What are the economic prospects for the Euro area?

As we progress into 2020 there has been a flurry of information on the Euro area economy. However there has been quite a bit of dissatisfaction with the usual indicators so statistics offices have been looking  at alternatives and here is the German effort.

The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 0.6% in December 2019 compared with the previous month.

As a conceptual plan this can be added to the way that their colleagues in Italy are now analysing output on Twitter and therefore may now think world war three has begun. Returning to the numbers the German truck data reminds us that the Euro areas largest economy is struggling. That was reinforced this morning by some more conventional economic data.

Germany exported goods to the value of 112.9 billion euros and imported goods to the value of 94.6 billion euros in November 2019. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports decreased by 2.9% and imports by 1.6% in November 2019 on the same month a year earlier. Compared with October 2019, exports were down 2.3% and imports 0.5% after calendar and seasonal adjustment.

We get a reminder that what was one if the causes of economic imbalance before the credit crunch has if anything grown as we note the size of Germany’s trade surplus.  It is something that each month provides support for the level of the Euro. Switching to economic trends we see that compared to a year before the larger export volume has fallen by more than import volume. This was even higher on a monthly basis as we note that the gap between the two widened. But both numbers indicate a contractionary influence on the German economy and hence GDP ( Gross Domestic Product).

Production

Today’s data opened with a flicker of positive news.

In November 2019, production in industry was up by 1.1% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In October 2019, the corrected figure shows a decrease of 1.0% (primary -1.7%) from September 2019.

However this still meant this.

-2.6% on the same month a year earlier (price and calendar adjusted)

There is a particular significance in the upwards revision to October as some felt that the original numbers virtually guaranteed a contraction in GDP in the last quarter of 2019. In terms of a breakdown the better November figures relied on investment.

In November 2019, production in industry excluding energy and construction was up by 1.0%. Within industry, the production of capital goods increased by 2.4% and the production of consumer goods by 0.5%. The production of intermediate goods showed a decrease by 0.5%.

Only time will tell if the investment was wise. The orders data released yesterday was not especially hopeful.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2019 a seasonally and calendar adjusted 1.3% on the previous month.

Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.

-6.5% on the same month a year earlier (price and calendar adjusted)

Perhaps the investment was for the domestic economy as we look into the detail.

Domestic orders increased by 1.6% and foreign orders fell 3.1% in November 2019 on the previous month. New orders from the euro area were down 3.3%, new orders from other countries decreased 2.8% compared to October 2019.

But if we widen our outlook from Germany to the wider Euro area we see that it was the source of the strongest monthly slowing.

In a broad sweep orders for production rose from 2013 to December 2017 with the series peaking at 117.1 ( 2015=100) but we have been falling since and have now gone back to 2015 at 100.3.

The Labour Market

By contrast there is more to cheer from this area.

The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in November 2019, stable compared with
October 2019 and down from 7.9% in November 2018. This remains the lowest rate recorded in the euro area
since July 2008.

In terms of the broad trend the Euro area is now pretty much back to where it was before the credit crunch and is a long way from the peak of above 12% seen around 2013. But there are catches and nuances to this of which a major one is this.

In November 2019, the unemployment rate in the United States was 3.5%, down from 3.6% in October 2019 and
from 3.7% in November 2018.

That is quite a gap and whilst there may be issues around how the numbers are calculated that still leaves quite a gap. Also unemployment is a lagging indicator but it may be showing signs of turning.

Compared with October 2019, the number of persons unemployed increased by
34 000 in the EU28 and decreased by 10 000 in the euro area. Compared with November 2018, unemployment fell
by 768 000 in the EU28 and by 624 000 in the euro area.

The rate of decline has plainly slowed and if we look at Germany again we wait to see what the next move is.

Adjusted for seasonal and irregular effects, the number of unemployed remained unchanged from the previous month, standing at 1.36 million people as well. The adjusted unemployment rate was 3.1% in November, without any changes since May 2019.

Looking Ahead

There was some hope for 2020 reflected in the Markit PMI business surveys.

Business optimism about the year ahead has also improved
to its best since last May, suggesting the mood
among business has steadily improved in recent
months.

However the actual data was suggested a low base to start from.

Another month of subdued business activity in
December rounded off the eurozone’s worst quarter
since 2013. The PMI data suggest the euro area
will struggle to have grown by more than 0.1% in
the closing three months of 2019.

There is a nuance in that France continues to do better than Germany meaning that in their turf war France is in a relative ascendancy. In its monthly review the Italian statistics office has found some cheer for the year ahead.

The sectoral divide between falling industrial production and resilient turnover in services persists. However, business survey indicators convey first signals of optimism in manufacturing. Economic growth is projected to slightly increase its pace to moderate growth rates of 0.3% over the forecast horizon.

Comment

The problem for the ECB is that its monetary taps are pretty much fully open and money supply growth is fairly strong but as Markit puts it.

At face value, the weak performance is
disappointing given additional stimulus from the
ECB, with the drag from the ongoing plight of the
manufacturing sector a major concern.

It is having an impact but is not enough so far.

However, policymakers will be encouraged by the resilient
performance of the more domestically-focused
service sector, where growth accelerated in
December to its highest since August.

This brings us back to the opening theme of this year which has been central bankers both past and present singing along with the band Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To blockbuster

Hence their move towards fiscal policy which is quite a cheek in the circumstances.

The conceptual issue is that all the intervention and central planning has left the Euro area struggling for any sustained economic growth and certainly slower growth than before. This is symbolised by Italy which remains a girlfriend in a coma.

The Composite Output Index* posted at 49.3 in December,
down from 49.6 in November, to signal a second consecutive fall in Italian private sector output. Moreover, the decline quickened to a marginal pace.

 

UK GDP growth is as flat as a pancake

Today brings us the last major set of UK economic data before the General Election on Thursday at least for those who vote in person. It is quite a set as we get trade, production, manufacturing and construction data but the headliners will be monthly and quarterly GDP. As the latter seem set to be close to and maybe below zero no doubt politicians will be throwing them around later. Let’s face it they have thrown all sorts of numbers around already in the campaign.

The UK Pound

This has been the economic factor which has changed the most recently although it has not got the attention it deserves in my opinion. At the time of writing the UK Pound £ is above US $1.31, 1.18 to the Euro and nearing 143 Yen. This means that the effective or trade-weighted index calculated by the Bank of England is at 81.1 which is about as good as it has been since the post EU leave vote fall ( there were similar levels in April of last year). This particular rally started on the 9th of August from just below 74 so it has been strong or if you prefer for perspective we opened the year at 76.4.

Thus using the old Bank of England rule of thumb we have seen the equivalent of more than a 1% rise in official interest-rates or Bank Rate in 2019 so far. This has produced two economic developments or at least contributed to them. The first is that inflation prospects look good and I mean by my definition not the Bank of England one. The CPI versions could head below 1% in the months to come and RPI towards 1.5%. The other is that it may have put a small brake on the UK economy and contributed to our weak growth trajectory although many producers are probably used to swings in the UK Pound by now.

Some good news

The trade figures will be helped by this from UK wind.

GB National Grid: #Wind is currently generating 13.01GW (33.08%) out of a total of 39.34GW

The catch is that of course we are reliant on the wind blowing for a reliable supply. Also that it is expensive especially in its offshore guise, as it it both outright expensive to add to the costs of a back-up.

GDP

As to growth well our official statisticians could not find any.

UK GDP was flat in the three months to October 2019.

If we look at the different sectors we see what has become a familiar pattern.

The services sector was the only positive contributor to gross domestic product (GDP) growth in the three months to October 2019, growing by 0.2%. Output in both the production and construction sectors contracted, by 0.7% and 0.3%, respectively. The weakness seen in construction was predominantly driven by a fall of 2.3% in October.

So services grew and production shrank with construction erratic but also overall lower. If you wish to go to another decimal place you can find a small smidgeon of growth as services pushed GDP up by 0.17%, production cost 0.1% and construction cost 0.02% leaving a net 0.05%. But that is spurious accuracy as that puts the numbers under too much pressure.

Services

There was something of note in the monthly series ( October).

Services also grew by 0.2% in October, with widespread growth in several industries. The most notable of these were real estate activities and professional, scientific and technical activities, which both contributed 0.06 percentage points to gross domestic product (GDP) growth. The latter was driven by strength in both architectural and engineering activities, and research and development.

Two things stand out from this. Firstly the quarterly growth was essentially October  and next that much of it was from real estate and architecture. Is Nine Elms booming again? But more seriously something is perhaps going on here that has not been picked up elsewhere.

Production

Here the news has been pretty gloomy all round although the energy part is good news in terms of better weather and less expense for consumers.

Total production output decreased by 0.7% for the three months to October 2019, compared with the three months to July 2019; this was led by manufacturing output, which fell by 0.7%, followed by falls in mining and quarrying (2.6%) and electricity and gas (1.0%).

This reminds us that these areas have been seeing a depression in the credit crunch era.

Production output in the UK remained 6.2% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008……..Manufacturing output in the UK remained 3.5% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008.

It was not so long ago that it looked like manufacturing was about to escape this but then the trade war happened.

There was a flicker in October alone but the impact of the swings in the pharmaceutical industry are usually much stronger than that.

The growth of 0.1% in total manufacturing output in October 2019, compared with September 2019, was mainly because of widespread strength, with 8 of the 13 subsectors displaying upward contributions. The largest of these came from the volatile pharmaceutical products subsector, which rose by 2.1%, following two consecutive periods of significant monthly weakness during August and September 2019.

Trade

The issue here is the uncertainty of the data which today has illustrated,

The total UK trade deficit (goods and services) widened £2.3 billion to £7.2 billion in the three months to October 2019, as imports grew faster than exports

That seems clear but then again maybe not.

Excluding unspecified goods (which includes non-monetary gold), the total trade deficit narrowed £4.3 billion to £2.9 billion in the three months to October 2019.

The oversea travel and tourism problems have still not be solved.

For earlier monthly releases of UK Trade
Statistics that have also been affected by this error, the versions on the website should be amended
to make clear to users that the errors led the Authority to suspend the National Statistics
designation on 14 November 2014.

Moving on there is also this.

In current prices, the trade in goods deficit widened £6.8 billion to £35.6 billion, largely driven by rising imports; the trade in services surplus widened £4.4 billion to £28.4 billion, largely driven by rising exports.

So there is hope for the UK services exports which seem to be doing well and I have long suspected have been under recorded. For example smaller businesses are likely to be missed out. The scale of this is simply unknown and as we have issues here this must feed into the wider GDP numbers which are so services driven.

So our trade problem is a case of definitely maybe.

Comment

We perhaps get the best perspective from the annual rate of GDP growth which is now 0.8% using the quarterly methodology. If we take out the spring blip that has been declining since the 2% of August 2018. There are some ying and yangs in the detail because of we start with the positive which is services growth ( 1.3%) it has been pulled higher by the information and communication category which is up by 5.4% and education which is up by 3%. But on the other side of the coin the depression in production and manufacturing has worsened as both have fallen by 1.5%. I have little faith in the construction numbers for reasons explained in the past but growth there has fallen to 0%.

There are lots of permutations for the General Election but yet another interest-rate cut by the Bank of England just got more likely. It meets next week. Also political spending plans are getting harder to afford in terms of economic growth,

 

 

 

Is the Bundesbank still sure that Germany is not facing a recession?

The year so far has seen a development which has changed the economic debate especially in Europe.This is the malaise affecting the German economy which for so long has been lauded. This continued in 2017 which saw quarterly GDP growth of 1.2%, 0.6%, 0.9% and 0.7% giving the impression that it had returned to what had in the past been regarded as normal service. However before the trade war was a glint in President Trump’s eye and indeed before the ECB QE programme stopped things changed. As I have pointed out previously we did not know this at the time because it is only after more recent revisions that we knew 2018 opened with 0.1% and then 0.4% rather changing the theme and meaning that the subsequent -0.1% would have been less of a shock. We can put the whole situation in perspective by noting that German GDP was 106.04 at the end of 2017 and was 107.03 at the end of the third quarter this year. As Talking Heads would put it.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride

Industrial Production

This has been a troubled area for some time as regular readers will be aware. Throughout it we have seen many in social media claim that in the detail they can see reasons for an improvement, whereas in fact things have headed further south. This morning has produced another really bad number. .

WIESBADEN – In October 2019, production in industry was down by 1.7% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In September 2019, the corrected figure shows a decrease of 0.6% from August 2019, thus confirming the provisional result published in the previous month.

If we look at the breakdown we see that the future is not bright according to those producing capital goods.

Within industry, the production of intermediate goods increased by 1.0% and the production of consumer goods by 0.3%. The production of capital goods showed a decrease by 4.4%. Outside industry, energy production was up by 2.3% in October 2019 and the production in construction decreased by 2.8%.

There is a flicker of hope from intermediate goods but consumer goods fell. There is an additional dampener from the construction data as well.

Moving to the index we see that the index set at 100 in 2015 is at 99.4 so we are seeing a decline especially compared to the peak of 107.8 in May last year. If we exclude construction from the data set the position is even worse as the index is at 97.6.

The annual comparison just compounds the gloom.

-5.3% on the same month a year earlier (price and calendar adjusted)

Looking Ahead

Yesterday also saw bad news on the orders front.

WIESBADEN – Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in October 2019 a seasonally and calendar adjusted 0.4% on the previous month.

This was a contrast to a hint of an uptick in the previous month.

For September 2019, revision of the preliminary outcome resulted in an increase of 1.5% compared with August 2019 (provisional: +1.3%).

If we peer into the October detail we see that this time around the problem was domestic rather than external.

Domestic orders decreased by 3.2% and foreign orders rose 1.5% in October 2019 on the previous month. New orders from the euro area were up 11.1%, new orders from other countries decreased 4.1% compared to September 2019.

The oddity here is the surge in orders from the rest of the Euro area when we are expecting economic growth there to be very flat. If we switch to Monday’s Markit PMI then there was no sign of anything like it.

At the aggregate eurozone level, ongoing declines in
output and new orders were again recorded.

Indeed ICIS reported this in October based on the Markit survey.

Sharp declines in order book volumes weighed on operating conditions during the month, concentrated on intermediate goods producers, while consumer goods makers saw significantly milder levels of deterioration.

If we look back we see that this series has turned out to be a very good leading indicator as the peak was in November 2017 at 108.9 where 2015 = 100. Also we see that in fact it is domestic orders which have slumped the most arguing a bit against the claim that all of this is trade war driven.

The annual picture is below.

-5.5% on the same month a year earlier (price and calendar adjusted)

Monetary Policy

This has remained extraordinarily easy but does not appear to have made any difference at all. The turn in production took place when ECB QE was still going full steam ahead for example. Indeed even those who voted for such measures seem to have lost the faith as this from yesterday’s twitter output from former Vice-president Vitor Constancio suggests.

In 2014 when the main policy rate reached zero, keeping a corridor implied a negative deposit rate. There was then a risk of deflation and it was supposed to be a temporary tool.Since last year I have been tweeting against going to deeper negative rates.

A welcome realisation but it is too late for him to change policy now.

The problem for monetary policy is that with the German ten-year yield being -0.3% and the official deposit rate being -0.5% what more can be done? It all has the feeling of the famous phrase from Newt in the film Aliens.

It wont make any difference

Fiscal Policy

The policy was explained by Reuters in late October.

Eurostat said Germany’s revenues last year exceeded expenses by more than previously estimated, allowing Berlin to post a budget surplus of 1.9% of its output, above the 1.7% that Eurostat had calculated in April.

That has been the state of play for several years now and the spending increases for next year may not change that much.

The total German state budget for next year is to be €362 billion ($399 billion), €5.6 billion more than is being spent this year. ( DW )

Although further down in the article it seems that the change may be somewhat limited.

As in previous years, and following the example of his conservative predecessor, the Social Democrat Finance Minister Scholz has pledged not to take on any more debt – maintaining Germany’s commitment to the so-called “black zero”: a balanced budget.

Some more spending may have an implicit effect on the industrial production numbers. Indeed defence spending can have a direct impact should orders by forthcoming for new frigates or tanks.

Yesterday FAZ reported that this fiscal year was more or less the same as the last.

German state is facing a significant surplus this year. All in all, revenues will exceed spending by around 50 billion euros. This is apparent from an internal template for the Stability Council meeting on 13 December. It contains the information on the state’s net lending of between € 49.5 and 56.5 billion.

Comment

There is a case here of living by the sword and perhaps then dying by it as it is what has been considered a great success for Germany which has hit the buffers last year then this. The manufacturing sector is around 23% of the economy and so the production figures have a large impact. October is only the first month of three but such weak numbers for an important area pose a question for GDP in the quarter as a whole? Rather awkwardly pay rates seem to have risen into the decline.

The third quarter saw an exceptionally strong
increase in negotiated pay rates. Including additional benefits, these rates rose year-on-year
by 4.2% in the third quarter of 2019, compared
with 2.1% in 2018. This temporary, considerably higher growth rate was mainly due to new
special payments in the metal-working and
electrical engineering industries, which had
been agreed last year and were first due in July
2019.

Before we knew the more recent data the Bundesbank was telling us this.

The slowdown of the German economy will
probably continue in the fourth quarter of
2019. However, it is not likely to intensify markedly. As things currently stand, overall economic output could more or less stagnate.
Thus, the economy would largely tread water
again in the second half of this year as a whole.

Then they left what is now looking like a hostage to fortune.

However, from today’s vantage point, there is
no reason to fear that Germany will slide into recession.

 

 

The UK Services sector is the shining star of the economy and GDP

Today brings us a whole raft of data on the UK economy or what out official statisticians call a theme day. Actually we get too much in one burst with the trade data usually being ignored which may well be a Sir Humphrey Appleby style plan. But before we get to that we can look at the economy from the viewpoint of the Bank of England.

Turning to prices, the headline price balance sees a flat trend in house price inflation. However, there is once again a mixed picture across the UK with negative momentum in London and the South East, and solid gains in Northern Ireland, Scotland and the North West.

Looking ahead, price expectations for the coming three months stand at -16% pointing to a modest decline on a UK-wide basis. However, the twelve-month outlook points to a turnaround, with +18% more respondents expecting prices to rise (rather than fall) over the coming year.

That is from the Royal Institute of Chartered Surveyors or RICS. As you can see there are no “wealth effects” to be found presently unless they can somehow only draw Governor Carney’s attention to the North or Scotland and Northern Ireland.

A little innovation will be required to present this as good news.

 In keeping with this, newly agreed sales fell, with a net balance of -27% (from -11% previously), with activity reportedly slipping in virtually all parts of the UK. As far as the near-term outlook is concerned, sales expectations stand at -9%, suggesting sales will remain subdued in the coming three months………This will not only be a direct hit on the housing market itself but could have ramifications for the wider economy as the normal spend on furniture, fittings and appliances that typically accompanies a house move is also put on hold.

One possibility for the morning staffer presenting such information to an irascible Governor is to appeal to his plan to be a fearless climate change champion and say it is in line with this.

The TCFD provides the necessary foundation for the financial sector’s role in the transition to net zero that
our planet needs and our citizens demand.

He is indeed so enthusiastic about this that he has flown to Tokyo to point this out. This contrasts the highly important nature of his flights as to the extremely unimportant climate change causing flights of plebs like us.

This backs up what the Halifax told us on Monday and the emphasis is mine because the date is pretty much when the effect of the Funding for Lending Scheme arrived,

“Annual house price growth slowed somewhat in September, rising by just 1.1% over the last year. Whilst
this is lowest level of growth since April 2013, it remains in keeping with the predominantly flat trend we’ve
seen in recent months.”

UK GDP

This brought some welcome news.

UK GDP grew by 0.3% in the three months to August 2019.  Rolling three-month GDP growth increased for the second consecutive month after falling in Quarter 2 2019.

It is put in neutral terms but the UK moved away from recession in this period although in monthly terms it did so in a slightly odd fashion.

Monthly gross domestic product (GDP) growth was negative 0.1% in August 2019, following growth in both June and July 2019…….Overall, revisions to monthly GDP growth were small. However, both June and July 2019 have been revised up by 0.1 percentage points, giving extra strength to the most recent rolling three-month estimate.

As you can see we had a dip in August ( assuming that is not revised higher over time) but that was more than offset by upwards revisions in both June and July. For those of you wondering if the June figure affects the second quarter contraction of -0.2% the answer is not so far although it must have an impact if we move another decimal place.

The shift to Services

I have long argued that the services sector must now be over four-fifths of the UK economy and it seems the Office for National Statistics is picking this up.

The main contributor to gross domestic product (GDP) growth in the three months to August 2019 was the services sector, which grew by 0.4%. This was driven by widespread strength across the services industries in June and July, following a period of largely flat growth in the previous three months. Meanwhile, the production sector fell by 0.4% in the same period, while construction output grew by 0.1%.

For newer readers this has been the trend for years and indeed decades or as Talking Heads put it.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

This means somewhat ironically that the UK may well do relatively well in the manufacturing recession that we are seeing in much of the world. The irony is that we have often wanted to be more like Germany with its success in this area but for now out more services based model works better. This does not mean that the manufacturing sector we have is avoiding the chill winds blowing.

Rolling three-month growth in the production sector was negative 0.4% in August 2019, with growth in manufacturing at negative 1.1%.

There were widespread falls across manufacturing, offset partially by the manufacture of transport equipment, which is still seeing a bounce back from the weakness in April 2019 as a result of car production plants bringing forward their summer shutdowns.

There is another example of same as it ever was if we look at the detail of the services growth.

However, the sub-industry that had the largest contribution to gross domestic product (GDP) growth was motion pictures (including TV and music), which has been one of the best performing sectors over the last year, growing at a notably faster rate than services as a whole.

So if you pass a Luvvie today please be nice to them as they are doing a sterling job.

August

It looks as though there was something we have been noting for several years was behind the 0.1% GDP fall in August.

Within production, manufacturing fell by 0.7%. This was driven largely by a fall-back in the often volatile manufacture of pharmaceuticals, following strong growth in July.

It would seem that the production pattern is not monthly and thus is over recorded and  then under recorded. So that the  truth seems likely to be that we should take a bit off July and add it to August. More fundamentally it exposes one of the problems of producing a monthly GDP series.

Comment

As I look at the numbers I note that yet again we see to be reverting to the mean growth level of around ~0.3% per quarter that I suggested a couple of years ago. In the current circumstances that is pretty good although I note Torsten Bell of the Resolution Foundation calls it “Growth is really rubbish”. Mind you I note that he is retweeting something which describes the 0.3% rise in the quarterly or 3 monthly growth rate as a “small rebound” which speaks for itself.

The situation is that we should be grateful for our services sector which is keeping the UK out of a recession for now. So instead of the “march of the makers” promised by former Chancellor George Osborne we are seeing a “surge of the services”. This brings its own issues but at a time like this we should welcome any growth we can find. A particular success is the film and music industry and some of this is near to me as Battersea Park is regularly used these days. In a away this represents cycles as what has suited Germany (manufacturing) fades and we see something where the UK is strong (services) replacing it. How long that will last I do not know.

Meanwhile some of you may have followed my debate with former Bank of England policymaker Danny Blanchflower on social media. When I pointed out to him that today saw 2 more upwards revisions to UK GDP ( as opposed to his continual promises of downwards ones) he replied thus.

So what? Go and look at the supporting data

 

The Investing Channel

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?

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Germany has become a weak link for the Euro area economy

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

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

Manufacturing

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

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

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

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

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

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

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

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

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

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

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

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

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

Services

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

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

Sadly the answer is yes.

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

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

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

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

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

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

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

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

Bonds

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

Comment

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

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

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

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

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

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

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

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

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UK GDP bounces back

Today will or depending when you read this has seen the return of something which if not an old friend is at least something familiar. From the Bank of England.

As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).

Just as a reminder it will buy short-dated Gilts today, longs tomorrow and mediums on Wednesday, with just under £1.3 billion being reinvested each time. The large Gilt redemption may have an effect on the UK Public Finances because the £2 billion discrepancy in July that the Office for National Statistics is still unable to explain to me will be over £7 billion if we pro rata Gilt maturity size.

As to the wider QE issue the Resolution Foundation has been on the case. I have to say they start with what looks a load of rubbish to me.

First, QE works by signalling that the policy rate isn’t going to rise anytime soon, affecting longer-term interest rates which move with expectations of future movements in policy rates. Put simply, QE convinces people that policy rates are going to stay low for a long time;

That view can only come from an Ivory Tower. After all nobody seriously thinks interest-rates are going to rise anyway. They are on better ground with the portfolio rebalancing effect as we have seen rises in asset prices.

Overall they conclude this and the emphasis is mone.

There is also evidence linking QE to improvements in the economic outlook. Many of the studies listed in Table 1, as well as others, find that QE has led to falls in a broad range of interest rates, rises in other asset prices, and falls in exchange rates. In turn, economic models of different types imply that these effects boost economic growth. For example, for the UK, Churm, Joyce, Kapetanios and Theodoridis estimate that QE had a cumulative macroeconomic effect equivalent to a short-term interest rate cut of 1.5 to 3 percentage points (or around 1 per cent of GDP).

Only an imply?! Also 1% is not much frankly for all that effort and the distortions it created. To be fair they admit this issue with wealth effects for the already wealthy.

Around 40 per cent of the aggregate
boost to wealth from changes in financial asset prices, property prices, and inflation went to families in the highest wealth decile, while only 12 per cent of the benefit went
to the bottom half of the distribution.

They claim that the income distribution improved but this is essentially based on the rise in employment we have observed. It is true that we have seen that but we simply do not know what would have happened without QE so it is a Definitely Maybe.

The impact of QE on employment and wages provided a 4.3
per cent income boost to those in the bottom half of the income distribution, compared to a 3.2 per cent boost across the top half.

Also those are relative numbers so care is needed as 4.3% of not much is, well I am sure readers can figure that out for themselves.

Still some employment prospects have genuinely improved because if the authors of this report ever want to work at the Bank of England it will love this on their CV.

Monthly GDP

I have to admit that I had a wry smile when I saw the number as at the end of last week there were more than a few on social media telling us that the UK was in recession and one told me my argument that we may not be was “idiotic”.

GDP grew by 0.3% in July 2019, with all components apart from agriculture showing growth.

If we go to the breakdown we see this.

Production output rose by 0.1% between June 2019 and July 2019; manufacturing provided the largest upward contribution (0.3%),

The latter development was welcome in these times especially after what we have seen in Germany and was caused by this.

pharmaceutical products (3.8%); following two strong monthly growths……the weapons and ammunition industry, which rose by 12.1%, owing to the completion of high-value contracts.

We know that the pharmaceuticals sector has been an overall strength albeit an erratic one. We have noted this from the ammo sector before and I suspect the flow is more regular and is missmeasured. of course some will think it is not a good idea anyway.

The main player as ever was this.

The Index of Services (IoS) increased by 0.3% between June 2019 and July 2019……The administrative and support services sector made the largest contribution to this growth, contributing 0.09 percentage points.

Actually this number suggests it is running just about everything as that is pretty much our annual rate of growth.

In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018.

Tucked away in the detail was something of a critique though as to my mind it may explain at least some of the problems with the construction data as this was in services.

services to buildings and landscape activities, which increased by 4.0%, contributing 0.03 percentage points

More GDP Perspective

Here the news was good too as we recall where we started from.

Rolling three-month growth was flat in July 2019, following growth of negative 0.2% in Quarter 2 (Apr to June) 2019.

This time around it was all services though.

The services sector continued to show subdued growth in the three months to July 2019, growing by 0.2%.

However our official statisticians then get themselves into something of a mess by saying this.

This longer-term weakening has been most notable in “other services”, which has declined from the start of 2019.

As we saw a strong July after a weaker phase.

However, this relatively large growth for services in July follows four consecutive months of flat growth in the sector.

Whilst the numbers below are true we may just have seen a change in trend.

In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018. This continues a weakening from the three months to April 2019 (2.1%). The growth in the three months to July 2019 was last lower in the three months to October 2013 which grew by 1.3% (was equal in April 2018).

In the end it was all services as the numbers below highlight.

For the three months to July 2019, production output decreased by 0.3%, compared with the same three months to July 2018; this was because of a fall in manufacturing of 0.7%, which was partially offset by rises from mining and quarrying (1.7%) and water and waste (0.7%).

Comment

Whilst we should welcome today’s news it does come with various perspectives. The first is that monthly GDP data needs refining and is subject to particular revision. However as it stands July was not a good month for the Markit PMI business survey which at 50.3 showed no growth at all rather than the 0.3% recorded. Also security needs to be tightened as there was a noticeable rally in the exchange rate of the UK Pound £ about 15 minutes before the official release.

Next up comes the sudden flood of research telling us that economic policy needs to be more active, for that is the gist of the Resolution Foundation report. As to monetary policy that deserves a good laugh as whilst at 1% rise in GDP is welcome it is not a lot when you consider all the efforts gone to. Frankly it makes me worry that once you throw in the side-effects such as zombie companies we may be worse off.

Lloyds Banking Group is facing an extra bill of up to £1.8bn to cover a late rush of claims for the mis-selling of Payment Protection Insurance (PPI)……..

Last week, RBS said it expected to take an additional charge of between £600m and £900m, while shares in CYBG fell sharply after it warned it could take a hit of up to £450m

Estimates suggest that the last-minute rush of claims means that banks will ultimately have set aside well over £50bn in total to pay for the PPI scandal.

Was that the 1% of GDP boost? Some of this is simply a transfer but with such large sums only a small discrepancy can be a big factor.

There is some scope for fiscal policy but everyone seems to have forgotten the long lags involved. I guess we will have to learn them all over again.

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