecast (-13.0% ), they still not allow a recovery to values close to
those recorded before the pandemic.
In fact, should these perspectives be confirmed, the exports of goods in 2021 will correspond to a level 12.8% lower
than the total exports of goods recorded in 2019.

This survey has proved reliable in the past. So we should take the idea of an improvement but still quite a decline on pre pandemic levels seriously. In the meantime there is the likelihood of at least a one month lockdown.

The transport sector I highlighted earlier has particular problems as it was one of the worst affected areas.

It stood out the categories Transport Equipment and parts and accessories thereof (with the highest decrease expected for 2020, corresponding to -20.3%).

But not much of an expected recovery this year.

Transport equipment and parts and accessories thereof (+4.7%), mainly for Intra-EU markets (+6.8%,
+5.7% and +5.1%, respectively).

Financial Markets and Finances

There is something of a ying and yang here. If we start with the currency then Portugal will have been affected by the stronger Euro which I note has got a mention from the ECB today.

ECB’s Villeroy: We Will Keep Favourable Monetary Conditions As Long As Necessary -We Are Closely Following The Negative Effects Of The Euro Exchange Rate ( @LiveSquawk)

Although I guess it does help with the international position in one area.

At the end of the third quarter of 2020, the Portuguese economy had a net financial position vis-à-vis the rest of the world of -101.9 per cent of GDP (Chart 2), compared to -101.3 per cent of GDP at the end of the same quarter of 2019. ( Bank of Portugal)

If we switch to debt metrics then the Portuguese government is in relative terms running a tight fiscal ship.

This result reflects the net borrowing of general government and non-financial corporations (4.0 and 2.3 per cent of GDP respectively)

The latest national debt figures are running to the same tune.

In November 2020 public debt stood at €267.1 billion , a €1.1 billion decrease from the end of October. This was mainly driven by a decrease in debt securities (€1.2 billion)

General government deposits decreased by €2.0 billion, with public debt net of deposits increasing by €0.9 billion from the previous month, to a total of €244.7 billion.

These days the public debt burden is less of a debated issue because of the way that Portugal can borrow so cheaply.In fact it can borrow for ten years for effectively nothing (0.01%). As this feeds in the Bank of Portugal projects this.

The implicit interest rate on public debt is expected to fall over the projection horizon, from 2.6% in 2019 to 1.8% in 2023, which reflects the assumption that interest rates on new issues will remain low.

Comment

There are two main themes here. The first is that the Euro area crisis seems now like it is from a place “far,far away.” Back then solvency fears sent the benchmark bond yield into the teens for a while and if I remember correctly briefly as high as 21% as opposed to the present 0%. Although there does seem to be a hangover from those days as Portugal is being relatively rather restrained in its use of fiscal policy.

The next theme is that the December projections of the Bank of Portugal look rather optimistic now.

Accordingly, an 8.1% decline in GDP is projected in 2020, followed by growth of 3.9% in 2021, 4.5% in
2022 and 2.4% in 2023 . Activity will return to pre-pandemic levels at the end of 2022.

The V-shapers have proved to be rather panglossian and even that only had Portugal back to pre pandemic levels at the end of 2022. One curiosity I find is that those concerned with “output gaps” and the like seem to have disappeared. Anyway the first half of 2021 will be grim again and will follow on from a decline at the end of last year.

Let me finish with a metric that will be announced to cheers from the Frankfurt towers of the ECB.

In the 3rd quarter of 2020, the House Price Index (HPI) grew by 7.1% when compared with the same period of 2019……On a quarter-to-quarter basis, the HPI increased by 0.5% (0.8% in the 2nd quarter of 2020). By category, the existing dwellings prices increased by 0.6%, above that observed for new dwellings (0.1%).

First-time buyers will need a process of re-education before they understand how good this is for them…….

 

 

 

The rise and rise of negative interest-rates

This week is ending with a topic that has become something of a hardy perennial in these times. By these times I mean the way that the Covid-19 pandemic has added to the credit crunch. An example has been provided this morning by Bank of England Governor Andrew Bailey.

BoE’s Bailey: As You Go Towards Zero And Into Negative Territory, Academic Research Says Impact Of Structure Of Banking System On Transmission Tends To Increase Most Countries That Have Used Negative Rates Have Not Used Them For Retail Deposits ( @LiveSquawk)

This has reminded markets again about the Bank of England looking at negative interest-rates which as an aside is none too bright at a time when the UK Pound is seeing pressure. Perhaps he has gone native early and started the old tactic of talking it lower. But on the subject of negative interest-rates he is both reinforcing a point made by some of his colleagues and disagreeing with them. The agreement is with this bit from Michael Saunders on the

In my view, there may be some modest scope to cut Bank Rate further but, if we do, it may be preferable to move in relatively small steps.

The disagreement has been over the impact on banks with both Michael Saunders and Silvana Tenreyro claiming they can help them a view which I consider to be evidence free. It is also contradicted by this from the Saunders speech.

For example, if the TFS (or TFSME) interest rate is
below Bank Rate, then banks could borrow funds at the (lower) TFS rate and earn the (higher) interest rate
on reserves. This subsidy for banks would come at the BoE’s expense.

Firstly nice of him to confirm my point that such policies are indeed a bank subsidy. But why so banks need a different interest-rate to everyone else especially if they are unaffected.

But the clear message here has been the development of the effective lower bound or ELB. I still recall Governor Carney telling us this.

The Bank of England’s website says that the “effective lower bound” for the interest rate it sets, Bank Rate, is the current rate of 0.5%.

This is the level, according to the Bank, “below which it cannot be set” – the lowest practicable official interest rate. ( BBC March 2015)

Of course that became 0.1% when we cut to 0.1% and Governor Carney had previously contradicted his own rhetoric by cutting to 0.25% after the EU Leave vote. Well now according to Michael Saunders it has got lower again.

As discussed above, I suspect the ELB is probably somewhat below zero, but there is uncertainty around this. With this uncertainty, it may be preferable to make any further rate cuts in relatively small steps, less than the normal 25bp increments.

So 0.5% became 0.1% ( after they cut to 0.25%) and now it is somewhere below 0%. Were it not so serious this would be a comedy version of central banking 101. The other ridiculous part was claiming it was 0.5% when only across The Channel the ECB had cut below 0%.

The road below zero has been littered with official denials, although the record remains with Governor Kuroda of the Bank of Japan who imposed negative interest-rates only 8 days or a Beatles week after denying any such intention in the Japanese parliament.

Yesterday

We did not get an ECB interest-rate cut partly because they had reined back on that and partly because it looks as though there was some dissension in the camp.

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde brokered a difficult compromise this week to secure backing for a new pandemic-fighting package of measures, but her battle to convince sceptics among her colleagues and investors has only just begun.

Her claim that she had ended dissension has gone the way of well many of her other claims. But there was a nuance to the interest-rate debate as she simultaneously said down and then up.

She starts by saying “we are enlarging the volume of lending that can be obtained at those rates” And then says “we are slightly changing the reference period…. to make it a little more challenging” Seems at cross purposes… ( @LorcanRK)

It has turned out that there has been some potential tightening here, but I would not worry about it too much as once they realise it will hurt The Precious! The Precious! it will be changed. The interest-rate of -1% remains but how much of that banks can access has potentially been reduced.

I would not worry about this too much as once somebody points out to Christine Lagarde that she has made another mistake this will be reversed.

Bond Yields

We can continue the theme of mistakes by President Lagarde as someone was keen in the ECB messaging to make sure there would not be another “we are not here to close bond spreads” debacle.

We will conduct our purchases under the PEPP to preserve favourable financing conditions over this extended period. We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy.

This was a subplot to the main event in this area.

Second, we decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. We also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

We can now move to what The Frenchman in the Matrix series of films would call cause and effect.

And BOOM!

The 10-year Spanish bond yield turned negative for the first time ever. Still somewhat of a national embarrassment that Portugal went there first, I suppose. ( @fwred)

Fred has rather stolen my thunder about what had happened in anticipation of the move.

Yesterday Portugal joined the euro zone’s growing pool of negative yields as 10-year YTM dropped to -0.1% for the first time in history.

 

Comment

As I have been typing this there has been a reminder of old times for me and well you can see for yourselves.

Money Markets Assign 65% Probability Of 10 Bps Bank Of England Interest Rate Cut By March 2021 Vs 16% At Start Of Month ( @LiveSquawk)

It is hard not to laugh as a cut of 0.1% after cuts approaching 5% would do what exactly? But it would appear that for rate cuts central bankers keep singing along with the Average White Band.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

In terms of the UK we do already have negative interest-rates as both the two-year ( -0.14%) and the five-year yields ( -0.11%) are already there and as a real world issue they feed into mortgage rates because so many are at a fixed rate these days.

In terms of the world well it is arriving right now in a land down under.

An auction of three-month Australian notes on Thursday saw an average yield of 0.01%, with buyers who bid most aggressively at the sale receiving a yield of minus 0.01%. ( Bloomberg)

Adding in time to this.

 

Eurobonds To be? Or not to be?

We find that some topics have a habit of recurring mostly because they never get quite settled, at least not to everyone’s satisfaction. At the time however triumph is declared as we enter a new era until reality intervenes, often quite quickly. So last night’s Franco-German announcement after a virtual summit caught the newswires.

France and Germany are proposing a €500bn ($545bn; £448bn) European recovery fund to be distributed to EU countries worst affected by Covid-19.

In talks on Monday, French President Emmanuel Macron and German Chancellor Angela Merkel agreed that the funds should be provided as grants.

The proposal represents a significant shift in Mrs Merkel’s position.

Mr Macron said it was a major step forward and was “what the eurozone needs to remain united”. ( BBC)

Okay and there was also this reported by the BBC.

Mrs Merkel, who had previously rejected the idea of nations sharing debt, said the European Commission would raise money for the fund by borrowing on the markets, which would be repaid gradually from the EU’s overall budget.

There are a couple of familiar features here as we see politicians wanted to spend now and have future politicians ( i.e not them face the issues of paying for it). There is an undercut right now in that the choice of Frau Merkel reminds those of us who follow bond markets that Germany is being paid to borrow with even its thirty-year yield being -0.05%. So in essence the other countries want a slice of that pie as opposed to hearing this from Germany.

Money, it’s a crime
Share it fairly but don’t take a slice of my pie
Money, so they say
Is the root of all evil today
But if you ask for a raise it’s no surprise that they’re
Giving none away, away, away ( Pink Floyd)

Actually France is often paid to borrow as well ( ten-year yield is -0.04%) but even it must be looking rather jealously at Germany.Here is how Katya Adler of the BBC summarised its significance.

Chancellor Merkel has conceded a lot. She openly agreed with the French that any money from this fund, allocated to a needy EU country, should be a grant, not a loan. Importantly, this means not increasing the debts of economies already weak before the pandemic.

President Macron gave ground, too. He had wanted a huge fund of a trillion or more euros. But a trillion euros of grants was probably too much for Mrs Merkel to swallow on behalf of fellow German taxpayers.

She has made a technical error, however, as Eurostat tends to allocate such borrowing to each country on the grounds of its ECB capital share. So lower borrowing for say Italy but not necessarily zero.

The ECB

Its President Christine Lagarde was quickly in the press.

So there is zero risk to the euro?

Yes. And I would remind you that the euro is irreversible, it’s written in the EU Treaty.

Of course history is a long list of treaties which have been reversed. Also there was the standard tactic when challenged on debt which is whataboutery.

Every country in the world is seeing its debt level increase – according to the IMF’s projections, the debt level of the United States will reach more than 130% of GDP by the end of this year, while the euro area’s debt will be below 100% of GDP.

Actually by trying to be clever there, she has stepped on something of a land mine. Let me hand you over to the French Finance Minister.

French Finance Minister Bruno Le Maire said on Tuesday, the European Union (EU) recovery fund probably will not be available until 2021.

The 500 bln euro recovery fund idea is a historic step because it finances budget spending through debt, he added. ( FXStreet )

So the height of the pandemic and the economic collapse will be over before it starts? That is an issue which has dogged the Euro area response to not only this crisis but the Greek and wider Euro area one too. It is very slow moving and in the case of Greece by the time it upped its game we had seen the claimed 2% per annum economic growth morph into around a 10% decline meaning the boat had sailed. In economic policy there is always the issue of timing and in this instance whatever you think of the details of US policy for instance it has got on with it quickly which matters in a crisis.

Speaking of shooting yourself in the foot there was also this.

Growth levels and prevailing interest rates should be taken into account, as these are the two key elements.

The latter is true and as I pointed out earlier is a strength for many Euro area countries but the former has been quite a problem. Unless we see a marked change we can only expect the same poor to average performance going ahead. Mind you we did see a hint that her predecessor had played something of a Jedi Mind Trick on financial markets.

Outright Monetary Transactions, or OMTs, are an important instrument in the European toolbox, but they were designed for the 2011-12 crisis, which was very different from this one. I don’t think it is the tool that would be best suited to tackling the economic consequences of the public health crisis created by COVID-19.

They had success without ever being used.

Market Response

Things have gone rather well so far. The Euro has rallied versus the US Dollar towards 1.10 although it has dipped against the UK Pound. Bond markets are more clear cut with the Italian bond future rising over a point and a half to above 140 reducing its ten-year yield to 1.62%. The ten-year yield in Spain has fallen to 0.7% as well. It seems a bit harsh to include Spain after the economic growth spurt we have seen but nonetheless maybe it did not reach escape velocity.

Comment

Actually there already are some Eurobonds in that the ESM ( European Stability Mechanism) has issued bonds in the assistance programmes for Greece, Italy, Portugal and Spain. Although they were secondary market moves mostly allowing countries to borrow more cheaply rather than spend more. On that subject I guess life can sometimes come at you fast as how is this going?

Taking into account these measures, the
government remains committed to meeting the
primary fiscal surplus for 2020 and forecasts a
primary surplus at  3.6% of GDP ( Greece Debt Office)

On the other side of the coin it will be grateful for this.

81% of the debt stock is held by official sector creditors,
allowing for long term maturity profile and low interest
rates

On a Greek style scale the 500 billion Euros is significant but now we switch to Italy we see that suddenly the same sum of money shrinks a lot. I notice that Five Star ( political party not the band) have already been on the case.

It’s just too little, too late
A little too long
And I can’t wait ( JoJo)

This brings me to the two real issues here of which the first is generic. In its history fiscal policy finds that it can not respond quickly enough which is why the “first responder” is monetary policy. The problem is that the ECB has done this so much it is struggling to do much more and the European Union is always slow to use fiscal policy. Such as it has then the use has been in the other direction via the Stability and Growth Pact.

Next comes the fact that there are 19 national treasuries to deal with for the Euro and 27 for the European Union as I note that last night’s deal was between only 2 of them. Perhaps the most important ones but only 2.

Portugal has house price growth of 10% but apparently negative inflation!

It is time to turn our telescope towards Portugal as we have not looked at it for a while and signals abound that the times they are a-changing. Let me give you an example of that from this morning.

“The eurozone economy ground to a halt in
September, the PMI surveys painting the darkest
picture since the current period of expansion began
in mid-2013. GDP looks set to rise by 0.1% at best
in the third quarter, with signs of further momentum
being lost as we head into the fourth quarter,
meaning the risk of recession is now very real.” ( IHS Markit )

Actually those surveys were already projecting growth at 0.1% so I am not sure how it stays there with the reading falling from 51.9 to 50.1. Perhaps it is a refreshing acknowledgement that the survey is much blunter than using decimal points. Also ther are some grim portents looking ahead.

Export trade remained a key source of new
business weakness as highlighted by another
monthly decline in overall new export orders.
According to the PMI figures, exports have been
falling throughout the past year and September’s
deterioration was the sharpest since composite
export data were first available just over five years
ago.

There is a nuance here in that the Euro area PMI survey is for the larger economies so not Portugal. But it does provide a background as well as likely trend. Also I have looked at the export trend in particular as this is an issue for Portugal on several fronts. If we look back in time we see that its regular visits to the International Monetary Fund or IMF for help and aid have been driven by trade deficits. Next if we move forwards to the Euro area crisis from around 2011/12 one of the policies applied was called “internal devaluation” which was to make the economy more competitive in trade terms. Oh and as an aside “internal devaluation”  essentially means lower real wages, it just sounds better.

This feeds into a current feature of the Portuguese economy which has been the growth of the motor sector which accounts for around 4% of economic output or GDP. This has been a trend in that against the stereotype car production in the Euro area has headed south into the Iberian peninsular. Portugal has benefited from this with the flagship being the large Volkswagen operation there. In January Caixa Bank did some research on the sector showing its significance.

 in the latter part of 2018, exports of the automotive industry reached 13.0% of the total exports of goods (the highest figure since the end of 2004) and 3.7% of GDP (an all-time high). In addition, as can be seen in the second chart, in October 2018 the sector’s exports registered a growth of 39.4% year-on-year (reaching 7.5 billion euros for the 12-month cumulative total).

This has been a good news story but we now look at it with not a little trepidation as it was only yesterday we looked at manufacturing problems which have been driven by the motor sector. The reputation of Volkswagen is not what it was either.

Trade Figures

If we look at the official data we see this.

In July 2019, exports and imports of goods recorded nominal year-on-year growth rates of +1.3% and +7.9%
respectively (-8.3% and -3.7% in the same order, in June 2019). The emphasis was on the increase of 27.9% in
imports of Transport equipment, mainly Other transport equipment (mostly Airplanes), contributing by +4.2 p.p. to the total year-on-year rate of change.

If we take out what was presumably an aircraft purchase by TAP we see that import growth was at 3.7% well above export growth and not only was there a deficit but it is growing.

The trade balance deficit amounted to EUR 1,751 million in July 2019, increasing by EUR 452 million when compared
to the same month of 2018.

So we see a troubling picture. But we can add to this as monthly figures are unreliable in this area and we are not allowing for a strength of Portugal which is tourism so let us widen our search.

The goods account deficit increased by €2,028 million and the services account surplus declined by €137 million year on year.

In the first seven months of the year, exports of goods and services grew by 3% (2.2% in goods and 4.6% in services) and imports rose by 7.4% (6.7% in goods and 10.8% in services). ( Bank of Portugal )

As you can see the general picture remains the same of a rising deficit although the nuance changes as the export picture gets better. It looks as though tourism has helped but has been swamped by imports of unspecified services.

Before I move on the motor industry has more than a few similarities with the UK.

Lastly, despite the buoyancy of exports in the automotive sector as a whole, in net terms the sector’s trade balance remains negative. However, this situation has improved considerably in the last year: in October 2018, the balance of the automotive sector stood at –1.3 billion euros, compared to –2.7 billion euros in October 2017.  ( Caixa Bank)

Production

On Monday we were updated but as you can see there is little detail.

Industrial Production year-on-year change rate was -4.8% in August (-2.4% in the previous month). Manufacturing
Industry year-on-year change rate was -1.7% (-0.4% in July).

According to Trading Economics we do have some car production data for the month before.

Car production in Portugal decreased 4.2 percent year-on-year to 20,969 units in July 2019.

We do have the official view on September though for manufacturing overall.

In Manufacturing Industry, the confidence indicator decreased in September, reversing the increase observed in
August. The evolution of the indicator reflected the negative contribution of the balances of the opinions on global
demand and on the evolution of stocks of finished products, while the opinions on the production perspectives
stabilized.

Comment

Before this new phase there was much to like about the economic performance of Portugal. The cold recessionary and indeed depressionary winds of the Euro area crisis had been replaced by some badly needed economic growth. This meant that the unemployment situation has improved considerably from the crisis highs.

The provisional unemployment rate estimate for August 2019 was 6.2% and decreased by 0.2 pp from the previous month.

Indeed the past was revised higher still last month.

Gross Domestic Product (GDP) grew 3.5% in real terms in 2017, where the high growth of Investment stands out
(11.9%). In 2018, GDP presented a growth rate of 2.4% in real terms, where Investment remained as the most
dynamic component (growth rate of 6.2%).

So the number I looked at back on the 9th of May will be better than this now.

In 2018 real GDP was 1.2% higher than in 2008…

So far the official data still looks good.

In comparison with the first quarter of 2019, GDP increased by 0.5% in real terms, maintaining the growth rate
recorded in the previous quarter.

The fear though is that the growth phase was driven higher by the Euro boom and ECB policy and to add to the trade fears above there is this.

The House Price Index (HPI) increased 10.1% in the 2nd quarter of 2019, when compared to the same period of 2018, 0.9 percentage point (pp) more than in the previous quarter………On a quarter-to-quarter basis, the HPI grew 3.2%.

This leaves me with two thoughts for you. Firstly Portuguese first time buyers must wonder how there can be no inflation?

The estimate of the Portuguese Harmonised Index of Consumer Prices (HICP) annual rate of change was -0.3% (-0.1% in August).

Next that it was overheating issues that have led to my long-running theme for Portugal that economic growth does not average more than 1% for long. Can anybody spot any signs of that?

The Investing Channel

In the future will all mortgage rates be negative?

Today I thought that I would look at some real world implications of the surge in bond markets which has led to lower and in more than a few cases ( Germany and Switzerland especially) negative bond yields. The first is that government’s can borrow very cheaply and in the case of the two countries I have mention are in fact being paid to borrow at any maturity you care to choose. This gets little publicity because government’s prefer to take the credit themselves. My country the UK is an extreme case of this as the various “think tanks” do all sorts of analysis of spending plans whilst completely ignoring this basic fact as if a media D-Notice has been issued. I would say that “think tank” is an oxymoron except in this instance I think you can take out the oxy bit.

Negative Mortgage Rates

Denmark

Back on the 29th of May we were already on the case.

Interest rates on Danish mortgage loans have fallen since 2008. From an average interest rate including administration fee of close to 6 per cent in 2008 to under 2.2 per cent in August 2018. This is the lowest level since the beginning of the statistics in 2003.

Back then we also observed this.

For one-year adjustable-rate mortgage bonds, Nykredit’s refinancing auctions resulted in a negative rate of 0.23%. The three-year rate was minus 0.28%, while the five-year rate was minus 0.04%.

As you can see at the wholesale or institutional level interest-rates had gone negative and the central bank the Nationalbanken had seen reductions in the fees added to these as well.

That was then but let us pick up the pace and move forwards to the 2nd of this month. Here is The Local in Denmark.

Mortgage provider Realkredit Danmark will next week start offering Denmark’s cheapest ever 30-year mortgage, with an interest rate of just 0.5 percent per year. The fixed-rate 30-year loan is the lowest interest mortgage ever seen in Denmark, and is likely to be matched by Realkredit competitor Nordea Kredit.

That implied negative mortgage rates at shorter maturities although we already knew that but this week things have taken a further step forwards or perhaps I should write backwards. From Bloomberg.

In the world’s biggest covered-bond market, a Danish bank says it’s now ready to sell 10-year mortgage-backed notes at a negative coupon for the first time.

It’s the latest record to be set in a world that’s being dragged down by ever lower interest rates. In Denmark, where Jyske Bank will offer 10-year mortgage bonds at a fixed rate of minus 0.5 per cent, average Danes will borrow at rates far lower than those at which the US government can sell its debt.

Since then things have taken a further step as Nordea has started offering some mortgage bonds for twenty years at 0%, So we have nice even 0.5% changes every ten years.

If we look at Finance Denmark it tells us that variable rate mortgage bonds are at -0.67% in Danish Kroner and -0.83% in Euro in the 31st week of this year with a noticeable 0.2% drop in Euro rates.

This is impacting on business as we see that the latest three months have seen over 30,000 mortgages a month taken out peaking at 39,668 in June. This compares to 16/17k over the same 3 months last year so quite a surge. If we switch to lending volumes then the Danish mortgage banks lent more than double ( 212 billion Kroner) in the second quarter of this year.

Also as the Copenhagen Post points out whilst it may seem that negative mortgages are easy to get banks will behave like banks.

Banks are set to make money from the mortgage loan restructuring.

“We are in the process of a huge conversion wave, and the banks are of course also very interested in talking about that. Because they make good money every time a new loan is taken up,” explained Morten Bruun Pedersen, a senior economist at the Consumer Council, to TV2.

These days banks make money from fees and charges as there is no net interest income and on that subject we have a curiousity. On the one hand Danes are behaving rationally by switching to cheaper mortgages on the other the data from the Nationalbanken is from earlier this year but they have around 900 billion Kroner on deposit at 0% which is less rational and will have central banking Ivory Towers blowing out plenty of steam.

So whilst there are some negative mortgage rates the fees added are doing their best to get them into positive territory. The Nationalbanken highlights this here.

In 2018, Danish households paid an average interest rate of 1.20 per cent on their mortgage debt along with 0.96 per cent in administration fees.

I guess someone has to pay the banks money laundering fines

Just for research purposes I looked at borrowing 2 million Kroner on the Danske bank website and after 30 years I would have repaid 2.2 million so not much extra but it was positive.

Portugal

It has not been reported on much but there was an outbreak of negative mortgage rates in Portugal as this from Portugal on the move highlights.

The new law forces banks to reflect Euribor negative interest in home loan contracts. It was supported by all political parties in the country except the centre-right PSD which abstained.

The bill, which the banks and the Bank of Portugal tried to block, applies to all mortgages index-linked to Euribor rates.

Above all the law will benefit those with Euribor mortgages with very low spreads (commercial margins of banks), at around 0.30%.

The law allows for Euribor rates, currently in the negative across all terms, should be reflected in contracts, even after the cancelled spread, which implies a capital payout.

Typical that the banks would try to evade their obligations and notable that the Bank of Portugal could not look beyond “The Precious”

UK

When the credit crunch hit the UK saw a brief burst of negative mortgage rates. This was caused by the market being very competitive and mortgages being offered below Bank Rate and so much so that when it plunged to 0.5% some went negative. The most famous was Cheltenham and Gloucester and I forget now if it went to -0.02% or -0.04%.

This had wider consequences than you might think as banking systems were unable to cope and repaid capital rather than recording a negative monthly repayment. That was echoed more recently in the saga in Portugal above. A consequence of this was that the Bank of England went white faced with terror muttering “The Precious! The Precious!” and did not cut below an interest-rate of 0.5%. This was the rationale behind Governor Carney;s later statements that the “lower bound” was 0.5% in the UK.

If you are wondering how he later cut to 0.25% please do not forget that the banks received an around £126 billion sweetener called the Term Funding Scheme.

Comment

So we have seen that there are negative mortgage rates to be found and that we can as a strategy expect more of them. After all it was only yesterday we saw 3 central banks cut interest-rates and I expect plenty of others to follow. A reduction in the ECB Deposit Rate (-0.4%) will put pressure on the Danish CD rate ( -0.65%) and the band will strike up again.

In terms of tactics though maybe things will ebb away for a bit as this from Pimco highlights.

It is no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative……..What was once viewed as a short-term aberration – that creditors are paying debtors for taking their money – has already become commonplace in developed markets outside of the U.S. Whenever the world economy next goes into hibernation, U.S. Treasuries – which many investors view as the ultimate “safe haven” apart from gold – may be no exception to the negative yield phenomenon. And if trade tensions keep escalating, bond markets may move in that direction faster than many investors think.

The first thought is, what took you so long? After all we have been there for years now. But you see Pimco has developed quite a track record. It described UK Gilts as being “on a bed of nitro-glycerine” which was followed by one of the strongest bull markets in history. Also what happened to US bond yields surging to 4%?

Maybe they are operating the “Muppet” strategy so beloved of Goldman Sachs which is to say such things so they can trade in the opposite direction with those who listen.

As to the question posed in my headline it is indeed one version of our future and the one we are currently on course for.

 

 

 

Can Portugal continue its economic success story?

Today is the anniversary of the oldest alliance in the world as England signed the Treaty of Windsor with Portugal back in 1386. So let us take the opportunity to peer under the bonnet of the Portuguese economy which has been seeing better times after the struggles created by the Euro area crisis of the early part of this decade. Back then it was illustrated by an unemployment rate and benchmark bond yield in the high teens in percentage terms. The Euro area crisis saw the economy shrink at an annual rate of over 4% for a while which not only saw unemployment soar but also questioned the solvency of the nation which is why bond yields went with it. The latter point was an issue because like Italy Portugal had built up a history of not being able to sustain economic growth beyond 1% per annum but was unfortunately able to participate in any declines.

What about more recently?

A recovery began in 2014 but it was only slow growth and 2015 saw a rise but it was not until the third quarter of 2016 that we saw a real change with annual GDP growth going above 2% to 2.3%. This welcome rally continued and the first half of 2017 saw annual GDP growth at 3.1%. After the rough times of the credit crunch followed quickly by the Euro area crisis Portugal badly needed this.

2017 was the peak year as the second half maintained an annual growth rate of 2.5% so Portugal for once was not only joining in with a period of Euro area growth it was exceeding it. The latter theme continued in 2018 with Portugal slowing but doing considerably better than the average, although the catch is that in the last half of 2018 this happened.

In comparison with the third quarter of 2018, GDP increased 0.4% in real terms (0.3% in the previous quarter)

 

This meant the annual rate slowed to 1.7% and it was accompanied by something familiar.

The contribution of net external demand to GDP year-on-year rate of change shifted from -0.3 percentage points in the third quarter to -1.6 percentage points, with a decrease in real terms of exports of goods. The positive contribution of domestic demand increased to 3.3 percentage points in the fourth quarter

 

This is familiar on two counts. Firstly Portugal has a long history of going to the IMF due to balance of trade problems. Next comes the fact that problems with exports were a theme of the latter part of 2018 and has me wondering if this is related to the automotive sector in Portugal which is around 4% of the economy? Through the better period that sector has been a success but now times have got much harder illustrated by the fact that for example car sales by the largest Chinese manufacturer SAIC fell 20% on a year ago in April.

Moving to the Euro area strategy of “internal devaluation” which essentially means lower real wages that collided at the end of 2018 with the world trade issues, which of course are in the news right now. Next comes the role of the European Central Bank summarised here by its President Mario Draghi.

 I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery……..We view this as – but I don’t think I’m the only one to be the crucial driver of the recovery in the eurozone. At the time, by the way, when also other drivers were not really – especially in the first part, there was no other source of growth in the real economy.

If you take Mario at his word then QE and negative interest-rates were the driver of the recovery in Portugal. Thus the fading of growth should be no surprise as the monthly QE flow was tapered and then ended. Anyway that is Mario’s view and we should also note that he is hardly independent in this regard.

Unemployment

This is perhaps the clearest signal of better times.

In the 1st quarter of 2019, the unemployment rate stood at 6.8%, higher than the previous quarter value by
0.1 percentage points (pp) and lower than the year-on-year rate by 1.1 pp.

If we ignore for the moment the quarterly move we see that in comparison to the move above 17% ( 17.5%( in early 2013 things have got much better in this regard. Another way of putting it is that Portugal Statistics calculates a very broad measure including underemployment and thinks this.

Albeit of the quarterly increase in the 1st quarter of
2019, the unemployed population and the labour
underutilisation have displayed downwards trends since
the 1st quarter of 2013, having decreased in total
61.8% and 49.8%, respectively (corresponding to
573.2 thousand and 731.8 thousand people in each
case).

Looking Ahead

The Bank of Portugal tells us this.

The Portuguese economy is expected to continue to grow by 2021, although at a slightly slower pace than in the past few years. After a 2.1% increase in 2018, gross domestic product (GDP) is expected to grow by 1.7% in 2019 and 2020, and by 1.6% in 2021, drawing closer to potential growth.

Let us start with the good news within this.

Projected growth for economic activity in Portugal outpaces that projected by the European Central Bank for the euro area, which indicates slight progress in the Portuguese economy’s convergence towards average income levels in the euro area.

Mind you with the trade war issue continuing there has to be doubt over this bit.

The Portuguese economy should continue to benefit from a favourable economic and financial environment, including an average growth in external demand of 3.4% and the maintenance of favourable financing conditions for economic agents.

National Debt

This has led to another favourable situation for Portugal which is the change in trend for the Public Finances. The annual deficit was running at an annual rate of 7.2% of GDP as 2015 began but is now running at an annual rate of 0.5%. This means that the national debt has finally begun to fall in relative terms to 121.5% of GDP. So we again see how economic growth can improve matters in this area.

However an “Obrigado Mario” is due as the ECB QE programme has unequivocally helped matters here with Portugal now having a ten-year yield of a mere 1.1%.

Comment

Let me continue with the good news theme with this from the Bank of Portugal this morning.

In 2018 real GDP was 1.2% higher than in 2008……The unemployment rate stood at 7.0%, the lowest figure in Portugal since 2004…… Although slowing down, tourism exports increased by 7.5% in 2018 and, together with car exports, were at the root of market share gains for Portuguese exporters,

Now let me move to the issues as it sees it.

However, labour productivity, measured as gross value added (GVA) per worker, declined by 0.6%……… Portuguese GDP per capita in 2018 stood at 58% of GDP per capita in the euro area.

If we take those issues in reverse we see that in spite of the recent stronger phase the troubles of the past leave Portugal mulling what happened to the promises of economic convergence made by the Euro area founders. Also last year saw Romania overtake Portugal in terms of total output but not on an individual basis.

However that issue is driven by the first statistic in my opinion. It stands out in two respects, as it is a disappointment compared to the rate of economic growth and compares very unfavourably with what we were looking at for America yesterday. More deeply it is systemic to Portugal which has long struggled with such issues with the stereotype being of old industries and old practices.

Finally the central bank may be happy about this but first time buyers will not be.

In the 4th quarter of 2018, the year-on-year change of median price of dwellings sales in Portugal was +6.9%,
increasing from 932 €/m2
in the 4th quarter of 2017 to 996 €/m2
in the 4th quarter of 2018. Lisboa stood out from the
other cities with more than 100 thousand inhabitants as it scored the highest house price (3 010 €/m2
) and also the
highest growth compared to the same period in the previous year: +23.5%….. Apart from Lisboa, the cities of Porto (+23.3%), Amadora (+20.3%) and Braga (+18.3%)
observed significant variations too.

Plenty of wealth effects for it to claim but how much lower would real GDP growth be if owner-occupied housing costs were not ignored by the inflation measures used?

 

 

 

Novo Banco is a case of meet the new boss same as the old boss

There are some matters who keep requiring our attention and there are some where it feels like they need supervision 24/7 365 days of the year. The latter includes the worst banking casualties like Monte Paschi, Deutsche Bank and my subject of today Novo Banco in Portugal. Please let us have no sniggering at the back as we remind ourselves that it was originally presented as a new bank as in the literal translation that was clean and in the words of Arcade Fire,ready to start.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets.

Readers might want to keep the last four words of that statement to mind before we look at the other issue from that statement.

The State will bear no costs related to this operation. The equity capital of Novo Banco, to the amount of €4.9 billion, is fully underwritten by the Resolution Fund.

Seems clear doesn’t it? Well the bailout water was a fiat bit muddier than that.

Given that the Resolution Fund started its operation only in 2012 and has not available sufficient financial resources to finance the resolution measure applied to Banco Espírito Santo, S.A., the Fund took out a loan from the Portuguese State.

Actually as the 2016 accounts of the Resolution Fund show that the plan for the Portuguese banks to replace this measure only partially happened as we mull yet again the establishment meaning of the word temporary.

in the case of the BES resolution in 2014 the initial capital injection of €4.9 billion by the Resolution Fund in Novo Banco was financed in €3.9 billion by the Portuguese State and only the remainder by the banks that are members of the Resolution Fund. ( Novo Note )

Is this a big deal? Yes it is because you see to quote South Park “And it’s gone”

On January 2018, the Resolution Fund disclosed its Annual Report for 2016, in which it recognizes full loss of the €4.9 billion cash injunction made into Novo Banco at the time the resolution measure was taken back in 2014: ( Novo Note)

But wait there was more

On the 4th of April 2017 I pointed out this.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

Yes just like with the word temporary the word clean seems to have an almost infinite number of variations as some bondholders found that the supposedly new clean bank had bonds which were being shifted to the bad one. Or that their chances of repayment went from being expected to be circa 100% to circa 0%. As you can imagine they were far from pleased and according to the Portugal news last December were joined in the courts by some retail bond investors.

More than 100 small retail investors holding bonds of five series retransferred from former Banco Espirito Santo (BES), Novo Banco, to the ‘bad bank’ BES, which contains the ‘toxic assets’ of the original bank, have filed a lawsuit against the Portuguese state, the representatives announced.

This reminds us that whilst the headlines are about bond funds it is mostly ordinary investors who are hurt by such moves whether explicitly as those above or implicitly by pension or investment holdings in the funds affected.

What about now?

You might think that it could not get any worse as 75% of the bank is now in the hands of Lone Star. Well as I pointed out in April 2017 there were ongoing issues.

  1. The nearly 2 billion Euros of bonds written off do not seem to have made the situation much better.
  2. The Portuguese Resolution Fund put in 4.9 billion Euros for a bank which is now apparently worth 1 and 1/3 billion.

The idea that a 25% holding in Novo Banco would eventually pay off the sums listed above always was far-fetched especially as we note something else from back then.

Quarterly losses since Novo’s creation have averaged €250m. A quarter of all loans are delinquent or “at risk” of being so.

At the end of last week another tale of woe was produced. From sapo.

he New Bank closed 2018 with losses of 1,412 million euros . It will ask for 1,149 million euros from the Resolution Fund under the contingent capital mechanism created when it was sold to Lone Star in 2017 to offset the large losses it had from the sale of troubled assets.

But you see this is apparently a triumph as last year has been revised downwards.

Last year, the bank led by António Ramalho had reported a negative result of 1,395 million euros and also appealed to the Resolution Fund. It has now been revised to € 2,298.0 million (justified by the fact that the capital injection of the Resolution Fund was counted as capital rather than revenue) , and the losses now presented represent an improvement of 38, 5%.

This is a bit like the famous phrase “tractor production is rising” where bad news is drip fed out in penny packets. So everything is worse but this way round 2018 can be presented as being better than 2017 unless of course it too will later be “discovered” to have been much worse than claimed concurrently.

Also whilst there is some good news in that as you can see below the non-performing loans category is being reduced it seems to be at the cost of pretty much one for one losses.

This negative result is related to the bad credit sale over the past year, including a portfolio of 2.150 million euros in December, , which is recognized as losses in the accounts. Following these operations, the non-performing loans ( NPL ratio fell to 22.4% (from 28.1% last year),while provisions and impairments decreased by 36.7% (or 147.2 million of euros) .

The journalist Patricia Kowsmann who still follows this in spite of the Wall Street Journal moving her from Lisbon to Frankfurt also pointed out some other changes.

The best part of Novo Banco’s 2018 results (a EUR1.4B loss btw) is that they‘ve split the bank ops into “legacy” and “core.” So BES was split between a bad bank and a good bank and the good bank has now been split between a good bank and a bad bank.

Will the new good bank later be split into a good and bad bank too? The metaphor here may well turn out to be one of Russian dolls.

Comment

As we pick our way through these events there is much that is familiar. The opening issue is the way that the truth is withheld and doled out later in penny packets.For example in the way that no losses for the taxpayer morphs into this from the European Commission on Portugal.

which mainly reflects the 0.4% of GDP impact of the activation of the Novo Banco contingent capital mechanism.

That is presented as a one-off but there is at least another one coming which reminds me of my timeline for a banking collapse which continues to stand the tests of time rather well.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

The ordinary Portuguese citizen is entitled to be nonplussed and a bit more by this as those in charge of their national finances have not told the truth.What was supposed to happen was that the Portuguese economy would improve and the non=performing loans would fade and the rusty battered can that was kicked into the suture could be picked up later. As we looked at only last week the Portuguese economy has improved but that means that Novo Banco was in a much worse state than claimed. Whether the due diligence of the Bank of Portugal was incompetent or a misrepresentation or both the Portuguese taxpayer faces a deal where they might get 25% of the profits one day but for the moment they seem to be facing a reality of around 80% of any losses.

It all reminds me of this from the film Snatch.

Turkish I fail to recognize the correlation between losing ten grand, hospitalizing Gorgeous, and a good deal.

 

 

Has Portugal escaped its economic depression or not?

We have an opportunity today to look at the Euro area from two different but linked perspectives. The first continues from yesterday’s money supply analysis which tells us that the weaker economic phase looks set to continue overall. The next is that whilst I have pointed out in the past that in terms of economic growth in the Euro area Italy and Portugal have been like twins with it struggling to get above 1% per annum on any sustained basis Portugal has been doing better than that in recent times. Another difference is that whilst Italy has been in the bad boys/girls club Portugal is pretty much a model Euro area nation in terms of doing what it is told.

Looking back

The credit crunch hit Portugal with the annual fall in GDP peaking at 4.3%, however the economy bounced back quickly until the Euro area crisis hit. It was the latter which drove the “lost decade” and indeed depression seen in Portugal as annual GDP growth went negative again at the opening of 2011 and remained there until the last quarter of 2013. Not only that but the last three-quarters of 2012 all saw annual rate of fall in GDP exceeding 4%.

That means that the subsequent recovery had to dig its way out of quite a hole especially as it started slowly. Things picked up late in 2016 and 2017 was strong meaning as I pointed out on the 19th of November last year.

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.

The catch to the recent good news is that the annual rate of economic growth has been fading from the peak of 3.1% seen in the first half of 2017 with the latest numbers below.

The Portuguese Gross Domestic Product (GDP) increased by 1.7% in volume, in the fourth quarter of 2018 (2.1% in the previous quarter…..In comparison with the third quarter of 2018, GDP increased by 0.4% in real terms (0.3% in the previous quarter)

So if we take the second half of the year with ~0.7% GDP growth we can expect a further slowing. So was it to use the words of ECB President Mario Draghi all QE driven?

What changed?

If you look at the past history of Portugal which is littered with interventions by the IMF the issue has been one of balance of payments deficits. This was what the internal competitiveness model ( lower wages) was supposed to improve and there is evidence that it had some success.

The recovery period subsequent to 2013 was characterised by the continued increase in the weight of exports in GDP , a trend that extends to all components, with emphasis on tourism, which presented the greatest cumulative growth. ( Bank of Portugal)

The problem looking ahead is again illustrated by the Bank of Portugal.

chiefly due to a downward revision of export growth. This reflects a revision of the assumptions relating to developments in external demand and the incorporation of the most recent information.

This was added to in the latest national accounts.

Net external demand presented a more negative contribution to year-on-year GDP rate of change, reflecting a reduction in volume exports of goods.

In case you are wondering why this is such a big deal it is driven by this. From the Bank of Portugal a week ago.

The net external debt of Portugal, which is the result of the IIP mostly excluding capital instruments, gold bullion and financial derivatives, reached €179.5 billion in December 2018. Net external debt as a percentage of GDP declined by 2.2 percentage points from the end of 2017 to the end of 2018. Net external debt went from 91.7% to 89.5% during this period, as a result of an increase in GDP that more than offset the nominal increase in debt.

I cancel caution about the accuracy of all this but the principle of a large external debt holds. The issue with accuracy is shown below as  whilst a currency fall is a fact the holdings detailed are an estimate which is unlikely to be that accurate.

In the case of exchange rate changes, a depreciation of the kwanza resulted in a reduction in the value in euro of Angolan assets held by residents.

Returning to possible consequences one have been removed by Euro area membership as a currency collapse could happen but is a long way away if we note the current account surplus driven by Germany. Instead in the Euro area crisis we saw the benchmark ten-year bond yield rise into the high teens. That is a long way away now as the combination of a better economic growth phase and ECB QE means the ten-year yield is a mere 1.47%. Crazy really, but then so many bond yields are these days.

The undercut is that the whole position would likely be much better if Portugal had an external competitiveness measure or its own exchange rate as a new Escudo would be much lower than the Euro.

Car Production

This has been an area driving Portugal’s growth as highlighted by this earlier this month from The Portugal News.

Automotive production in Portugal increased by 68% in 2018 compared to the previous year, to a total of 294,000 vehicles, accentuating the upward trend started in 2017, the Automobile Association of Portugal (ACAP) announced today.

We know, however, that the world automotive market has slowed down and this has especially affected countries which export cars like Portugal. There have been individual changes but no great detail on the overall picture. All we have are the hints from this.

Industrial Production year-on-year change rate was -0.3%, in December (-3.1% in the previous month). Manufacturing
Industry year-on-year change rate was -0.6% (-5.2% in November).

House Prices

This has been “Boom!Boom!Boom!” to quote the black-eyed peas. From the Portugal resident.

There are signs that this may be particularly true of the Portugal real estate market, which, taking its cue from activity in Lisbon, is increasingly an investment of choice for international property investors and property development companies who are looking to take advantage of some of the best returns available in Europe.

If we switch from the hype to the numbers we are told this.

The Confidencial Imobiliário Residential Price Index reports that the cost of Portuguese property was up 15.6% in September 2018 when compared to the same period the previous year. Furthermore, it also reported year-on-year increases of over 10% for every month since July 2017.

I have pointed out before that the Golden Visa system has led to celebrities such as Madonna coming to Lisbon which will create some economic activity. But the Portuguese first-time buyer faces quite a bit of inflation.

Comment

There has been plenty of good news in the past couple of years from the Portuguese economy and let me add another dose just released by Portugal Statistics.

In December 2018, the unemployment rate was 6.6%, down 0.1 percentage points (pp) from the previous month’s level, the same value as in three months before, and down 1.3 pp from the same month of 2017.

Except it came with a troubling kicker which is in line with more recent events.

The provisional unemployment rate estimate for January 2019 was 6.7%, up 0.1 p.p. from the previous month’s level.

We do not yet know whether the last couple of years will be seen by historians as a turn for the better as we hope or just another phase in a long running depression as we fear. If the latter the pumping of house prices will look like something out of a dystopian science-fiction piece where the already wealthy gain but future buyers lose heavily.

Also if we look what the Doobie Brothers called a “long train running” there is this.

In 2018, there were 87,325 live births registered and 113,477 deaths in the national territory……….This resulted in the deterioration of the natural balance (-25,982), which remains negative for the tenth consecutive year.

Another lost decade?

 

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.

 

 

 

 

Can the Portuguese economy rely on the Lisbon house price boom?

It is time to head south again and touch base with what is happening in sunny Portugal. In the short-term the UK weather may be competitive but of course in general Portugal wins hands down which is why so many holidaymakers do their bit and indeed best for retail sales and the tourism industry over there. No doubt they helped cushion things when the economy was hit by the double whammy of the credit crunch followed by the Euro area crisis but now the Bank of Portugal was able to report his in its May Bulletin.

In 2017 GDP grew by 2.7%, in real terms, after increasing by 1.6% in the previous year.

This is significant on several levels. The most basic is that growth is happening. Next comes the fact that for Portugal this is a performance quite a bit above par. This is because as regular readers will be aware the background is of an economy that has struggled to maintain economic growth above 1% per annum. It is also means that the statement below has been rather rare.

In Portugal, GDP growth stood close to the
euro area average.

Accordingly the nuance is a type of statement of triumph as not only has Portugal seen absolute economic problems it has been in relative decline. Tucked away in the detail was good news for issues which have plagued the Portuguese economy.

The factors behind the acceleration of the Portuguese economy in 2017 were exports and
investment. This composition of growth is particularly important in correcting a number of
structural problems persisting in the Portuguese economy. The strong performance of Portuguese
exports mostly resulted from a recovery in the pace of growth of external demand for Portuguese
goods and services, in particular from euro area partners.

So the “Euroboom” helped and one part of the story allows the central bank to do a bit of cheerleading.

These developments have a structural dimension, including the closure of firms which are more oriented towards the domestic market and the establishment
and expansion of new firms that export higher value-added goods and are oriented towards more diversified geographical markets than in the past.

However us Brits may well have done our bit for something which is also going well.

In 2017 the market share gain of Portuguese exports was also associated with extraordinary growth in tourism exports. The dynamism observed in the tourism sector in Portugal exceeds that of a number of competing
countries, namely the other countries in Southern Europe.

This issue matters because Portugal has in recent decades been something of a serial offender in terms of finding itself in the hands of the IMF ( International Monetary Fund). A familiar tale of austerity and cut backs then follows which is one of the causes of its economic malaise. The May Bulletin implicitly confirms this.

Bringing the GDP per worker in Portugal closer to the average of European Union (EU) countries is a particularly important challenge for the Portuguese economy.

Indeed and tucked away in the better news on investment is something of a warning.

Construction benefited from favourable financing conditions, an increase in demand from
non-residents and strong growth in tourism and related real estate activities……….This is particularly relevant for an economy such as Portugal, where housing has
a very high share of the capital stock and the level of capital per worker is low compared with
the other European countries.

This brings us to the background of Portugal being a low wage, low productivity and low growth economy. An issue is this way it leads this European league table.

In 2015, Portugal was the country with the largest weight of construction in the stock of fixed
assets, with 91.7% (41.5% associated with dwellings and 50.2% associated with other buildings
and structures)

Unemployment

The better economic situation has led to welcome developments in this area as you might expect. From Portugal Statistics on Friday.

The April 2018 unemployment rate was 7.2%, down 0.3 percentage points (p.p.) from the previous month’s level,
0.7 p.p. from three months before and 2.3 p.p. from the same month of 2017.

This area has been a particular positive as the unemployment rate has gone from a Euro area laggard to one improving the overall average. Whilst in Anglo-saxon and Germanic terms it still looks high for Portugal it is an achievement.

only going back to November 2002 it is
possible to find a rate lower than that.

On a deeper level we learn something from the employment trends. For newer readers in the credit crunch era rises in employment have become a leading indicator for an economy. Looked at like this then there was a change in the summer of 2013 and since then an extra half a million or so Portuguese have found work. Returning to economic theory this is a change as it used to be considered a lagging indicator whereas now we often see it being a leading one.

House Prices

The Bank of Portugal will be pleased to see this and will have its claims of wealth effects ready.

In the first quarter of 2018, the House Price Index (HPI) rose 12.2% in relation to the same quarter of the previous
year, 1.7 percentage points (p.p.) more than in the fourth quarter of 2017. This was the fifth consecutive quarter in
which dwelling prices accelerated

Perhaps this is what they meant by this.

Monetary and financial conditions contributed to this economic momentum, with the ECB’s monetary policy remaining accommodative.

A couple of areas stand out according to Reuters.

The National Statistics Institute said house prices in the Lisbon area rose 18.1 percent in the fourth quarter from a year earlier to an average of 1,262 euros per square meter. In Porto house prices rose 17.6 percent.

So Portugal now has the capital city house price disease. Just under half of recent turnover in houses by value has been in Lisbon. Yet the ordinary first-time buyer is seeing prices move out of reach.

Comment

The new better phase for Portugal is very welcome for what is a delightful country. But beneath the surface there are familiar issues. Let me start with an area that should be benefiting from the house price boom which is the banks.

Nevertheless, NPLs remain at high levels, in turn, weighing on banks’ profitability, funding and capital costs. High NPLs also hinder a more efficient allocation of resources in the corporate sector and thus weaken potential growth.

You may note that the European Central Bank prioritises the banks over the corporate sector as it reminds us that non performing loans remain an issue. Also there is the ongoing problem on how the new  bank Novo Banco went from being perceived as clean to dirty like it was a diesel.

The FT’s Rob Smith has a story today on the latest complication. Novo Banco is planning to push ahead with its bond sale, which involves tendering outstanding senior bonds, despite a new legal challenge from a London-based hedge fund, which argues that it has actually already defaulted on its senior debt. ( FT Aplhaville).

Also there is this pointed out by @WEAYL around ten days ago.

CGD, BCP and Novo Banco lent 100 million to the venture capital company ECS at the end of 2017. The next day they received the same amount in a distribution of the fund’s capital managed by ECS. (Economic Online)

Next comes the issue of demographics of which I get a reminder whenever I go to Stockwell or little Portugal.

The resident population in Portugal at 31 December 2017 was estimated at 10,291,027 persons (18,546 fewer than in
2016). This results in a negative crude rate of total population change of -0.18%, maintaining the trend of population decline, despite its attenuation in comparison to recent years.

Even worse the departed are usually the young, healthy and educated.

Should the trade wars get worse, then there will be an issue for the car industry as it is around 4% of economic output and has been doing well.