The UK joins France and Germany with falling production in April

Today brings us a raft of new detail on the UK economy and as it is for April we get the beginnings of some insight as to whether the UK economy picked up after the malaise of only 0.1% GDP ( Gross Domestic Product) growth in the first quarter of this year. According to Markit PMI business survey we have in the first two months of this quarter but of course surveys are one thing and official data is another.

So far, the three PMI surveys indicate that GDP looks set to rise by 0.3-0.4% in the second quarter.

As for the manufacturing sector the same set of surveys has told us this.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®
) rose to 54.4, up slightly from April’s
17-month low of 53.9, to signal growth for the
twenty-second straight month.

So we see that April can be looked at almost any way you like. Manufacturing has been in a better phase for a while now partly in response to the post EU leave vote fall in the UK Pound £. According to the survey we are still growing but April was the weakest month in this phase although some caution is required as I doubt whether a survey that can be in the wrong direction is accurate to anything like 0.5.

Of course the attention of Mark Carney and the Bank of England will be on a sector that it considers as and maybe more vital. From the Local Government Association.

Councils’ ability to replace homes sold under Right to Buy (RTB) will be all but eliminated within five years without major reform of the scheme, new analysis from the Local Government association reveals today.

The detail of the numbers is below.

The LGA said that, in the last six years, more than 60,000 homes have been sold off under the scheme at a price which is, on average, half the market rate, leaving councils with enough funding to build or buy just 14,000 new homes to replace them.

We sometimes discuss on here that the ultimate end of the house price friendly policies of the UK establishment will be to give people money to buy houses. Well in many ways Right To Buy does just that as those who have qualified buy on average at half-price. Also we see that one of the other supposed aims of the scheme which was to replace the property sold with new builds is failing. I guess we should not be surprised as pretty much every government plan for new builds fails.

Production and Manufacturing

These were poor numbers as you can see below.

In April 2018, total production was estimated to have decreased by 0.8% compared with March 2018, led by a fall of 1.4% in manufacturing and supported by falls in energy supply (2.0%), and water and waste (1.8%).

The fall in energy supply is predictable after the cold weather of March but the manufacturing drop much less so. If we review the Markit survey it was right about a decline but in predicting growth had the direction wrong. On a monthly basis the manufacturing fall was highest in metal products and machinery which both fell by more than 3% but the falls were widespread.

with 9 of the 13 sub-sectors falling;

If we step back to the quarterly data we see that it has seen better times as well.

In the three months to April 2018, the Index of Production increased by 0.3% compared with the three months to January 2018, due primarily to a rise of 3.2% in energy supply; this was supported by a rise in mining and quarrying of 4.3%………..The three-monthly fall to April 2018 in manufacturing of 0.5% is the largest fall since May 2017, due mainly to decreases in electrical equipment (9.4%), and basic metals and metal products (1.8%).

So on a quarterly basis we have some production growth but not much whereas manufacturing which was recently a star of our economy has lost its shine and declined. There has been a drop in trade which has impacted here.

The fall in manufacturing is supported by widespread weakness throughout the sector due to a reduction in the growth rate of both export and domestic turnover.

Actually for once the production and trade figures seem to be in concert.

Goods exports fell £3.1 billion, due mainly to falls in exports of machinery, pharmaceuticals and aircraft, while services exports also fell £2.5 billion in the three months to April 2018…….Falling volumes was the main reason for the declines in exports of machinery, pharmaceuticals and aircraft in the three months to April 2018 as price movements were relatively small.

That is welcome although the cause is not! But we see a signs of a slowing from the better trend which still looks good on an annual comparison.

In the three months to April 2018, the Index of Production increased by 2.3% compared with the same three months to April 2017, due mainly to a rise of 2.3% in manufacturing.

If we compare ourselves to France we see that it’s manufacturing production rose by 1.9% over the same period. However whilst we are ahead it is clear that our trajectory is worsening and we look set to be behind unless there is quite a swing in May. As to the Markit manufacturing PMI then its performance in the latest quarter has been so poor it has been in the wrong direction.

As we move on let me leave you with this as a possible factor at play in April.

 It should also be noted that survey response was comparatively high this month and notable weakness was due mainly to the cumulative impact of large businesses reporting decreased turnover.


We have already looked at the decline in good exports but in a way this was even more troubling.

 services exports also fell £2.5 billion in the three months to April 2018.

Regular readers will be aware that I have a theme that considering how important the services sector is to the UK economy we have very little detail about its impact on trade. As an example a 28 page statistical bulletin I read had only one page on services. I am reminded of this as this latest fall comes after our statisticians had upgraded the numbers as you see the numbers are mostly estimates.

So not a good April but the annual picture remains better.

The UK total trade deficit (goods and services) narrowed £6.7 billion to £30.8 billion in the 12 months to April 2018. An improvement to the trade in services balance was the main factor, as the trade surplus the UK has in services widened £9.9 billion to £108.7 billion. The trade in goods deficit worsened, widening £3.2 billion to £139.5 billion over the same period.


This was yet again a wild card if consistency can be that.

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

The consistency comes from yet another fall whereas the wild card element is that it got worse on this measure in spite of a small increase in April


There is a lot to consider here today but let us start with manufacturing where there are three factors at play. The money supply numbers have suggested a slow down and it would seem that they have been accurate. Next we have the issue that exports are weak and of course this is into a Euro area economy which is also slowing as for example industrial production fell by 0.5% in France and 1% in Germany in April on a monthly basis. Some are suggesting it is an early example of the UK being dropped out of European supply chains but I suspect it is a bit early for that.

Moving to construction we see that it is locked in the grip of an icy recession even in the spring. It seems hard to square with the 32 cranes between Battersea Dogs Home and Vauxhall but there you have it. I guess the failure of Carillion has had quite an effect and linking today’s stories we could of course build more social housing.

Looking forwards the UK seems as so often is the case heavily reliant on its services sector to do the economic heavy lifting, so fingers crossed.




UK production and manufacturing have seen a lost decade

Today brings us what is called a theme day by the UK Office for National Statistics as we get data on production, manufacturing and trade. This comes at a time when the data will be especially prodded and poked at. This is mainly driven by the fact that there have been hints of an economic slow down both in the UK and in the Euro area. Added to that we have seen rising tensions around Syria and the Middle East which have pushed the price of a barrel of Brent Crude Oil above US $70 which if sustained will give us another nudge higher in terms of cost push or if you prefer commodity price inflation. If we return to yesterday’s topic of Bank of England policy we see the potential for it to find itself between a rock and a hard place as a slowing economy could be combined with some oil price driven inflation.


This opened with a worrying note although of course the issue is familiar to us.

In the three months to February 2018, the Index of Production decreased by 0.1% compared with the three months to November 2017, due to a fall of 8.6% in mining and quarrying, caused mainly by the shutdown of the Forties oil pipeline within December 2017.

If we move to the February data we see that it rose but essentially only because of the cold weather that caused trouble for services and construction.

In February 2018, total production was estimated to have increased by 0.1% compared with January 2018; energy supply provided the largest upward contribution, increasing by 3.7%.

If we look into the detail we see that the colder weather raised production by 0.43% meaning that there were weaknesses elsewhere. Some of it came from the oil and gas sector where in addition to some planned maintenance there was a one-day shut down for the rather accident prone seeming Forties field. But there was also something which will attract attention.

Manufacturing output decreased by 0.2%, the first fall in this sector since March 2017, when it fell by 0.4%. Within this sector 7 of the 13 sub-sectors decreased on the month; led by machinery and equipment not elsewhere classified, which fell by 3.9%, the first fall since June 2017, when it decreased by 4.9%.

This has been a strength of the UK economy in recent times and concerns about a possible slow down were only added to by this.

 It should be noted that the growth in this sector of 0.1% during January 2018 and published last month, has been revised this month to 0.0%, further supporting evidence provided in the January 2018 bulletin of a slow-down in manufacturing output.

Although our statisticians found no supporting evidence for this there remains the possibility that the bad weather played a role in this. Otherwise we are left with an impression of a manufacturing slow down which does fit with the purchasing managers indices we have seen. The annual comparison however remains good just not as good as it was.

 in February 2018 compared with February 2017, manufacturing increased by 2.5%.

Also there were hopes that we might regain the previous peak for manufacturing output which was 106.8 in February 2008 where 2015 = 100 but we scaled to 105.4 in January and have now dipped back to 105.2. The situation in production is somewhat worse as we are still quite some distance from the previous peak which on the same basis was at 111.1 in February 2008 and this February was at 104.8. The issue is complicated by the decline of North Sea Oil and Gas but overall those are numbers which look like a depression to me especially after all this time which one might now call a lost decade.


We traditionally advance on these numbers with some trepidation after years and indeed decades of deficits on this particular front. So let us gather some cheer with some better news.

Comparing the 12 months to February 2018 with the same period in 2017, the total trade deficit narrowed by £12.9 billion to £27.5 billion; the services surplus widened by £11.1 billion to £108.3 billion and the goods deficit narrowed by £1.8 billion to £135.8 billion.

Tucked away in this was some good news and for once a triumph for economics 101.

Total exports rose by 10.4% (£59.4 billion) to £627.6 billion compared with total imports, which increased by 7.6% (£46.5 billion) to £655.1 billion.

In true Alice In Wonderland terms our exports have to do this to make any dent in our deficit because the volume of imports is larger.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

Both goods and services imports have responded well to the lower value of the UK Pound £ as well as being influenced by the favourable world economic environment.

 Goods exports rose by 11.3% (£34.9 billion) to £345.0 billion ……..Services exports rose by 9.5% (£24.5 billion) to £282.6 billion

We rarely give ourselves the credit for being a strong exporting nation because it gets submerged in our apparent lust for imports.

As to the more recent pattern I will let you decide if the change below means something as it is well within the likely errors for such data.

The total UK trade deficit (goods and services) widened by £0.4 billion to £6.4 billion in the three months to February 2018

A little wry humour is provided by the fact that in terms of good exports our annual improvement was due to exports to the European Union. However the humour fades a little as I note our official statisticians have no real detail at all on our services exports which is a great shame as they are a strength of our economy.


After the cold spell in February this was always going to be a difficult month.

Construction output continued its recent decline in the three-month on three-month series, falling by 0.8% in February 2018………Construction output also decreased in the month-on-month series, contracting by 1.6% in February 2018, stemming from a 9.4% decrease in infrastructure new work.

In the circumstances I thought this was not too bad although this may have left me in a class of two.

You see the past is better than we thought it was which also confirms some of the doubts I have expressed about the reliability of this data.

The annual growth in 2017 of 5.7% is revised upwards from the 5.1% growth reported.

So it is not in a depression but has entered a recession.


There is a fair bit to consider as we note that any continuation of the recent falls will see manufacturing continue its own lost decade as we note that overall production seems trapped in one with little hope of  what might be called “escape velocity”. That means that the Bank of England faces a scenario where the picture for this particular 14% of the economy has seen the grey clouds darken. By contrast construction went from a really good phase into a recession which  the bad weather has made worse. I would expect the weather effect to unwind fairly quickly but that returns us to a situation which looked weak,

This leaves the expressed policy of the “unreliable boyfriend” in something of a mess as his forward guidance radar seems to have looked backwards again. Perhaps his new private secretary James Benford will help although I note his profile has been so low Bloomberg had to look him up on LinkedIn, I hope they got the right person. Also life can be complex as for example Russians in the UK might be thinking as they go from threats of financial punishment to seeing the UK Pound £ rally by 2% today and by over 10% in the past week to around 91 versus the R(o)uble .

Let me remain in the sphere of the serially uncorrelated error term by congratulating Roma on a stunning win last night.



How quickly is the economy of Germany slowing?

Until last week the consensus about the German economy was that is was the main engine of what had become called the Euro boom. Some were thinking that it might even pick up the pace on this.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

This was driven by the PMI or Purchasing Managers Index business surveys from Markit which as I pointed out on the 3rd of January were extremely upbeat.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

This was followed by the overall or Composite PMI rising to 59 in January which suggested this.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

Actually that was for the overall Euro area which had a reading of 58,8. The catch has been that even this series has been dipping since as we now see this being reported.

The pace of growth in Germany’s private sector cooled at the end of the first quarter, with the services PMI retreating further from January’s recent peak to signal a loss of momentum in line with that seen in manufacturing.

This led to this being suggested.

it still promises to be a strong 2018 for the German economy – with IHS Markit forecasting GDP growth to pick up to 2.8%

Still upbeat but considerably more sanguine than the heady days of January. Then there was this to add into the mix.

However, unusually cold weather in March combined with continuing payback from January’s jump in activity has led to the construction PMI falling into contraction territory for the first time in over three years

Official Data on Production and Trade

The official data posted something of a warning last week.

In February 2018, production in industry was down by 1.6% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)…….In February 2018, production in industry excluding energy and construction was down by 2.0%. Within industry, the production of capital goods decreased by 3.1% and the production of consumer goods by 1.5%. The production of intermediate goods showed a decrease by 0.7%. Energy production was up by 4.0% in February 2018 and the production in construction decreased by 2.2%.

As you can see the monthly fall was pretty widespread and only offset by a colder winter. Whilst this did show an annual increase of 2.6% that was a long way below the 6.3% that had been reported for January and December. So on this occasion the PMI surveys decline seems to have been backed by the official numbers as we await for the March numbers which if the relationship holds will show a further slowing on an annual basis.

Thrown into this mix is concern that the decline is related to fear over the rise in protectionism and possible trade wars.

If we move to this morning’s trade data it starts well but then hits trouble.

Germany exported goods to the value of 104.7 billion euros and imported goods to the value of 86.3 billion euros in February 2018. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 2.4% and imports by 4.7% in February 2018 year on year. After calendar and seasonal adjustment, exports fell by 3.2% and imports by 1.3% compared with January 2018.

This may well be an issue going forwards if it is repeated as last year net exports boosted the German economy and added 0.8% to GDP ( Gross Domestic Product) growth.

On a monthly basis we saw this.

Exports-3.2% on the previous month (calendar and seasonally adjusted). Imports –1.3% on the previous month (calendar and seasonally adjusted).

Of course monthly trade figures are unreliable but this time around they do fit with the production data. The export figures look like they peaked at the end of 2017 from an adjusted ( seasonally and calendar) 111.5 billion Euros to 107.5 billion on that basis in February.

What are the monetary trends?

If we look at the Euro area in general then there are signs of a reduced rate of growth.

The annual growth rate of the narrower aggregate M1, which includes currency in circulation
and overnight deposits, decreased to 8.4% in February, from 8.8% in January.

The accompanying chart shows that this series peaked at just under 10% per annum last autumn. So that surge may have brought the recorded peaks in economic activity around the turn of the year but is not heading south. If we move to the broader measure we see this.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.2% in February 2018, from
4.5% in January, averaging 4.4% in the three months up to February.

This had been over 5% last autumn and like its narrower counterpart has drifted lower. If you apply a broad money rule then one would expect a combination of lower inflation and growth which is awkward for a central bank trying to push inflation higher.  If we move to credit then the impulse is fading for households and businesses.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation
and notional cash pooling) decreased to 3.0% in February, compared with 3.3% in January.

This is more of a lagging than leading indicator of circumstances.

These are of course Euro area statistics rather than Germany but they do give us an idea of the overall state of play. A possible signal of issues closer to home are the ongoing travails of Deutsche Bank. There has been a bounce in the share price today in response to the new Chief Executive Officer or CEO as Sewing replaces Cryan but 11.8 Euros compares to over 17 Euros last May. Yet in the meantime the economy has been seeing a boom and added to that as I looked at late last month house price growth will have been boosting the asset book of the bank yet the underlying theme seems to come from Coldplay.

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


The heady days of the opening of 2018 have gone and in truth the business surveys did seem rather over excited as I pointed out on January 3rd.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth.

We can bring that more up to date.

 In February 2018, roughly 44.3 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with February 2017, the number of persons in employment increased by 1.4% (+621,000 people).

Thus we see that it continues to suggest steady if not spectacular growth and bypasses the excitement at the turn of the year. Looking forwards we see that the monetary impulse is slowing which is consistent with the reduction in monthly QE to 30 billion Euros a month from the ECB. We then face the issue of how Germany will follow a good first quarter? At the moment a growth slow down seems likely just in time for the ECB to end QE! So it may well be a case of watch this space…..





The UK has a construction problem

Today brings us a whole raft of new data on the UK economy but before we get to that there has been some new analysis and indeed something of a confession. Let us start with @NobleFrancis who has crunched some numbers on the impact of the recent cold snap and snow in the UK.

In terms of construction work lost due to the bad weather between Wednesday and Friday last week, we estimate UK construction output has lost £1.6 billion (annual construction output in 2017 was £156.3 billion)……with the majority of new construction work postponed. External repair & maintenance (r&m) construction work was also postponed. r&m on internals of building could still be done but getting to site meant this was also hindered..

He is unconvinced that there will be a catch-up.

…theoretically it’s possible to ‘catch-up’ on work once the weather improves but in construction this rarely happens in practice.

This of course affects a sector which has been in recession since early summer last year and of course with the factor below might be an example of it never rains but it pours.

will also be adversely affected in 2018 Q1 by the liquidation of the UK’s second largest construction firm, Carillion, in January 2018.

The Markit PMI was showing something of a flat lining but it will have predated the worst of the cold weather. Also it seems to have missed this which is from this morning’s official release.

Construction output also decreased in the month-on-month series following growth in the final two months of 2017, contracting by 3.4% in January 2018.

As you can see Carillion had a big impact and added to what seems to have been weak construction output across much of Europe in January. This is the position compared to a year ago.

Compared with January 2017, construction output decreased by 3.9%, representing the biggest month-on-year decline since March 2013.

If this sector was a bank the UK establishment would be piling in like it was the US cavalry wouldn’t it?

On the other side of the coin we will have had a boost to GDP from the energy supply industry as the heating was turned up and it will be a quarter with the main Forties pipeline at full flow assuming there are no problems this month.

A confession of sorts

This came from the Bank of England in a working paper towards the end of last month. Remember the case I have made plenty of times on here that its QE bond buying inflated pension deficits which weakened the UK corporate sector and therefore was not the triumph it was claimed to be? Anyway after more than a few official denials we now have this.

Nor is this just a problem in the UK as low-interest rates have raised the value of pension liabilities around the world.

A sort of confession and attempted deflection all at once! We do however get some interesting detail on the scale of the issue which in spite of the way the sector has contracted is still substantial.

The 6000 DB pension schemes in the UK private sector are a significant source of retirement income, with around 11 million members and assets of around £1.5 trillion. The aggregate funding deficit that these schemes faced (on a Technical Provisions basis ) is estimated to have reached around £300 billion by 2015 , equivalent to more than 15% of annual GDP.

So how did things play out?

while firms with larger pension deficits had an incentive but not an obligation to act in
response to these deficits they paid lower dividends on average, but they did not invest less.

Okay so the first subtraction from the UK economy was lower dividend payments. Of course one of today’s themes Carillion and its economic impact was the opposite of this as it paid dividends rather than fixing its pension scheme. Moving on we get something which is even more damaging for QE supporters.

We show that obligations under recovery plans agreed with TPR prompted firms to adopt a different pattern of behaviour compared to their more voluntary
responses to deficits. Firms making contributions to close those deficits did reduce investment and
dividend payments on average. These effects were greater for firms that were financially constrained, reflecting the more limited options available to them to use external or other internal  funds to smooth out their expenditures. ( TPR = The Pensions Regulator ).

This had quite a big impact.

The scale of these effects was large for many FTSE 350
companies with DB deficits, and responses to them can explain some of the weakness in aggregate
dividends and investment observed since 2007.

This reinforces work first done by Toby Nangle and it is to his credit he was several years at least ahead in time. Oh and as the writers of the working paper have families to feed and one day might hope that the Bank of England tea and cake trolley might arrive again in the rather damp dungeon they have been posted to for further research there is this.

while the effects for some firms were large, by contrast the effects at the aggregate level
have been small in macroeconomic terms, and are dwarfed by the estimated positive impact of QE.
QE is estimated to have boosted the level of GDP by in the region of 1½-3% (Kapetanios et al,
2012; and Weale and Wieladek, 2016), while the negative effects of deficits are only estimated to
have reduced GDP by around 0.1% GDP since 2007.

I do like the way that one of the authors of the work about the GDP boost is the same Martin Weale who voted for it. We can imagine a paper from say Alan Pardew to the West Bromwich board stating that whilst they might be in a relegation crisis he has boosted their points haul by using counterfactual analysis. How do you think Baggies fans would treat the obvious moral hazard?

Production and Manufacturing

There was some expected good news here.

In January 2018, total production was estimated to have increased by 1.3% compared with December 2017; mining and quarrying provided the largest upward contribution, increasing by 23.5% due mainly to the re-opening of the Forties oil pipeline,

In it there was continued good news for manufacturing.

Since records began in February 1968, this sector has never recorded nine consecutive monthly growths……… ( Quarterly output was) manufacturing provided the largest upward contribution with an increase of 2.6% ( on a year ago).

Yet it was also true the monthly increase was only 0.1% and in something of a contradiction was driven by ( sorry).

Growth this month within manufacturing was due mainly to a rise of 1.9% in transport equipment. Within this sub-sector motor vehicles, trailers and semi-trailers rose by 3.2%

That is not as mad as it may seem as UK engine production has been very healthy. Also the erratic pharmaceuticals sector had a bad quarter (-7.8%) so on its past record it should rebound.


Tucked away in the numbers there was a hint of some better news. This of course has to be taken in the context of years and sadly decades of deficits but there was this.

Comparing the three months to January 2018 with the same period in 2017, the UK total trade (goods and services) deficit widened by £0.4 billion.

Which if we allow for the £2.2 billion increase in oil imports and fall in oil exports should show an improvement. Exports have also had a good year.

Although total (goods and services) exports increased by 5.6% (£8.4 billion)

We of course need a lot more of that.


If we step back and look at the overall position the UK economy continues to bumble its way forwards.We have seen a good run of manufacturing production which means that output is now only 0.3% below its pre credit crunch peak. However the fact it is still below after so much time shows the scale of the damage inflicted. Industrial production is also in a better phase.

On the trade issue there are flickers of improvement but we have a long journey to travel to end the stream of deficits. As to construction it seems to have hit something of a nuclear winter and as government policy has been involved in the creation of this via the impact of Carillion you might think it would be paying more attention, especially as other companies have not dissimilar weaknesses. If this was the banking sector the money would be pouring in. Also are we not supposed to be in the middle of a house building surge?





How does Abenomics solve low wage growth?

The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.

An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.

This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.

Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.

The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.

However, some evidence relating to inflation expectations suggests that this time could be different.

We also see something familiar from QE supporters.

Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.

In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.

Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop

As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.

Economic growth

The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.

But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.

Indeed if you read the headline you might think things are going fairly solidly.

Japan GDP slows to 0.5% in final quarter of 2017.

But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.

According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.

Not much is it and I note these features from the Nikkei Asian Review.

 Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.

Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all.  The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.

Troublingly for a nation with a large national debt there was this issue to note.

Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.

Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.


There was rather a grand claim in the BBC article as shown below.

Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.

“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.

One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)


As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.

So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).

As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.

Me on Core Finance TV




The economy of Italy has yet to awaken from its “Girlfriend in a coma” past

The subject of Italy and its economy has been a regular feature on here as we have observed not only its troubled path in the credit crunch era but also they way that has struggled during its membership of the Euro. This will no doubt be an issue in next month’s election but the present period is one which should be a better phase for Italy. Firstly the Euro area economy is doing well overall and that should help the economy via improved exports.

Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and in the EU28 during the fourth quarter of
2017, compared with the previous quarter……..Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.7% in the euro area and
by 2.6% in the EU28 in the fourth quarter of 2017…….Over the whole year 2017, GDP grew by 2.5% in both zones.

The impact on the economy of Italy

If we switch now to the Italian economy we find that there has been a boost to the economy from the better economic environment. From the monthly economic report.

Italian exports keep increasing with a positive trend following world trade expansion…….Over the period September-November, foreign trade kept a positive trend
driven by the exports (+2.9%), while the imports increased at a lower pace (+0.6%).

However the breakdown was not as might be expected.

Sales to the non-EU area (+4.6%) contributed positively to the favorable trend in exports and more than the sales to the EU area (+1.5%). In 2017, trade with non-EU countries increased both exports (+8.2%) and imports (+10.8%).

So the export-led growth is stronger outside the Euro area than in it which is not what we might expect as we observe the way that the Euro has been strong as a currency. Effects in this area can be lagged so it is possible via factors such as the J-Curve that the new higher phase for the Euro has yet to kick in in terms of its impact on trade, so we will have to watch this space.


There was some good news on this front in December as the previous analysis had been this.

Taking the average values of September-November, shows that production decreased compared to the previous quarter (-0.2%, ). In the same period all the main industrial groupings recorded a decrease except durable consumer goods (+2.7% compared to the previous quarter).

As you can see that is not what might have been expected but last weeks’ data for December was more upbeat.

In December 2017 the seasonally adjusted industrial production index increased by 1.6% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.8.

This meant that the position for the year overall looked much better than the downbeat assessment above.

in the period January-December 2017 the percentage change was +3.0 compared with the same period of

If we move to the outlook for 2018 then the Markit business survey or PMI could not be much more upbeat.

Italy’s manufacturing sector enjoyed a strong start
to 2018, registering the highest growth in output
since early 2011 and one of the greatest rises in
new orders of the past 18 years.

In addition domestic demand was seen adding to the party.

but January data pointed to a growing contribution from within Italy itself.

This leads to hopes for improvement in one of the Achilles heels of the Italian economy.

The response from many manufacturers was to
bolster employment numbers, and January’s survey
indicated the second-strongest rise of employment
in the survey history.

Unemployment and the labour market

At first glance the latest data does not look entirely impressive.

In December 2017, 23.067 million persons were employed, -0.3% over November 2017. Unemployed were
2.791 million, -1.7% over the previous month.

There is a welcome fall in unemployment but employment which these days is often a leading indicator for the economy has dipped too.

Employment rate was 58.0%, -0.2 percentage points over the previous month, unemployment rate was
10.8% -0.1 percentage points over November 2017 and inactivity rate was 34.8%, +0.3 percentage points in
a month.

However if we look back we see that over the past year 173,000 more Italians have been employed and the level of unemployment has fallen by 273,000.  What we are still waiting for however is a clear drop in the unemployment rate which has been stuck around 11% for a while. We are told it has dropped to 10.8% but there has been a recent habit of revising the rate back up to 11% at a later date meaning we have been told more than a few times that it has fallen below it. Sadly much of the unemployment is concentrated at the younger end of the age spectrum.

Youth unemployment rate (aged 15-24) was 32.2%, -0.2 percentage points over the previous month.

So better than Greece but isn’t pretty much everywhere as we again wonder how many of these have never had a job and even more concerning, how many never will?

Sometimes we are told that higher unemployment rates are a consequence of better wages. But is we look at wages growth there does not seem to be much going on here.

The labor market outlook is characterized by the wage
moderation: in 2017 both the index of contractual wages per employee and that of hourly wages increased by +0.6% y-o-y.

On a nominal level that is a fair bit below even the UK but of course the main issue is in real or inflation adjusted terms.

In January 2018, according to preliminary estimates, the Italian consumer price index for the whole nation (NIC) increased by 0.2% on monthly basis and by 0.8% compared with January 2017 (it was +0.9% in December 2017).

So there was in fact a small fall in real wages in 2017 which we need to file away on two fronts. Firstly there is the apparent fact that better economic conditions in Italy are not being accompanied by real wage growth and in fact a small fall. Secondly we need to add that rather familiar message to our global database.

The banks

This is a long running story of how the banking sector carried on pretty much regardless after the credit crunch and built up a large store of non-performing assets or if you prefer bad loans. This has meant that many Italian banks are handicapped in terms of lending to help the economy and some have become zombified. From Bloomberg earlier.

Even after making reductions last year, Italian banks are still weighed down by more than 270 billion euros ($330 billion) of non-performing loans. Struggling households account for almost a fifth of that total, according to the Bank of Italy.

It is hard not to have a wry smile at a proposed solution.

The Bank of Italy says an improvement in the country’s real estate market is helping to reduce the risks for banks.

Whether that will do much good for what has become the symbol of the problem I doubt but here is the new cleaner bailed out Monte Paschi. From Bloomberg on Monday.

The bank, which is cutting about a fifth of its workforce, eliminating branches and plans to sell 28.6 billion euros of bad loans by 2021, posted 501.6 million-euro net loss in the last three months of the year.

How is the bailout going?

The shares were down 2.8 percent at 3.72 euros as of 9:55 a.m. The stock, which returned to trading Oct. 25 after an 10-month suspension, is now valued more than 43 percent below the 6.49 euros apiece paid by Italy for the rescue.

This morning it is 3.44 Euros so the beat goes on especially as we note that pre credit crunch and the various bailouts the equivalent price peak was over 8800.


This issue continues to be ongoing.

The population at 1st January 2018 is estimated to be 60,494,000; the decrease on the previous year was
around 100,000 units (-1.6 per thousand).

Driven by this.

The number of live births dropped to 464 thousand, 2% less than in 2016 and new minimun level ever.

We have seen on the news so often that there is considerable migration to Italy and if we look into the detail we see that not only is it so there is something tucked away in it.

The net international migration in 2017 amounted to +184 thousand, recording a consistent increase on the
previous year (+40 thousand).

Yet Italians themselves continued to leave in net terms as 45,000 returned but 112,000 left which is a little surprising in the circumstances. As to the demographics well here they are.

At 1 January 2018, 22.6% of the population was aged 65 or over, 64.1% was aged between 15 and 64, while
only 13.4% was under 15 years of age. The mean age of the population exceeded 45 years.

The theme is that the natural change has got worse over the past decade rising from pretty much zero to the 183,000 of 2017 but contrary to the news bulletins net immigration is lower as it approached half a million in 2007.


This morning has brought news which will be very familiar to readers of my work which is an Italian economy which seems to struggle to grow at more than around 1% per annum for any sustained period.

In the fourth quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the third quarter of 2017 and by 1.6 per
cent in comparison with the fourth quarter of 2016.

As we note a negative official interest-rate ( -0.4%) and a large amount of balance sheet expansion from the European Central Bank the monetary taps could not be much more open. Italy’s government in particular benefits directly by being able to borrow very cheaply ( ten-year yield 2.05%) when you consider it has a national debt to annual GDP ratio of 134.1%. Thanks Mario!

Thus we return on Valentines Day to the “Girlfriend in a Coma” theme of Bill Emmott which is a shame as Italy is a lovely country. Can it change? Let us hope so and maybe the undeclared economy can be brought to task. Meanwhile if you want to take the Matrix style blue pill here is Bloomberg.

ITALY: GDP expanded by 0.3% in 4Q, a bit less than expected. Still, 2017 was the best growth year (+1.5%) since 2010. Shows how broad-based the euro-area recovery has become. A rising tide lifts all boats





If UK growth has a “speed limit” of 1.5% how is manufacturing growing at 3.4%?

Yesterday saw the Quarterly Inflation Report of the Bank of England where its takes the opportunity to explain its views on the UK economy. There was a subject which Governor Mark Carney returned to several times and it was also in the opening statement.

It is useful to step back to assess how the economy has performed relative to the MPC’s expectations in order to understand the forces at work on it.

You are always in trouble when you have to keep telling your audience you got things right. I don’t see Pep Guardiola having to explain things like that or Eddie Jones and that is because things have gone well for them. Increasingly the Governor is finding himself having to field questions essentially based upon my theme that the Bank of England has a poor forecasting record. Actually tucked away in his statement was yet another confession.

GDP growth is expected to average around 1¾%
over the forecast period, a little stronger than projected in November.

I would like to present his main point in another way as we were told that policy is “transparent” and being done “transparently”. Okay so apply that test to this?

The MPC judges that, were the economy to evolve broadly in line with its February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than it anticipated at the time of the
November Report, in order to return inflation sustainably to the target.

So if they get things right which they usually do not then interest-rates will rise by more than the previous unspecified hint? That is opaque rather than transparent especially when you have a habit of saying things like this.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced…………..It could happen sooner than markets currently expect. (Mansion House June 2014).

What actually happened? The next move was a Bank Rate cut! Also I noted this in the Financial Times from back then.

This speech marks an important change of tone from the governor……..with rates rising earlier, further and faster than markets currently price in.

I noted this because it was from Michael Saunders who was of course giving bad advice to Citibank customers as we wonder if his enthusiasm for the Governor’s thoughts and words got him appointed to the Monetary Policy Committee?

Also I note that the 0.25% Bank Rate cut and Sledgehammer QE is claimed to have had an enormous impact.

this strategy has worked with
employment rising and slack steadily being absorbed

Yet this morning Ben Broadbent has contradicted this on BBC 5 Live’s Wake Up To Money.

dep gov Ben Broadbent said that was “true to some extent”, adding he didn’t think a couple of 25 basis point [0.25%] rises in a year would be a great shock

So if two rises are no big deal how was one cut a big deal? I guess if you send out your absent-minded professor out at the crack of dawn he is more likely to go off-piste.

Our intrepid Governor was also keen to expound on the Bank of England’s improvement in the area of diversity which he did as part of a panel composed of four middle-aged white men. As to policy independence regular readers will be well aware of my theme that the establishment took the Bank back under its control some time ago.

Today’s data

This was always going to be affected by the shutdown of the oil and gas pipeline for the Forties area in the North Sea as we already knew it has reduced GDP by around 0.05%.

In December 2017, total production was estimated to have decreased by 1.3% compared with November 2017; mining and quarrying provided the only downward contribution, falling by 19.1% as a result of the shut-down of the Forties oil pipeline for a large part of December.

Ouch indeed! However if we look deeper we see that production has been on an upwards sweep.

Total production output increased by 2.3% for the three months to December 2017 compared with the same three months to December 2016……….For the calendar year 2017, total production output increased by 2.1% compared with 2016,

Now that the Forties pipeline is back to normal there will be an additional push to the numbers.


This sector has been on a good run which has been welcome to see after years and indeed decades of relative decline.

In the three months to December 2017……..due to a rise of 1.3% in manufacturing;

As to the driving force well we have heavy metal football at Liverpool courtesy of Jurgen Klopp and maybe we have some heavy metal economics too.

Within manufacturing, 9 of the 13 manufacturing sub-sectors experienced growth; the largest contribution to quarterly growth came from basic metals and metal products, which increased by 5.7%.

If we look deeper we see this which compares the latest quarter with a year ago..

The largest upward contribution came from manufacturing, which increased by 3.4%, due to broad-based strength, with 9 of the 13 sub-sectors increasing. Transport equipment provided the largest upward contribution, increasing by 6.6%, with three of its four industries increasing. The largest upward contribution came from the manufacture of aircraft, spacecraft and related machinery, while motor vehicles, trailers and semi-trailers fell by 0.3%.

There is something of an irony for those who found it amusing to jest that the UK would have to export to space in future as we indeed seem to be doing so. Of course space has been in the news this week with the successful, launch of the Falcon Heavy rocket with the successful landing of two of the three boosters which according to the Meatloaf critique “aint bad” and was also awe-inspiring. As you can imagine I heartily approve of it playing Space Oddity on repeat and the way Don’t Panic flashes on the car dashboard in big friendly letters.

Returning to manufacturing we have nearly made our way back to the place we were once before as the Eagles might put it.

 both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 5.2% and 0.5% respectively in the three months to December 2017.


The familiar theme is as ever of yet another deficit but the December numbers were even more difficult to interpret than usual due to the impact of the Forties pipeline closure. This was its impact on the latest quarter.

The 21.6% decrease in export volumes of fuels (mainly oil) had a large impact on the fall in export volumes. When excluding oil export volumes increased by 1.3%……The value increase in fuels imports was due largely to price movements, as fuels import prices increased by 14.2% while fuels import volumes increased by 0.3%.

If we look back 2017 was a better year for UK trade.

UK export volumes up 7.4% between 2016 & 2017, import volumes were up 4.1%

This meant that the trade deficit fell by £7 billion ( not by £70 billion as was initially reported) so the cautionary note is that we still have a long way to go.


Today’s numbers provide their own critique to the rhetoric of Mark Carney and the Bank of England. Let me show you the two. Firstly the data.

The largest upward contribution came from manufacturing, which increased by 3.4%

Yet according to the Bank of England this is the “speed limit”.

the MPC judges that very little spare capacity remains and that supply capacity will grow only modestly over the
forecast, averaging around 1½% a year.

If you think it through logically it is an area where you would expect physical constraints and yet it does not seem to be bothered. Indeed the other area where there are physical constraints has done even better on an annual comparison.

 construction output in Great Britain grew by 5.1% in 2017

So as ever the Bank of England prefers its models to reality and if you listened carefully to the press conference Ben Broadbent confirmed this. What he did not say was that he is persisting with this in spite of a shocking track record.

Just for clarity the construction numbers are correct but had really strong growth followed by the more recent weakness. However as I have pointed out many times care is needed as we regularly get significant revisions..