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.

Podcast

 

 

 

 

 

Are the UK trade numbers right or UK GDP?

As we look around us in the UK we see that the international environment has seen better days. One way of representing that has been the six central banks which have cut interest-rates this week as Serbia and the Phillipines yesterday joined the three we looked at on Tuesday. Those of you who have spotted I have mentioned only five, well as I do not think I have mentioned Peru before I thought it merited a proper mention.

The Board of Directors of the Central Reserve Bank of Peru (BCRP) decided to cut the reference
rate from 2.75 to 2.50 percent, thereby loosening the monetary policy stance.

Meanwhile it would appear that beds are burning in a land down under as look at this from Dr.Lowe of the Reserve Bank of Australia.

Things are going well.

He believes the economy may be at a positive “turning point”, as RBA rate cuts, tax cuts, a lower currency and infrastructure spending boost demand

So well in fact that he is considering cutting interest-rates to zero and started some QE bond purchases.

It is “possible” the RBA is forced to cut rates to near zero if other central banks do and the world economy has a serious downturn

The RBA is exploring other unconventional stimulus measures such as buying government bonds to drive down long-term interest rates if it does run out of cash rate cutting power. ( Australian Financial Review)

I have reported on this type of central banking Newspeak many times before where we get deflection ( optimism) but then the reality of what they really intend to do. Also if we note that the ten-year yield in Australia is already a mere 0.96% QE looks even more of a paper tiger than usual.

Also rather ominously bad production figures from Germany earlier this week were followed  this morning by this from France.

In June 2019, output slipped back sharply in the manufacturing industry (−2.2%, after +1.6%), as well as in the whole industry (−2.3%, after +2.0%)…….Over the second quarter of 2019, manufacturing output declined (−0.3%). Output increased slightly in the whole industry (+0.3%).

The UK

This meant that the mood music was right to be downbeat as we waited for the economic growth data.

UK gross domestic product (GDP) in volume terms was estimated to have fallen by 0.2% in Quarter 2 (Apr to June) 2019, having grown by 0.5% in the first quarter of the year.

This contrasts with what the Bank of England told us a week ago.

After growing by 0.5% in 2019 Q1, GDP is expected to have been flat in Q2, slightly weaker than anticipated in May.

That in itself was a reduction on its initial forecast of 0.2% growth so as you can see it turned out that net we ended up some 0.4% lower.

What happened?

As we have observed in France and Germany the action has been in production.

The production sector contracted by 1.4% in Quarter 2 2019, providing the largest downward contribution to GDP growth; the fall was driven by a sharp decline in manufacturing output, reflective of increased volatility in the first half of 2019.

Ouch! As we look for more detail there is this.

The quarterly fall in manufacturing of 1.4% is the strongest fall since Quarter 1 2009, due mainly to widespread weakness with 10 of the 13 subsectors decreasing; led by strong decreases from transport equipment (5.2%), chemicals and chemical products (6.2%) and basic metals (2.4%).

The transport numbers are no surprise in this environment but the chemical sector is more so. In terms of perspective this gives some food for thought.

To add further context to the volatility in growth during Quarter 1 2019 and Quarter 2 2019, the six months to June 2019 compared to the six months to December 2018 results in 0.0% growth in both the Index of Production and Index of Manufacturing.

So whilst we have had a Grand Old Duke of York half-year due to some Brexit stockpiling and unwinding the reality is that growth has disappeared. The credit crunch era pattern is now this.

Production and manufacturing output have risen since then but remain 7.1% and 3.4% lower respectively for June 2019 than the pre-downturn peak in February 2008.

Whilst we should not let a bad patch get us too down we should also wonder how and maybe if we will ever get back to that previous peak.

What did grow then?

Such growth as we got came from the services sector.

Services output increased by 0.1% in Quarter 2 (Apr to June) 2019 compared with Quarter 1 (Jan to Mar) 2019, following growth of 0.4% for Quarter 1 2019.

Not much although it looked better in annual terms.

In the three months to June 2019, services output increased by 1.6% compared with the three months ending June 2018.

Thus my theme that we are shifting ever more towards the services sector continues and they must be 80% of our economy by now.

Are we headed for recession?

Probably not if the monthly GDP figures are any guide. There is a danger because we have just seen a quarterly contraction but the monthly numbers suggest not. This is because the decline was in April when it fell by 0.5% on a monthly basis, followed by a 0.2% rise in May and then this.

Monthly GDP growth was flat in June 2019,

So we do not have much growth but we have a little and this is after downward revisions for April and May.

Trade

You may be surprised to read that this did really well.

The total trade deficit (goods and services) narrowed £16.0 billion to £4.3 billion in Quarter 2 (Apr to June) 2019, due largely to falling imports of goods.

Should this not lead to GDP rising? Well it is more complicated than that on two main counts. But let us try to get a better handle on the numbers actually going into the GDP numbers.

Excluding unspecified goods (including non-monetary gold), the trade deficit narrowed £6.2 billion to £4.0 billion in Quarter 2 2019, as imports from EU countries fell following sharp rises in Quarter 1 2019.

Even so we did better and on a monthly basis got near to balance or god forbid even a surplus.

Excluding unspecified goods (including non-monetary gold), the total trade balance remained in deficit at £0.6 billion in June 2019;

Now please forget what you were taught at school or maybe university as these are not in the output version of GDP they are in the expenditure version. So for now they get ignored! Time for me to remind you of one of Elton John’s albums.

Don’t shoot me I am only the piano player.

Okay let’s continue. The expenditure version has a problem which is this is an up and we know consumption is rising and to some extent government expenditure. So where’s the down?

GCF – which includes gross fixed capital formation (GFCF), changes in inventories and acquisitions less disposal of valuables – made a negative contribution of 4.01 percentage points to overall GDP growth in Quarter 2 2019. …………In Quarter 2 2019, changes in inventories (excluding both balancing and alignment adjustments) subtracted 2.24 percentage points from GDP growth.

 

Comment

As the above section was heavy going let me offer you some light relief courtesy of the Bank of England.

 the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

As Newt in the film Aliens points out “It wont make any difference” but central bankers are pack animals.

If we return to the GDP data then these numbers are a disappointment but far from a shock in the current environment. Also as I have shown there are more than a few reasons for doubt because of the current situation with trade and inventories, The water is even muddier than usual.

Or to put it another way I have already seen a barrage of tweets and the like about this being Brexit and so on. Us being better or worse than our peers. So let me help out by comparing annual growth rates.

When compared with the same quarter a year ago, UK GDP increased by 1.2% in Quarter 2 2019……..Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area and
by 1.3% in the EU28 in the second quarter of 2019.

All within the margin of error…..

 

 

 

 

Some better news for the economy of Italy as it faces up to Carige and Alitalia

For once we have the opportunity to look at some better news for the economy of Italy so let us take it. This came yesterday from the statistics office.

In May 2019 the seasonally adjusted industrial production index increased by 0.9% compared with the previous month.

That is at least something and happened in spite of the fact that the transport production sector declined by 2.5% meaning that manufacturing fell by 0.9%. Unfortunately as we look deeper we see that even a better month has only improved a declining trend.

The percentage change of the average of the last three months with respect to the previous three months was -0.1.
The calendar adjusted industrial production index decreased by 0.7% compared with May 2018 (calendar
working days in May 2019 being the same as in May 2018).

So we see that a better May provides some hope as it also happened in the UK and France

Bond Yields

There has been some relief for Italy from this area too as we note that the benchmark ten-year yield is now 1.7%. This has more than halved since the yield approached 3.7% in mid-October last year and as you can see there has been quite a plunge. Many countries have seen big falls in bond yields but Italy is perhaps the leader of the pack with the size of the fall. Part of this was driven by the news below which was reported by the Financial Times last week.

The European Commission on Wednesday ended weeks of negotiations with Rome by deciding not to trigger a so-called “excessive deficit procedure”, which could ultimately have led to financial sanctions.Italy’s ruling coalition promised to trim back this year’s budget shortfall by €7.6bn, or 0.42 per cent of gross domestic product, pushing the deficit down to 2.04 per cent and ensuring the country does not breach eurozone rules.

Thus those looking for yield piled into the Italian market with such enthusiasm that the two-year yield went negative for a while in response to this. When you look at the potential risks that seems rather mad to me and even the 0.08% as I type this seems much too low as we wonder how much of this will happen?

Italy instead said it would reduce its deficit by collecting an additional €6.2bn in revenues.

But the new apparent deal plus the likelihood that the ECB will add to its 365.4 billion Euro holdings of Italian government bonds ( BTPs) has created quite a bull market.

As a generic this will be very welcome for the government which can issue debt more cheaply. We saw an example of this only yesterday.

More than 80% of the demand for Italy’s 50-year debt issue on Tuesday came from foreign investors, with Germany in the forefront, the head of the Treasury’s debt management office told Reuters.

The 3-billion-euro top-up of the 2.80% March 2067 bond drew bids of more than 17 billion euros, with a final yield of 2.877%.

This is an ongoing job on a large-scale.

Total medium and long-term issuance this year will amount to some 240 billion euros, Iacovoni said ( Reuters )

I am a little unclear as to why Italy is planning this.

Italy is strongly committed to issuing its first dollar bond since 2010 before the end of this year and is also eyeing private placements in other currencies, the head of the Treasury’s debt management office told Reuters.

Maybe it is some sort of response to the plan we looked at from some sections of the government to issue government bonds in a new currency.

Labour Market

There was also some good news earlier this month as we saw the unemployment rate fall into single figures.

The unemployment rate dropped to 9.9% (-0.2 percentage points), the youth rate decreased to 30.5% (-0.7 percentage points).

Also 2019 so far seems to be seeing a pick-up in employment.

In the period from March to May 2019, employment rose compared with the previous quarter (+0.5%, +125
thousand).

Economics lives us to its reputation as the dismal science as we note that with growth hard to find this has implications for productivity. Also as we note elsewhere employment may not mean what we night assume.

Employed persons: comprise persons aged 15 and over who, during the reference week:
worked for at least one hour for pay or profit;

The Outlook

Our positive spin took a bit of a pounding from the European Commission yesterday.

Amid a challenging external environment real GDP growth in 2019 as a whole is forecast to be marginal (0.1%).
In 2020, economic activity should rebound moderately to 0.7% in line with the gradual improvement of the
global trade prospects and benefiting from a positive carryover effect and a calendar effect, given that 2020 has
two working days more than 2019.

Those are small numbers and I note that any improvement next year seems to rely on a calendar effect which will wash out. As Italy grew by 0.1% in the first quarter that is it for the year if this forecast is accurate. Also the forecast was worried about prospects for the labour market and underemployment in particular.

But weak economic activity is likely to weigh on the
labour market as indicated by the rising number of workers supported by the wage guarantee fund (Cassa
Integrazione Guadagni, CIG), which compensates for the income lost due to reduced work hours, and firms’
markedly lower employment expectations.

I also note that the Bank of Italy’s surveys show that Italians fear that unemployment may rise again.

The Banks

This has been quite a saga in the credit crunch era and the travails of Deutsche Bank earlier this week show that the problem extends way beyond the borders of Italy. In fact DB was not the only bank in the news on Monday as an old friend returned. From Reuters.

Italy is struggling to pull together a rescue plan for Carige (MI:CRGI) which the troubled Genoa-based bank needs to avoid a liquidation, two sources familiar with the matter said………..The latest attempt to salvage Carige revolves around a depositor protection fund (FITD) financed by Italian banks which, one of the sources said, would provide some 520 million euros ($583 million) in fresh capital out of a total of 800 million needed to save the bank.

That last number is revealing because I think last time around we were told that it was 600 million. No wonder no-one has been willing to step in. Also I note that FinanzaReport.it suggests this.

although some rumors in the last hours have raised the bar up to 900 million.

Those who recall the Atlante bailout fund will recall that it ended up weakening the other banks and had to call for more cash or Atlante II as we go down a familiar road.

The real issue is that all the dithering and denial means that things do not get sorted and thus the banks continue to be a drag on rather than an aid for growth in the Italian economy. Also the denial problem extends beyood the borders of Italy as the EU Auditors Commission pointed out yesterday.

The 2018 stress test imposed less severe adverse scenarios in countries with weaker economies
and more vulnerable financial systems. …. The
auditors also found that not all vulnerable banks were included in the test and that certain banks
with a higher level of risk were excluded.

I wonder which country was forefront in their minds?

Comment

Whilst there have been some flickers of better news we find ourselves in familiar “girlfriend in a coma” territory sadly. Italy is a lovely country but its economic problems can be symbolised by this from Corriere Della Salla

The government tries to close the game on Alitalia. The scheme is a veiled nationalization of the former flag company, focusing on the establishment of a new company where the majority of the capital will be in public hands. In practice, the process of re-launching the carrier, currently in the commissioning procedure, will have to be Ferrovie dello Stato, with a 35% stake, and the Ministry of Economy, through a 15% stake.

Still for an airline nicknames Always Late In Take-off Also Late In Arrival there was some more hopeful news in the report.

Last month Alitalia was also the most punctual carrier in Europe.

But as we look further ahead the weak birth rate will pose further problems should it continue.

Perhaps Italy should take the chance to claim it is rising to environmental and green challenges via this route

 

How can UK GDP be reported as rising and falling at the same time?

Let us open the week noting an area which is one part of something where the UK is strong. From the UK PPL.

In 2018 Ed Sheeran was once again the most played artist in the UK, according to data from music licensing company PPL. He has held the top spot in three of the last four years – 2018, 2017 and 2015 – and since his first album was released in 2011 he has been in the top five most played artists five times.

Whilst Ed may single-handedly be doing a good job there is far more to it than that.

The PPL said nine of the top 10 most-played artists were British, with Pink being the exception.

The charts were revealed ahead of at its AGM, where the society is due to announce that it collected £246.8 million on behalf of 105,192 performers and rights holders over the last year.

Seven of the top ten tracks also feature British talent, cementing a successful year for the UK industry.

Also let’s here it for the girls.

Her rise ( Jess Gynne) has contributed to a new milestone for the charts; 2018 was the first time that the majority of most played acts were, or featured, women, taking six out of the top ten spots.

Whilst these are domestic numbers according to UK Music much of the success is repeated abroad.

UK Music have today revealed our 2018 Measuring Music report, revealing that UK music industry exports rose by 7% to a record £2.6 billion last year. The UK music industry grew by 2% in 2017 to contribute a record £4.5 billion to the economy – up by £100 million on 2016, a new report by UK Music reveals today.

We do not know the figures for 2018 as we note that the world industry seems finally to be coming to terms with the issue of people in effect hiring or renting rather than buying their product. Trying to criminalise your consumers and customers was a non too bright strategy.

Film

The topic reminded me of the way that the UK film industry has been booming. Although I do not need much reminding because Battersea Park is regularly used by the film industry these days. From the British Film Industry or BFI.

The UK film industry’s GVA in 2016 was £6.1 billion. According to data published by the government in November 2017,
the GVA for all UK creative industries in 2016 was £91.8 billion, so film accounted for almost 7% of all creative
industries’ value added.
As Figure 4 shows, since 2007 GVA for film has increased by over 140%. In 2016 for the film industry as a whole,
distribution accounted for 50% of the total value added, production 40% and exhibition 10%.

As to can see the numbers from the industry do not yet fully reflect the growth we have seen.

Today’s Data

In the circumstances of the numbers reflecting what was supposed to be the post Brexit period we opened the batting solidly.

Rolling three-month growth was 0.3% in April 2019, down from 0.5% in March, but on par with growth rates at the start of 2019.

We can break that down.

The services sector had a positive contribution to rolling three-month growth in April 2019, increasing by 0.2%. The production sector increased by 0.7%, within which manufacturing grew by 1.2%, making it the second-largest contributor to rolling three-month growth. Construction also had a positive contribution, growing by 0.4% in the three months to April 2019.

Every sector was growing with services making GDP rise by 0.16% and construction by 0.02% and production by 0.09%. As we will be looking it in detail I will note that manufacturing was 0.11% ( so other parts of production were weak).

As this included March 29th when businesses had expected us to Brexit that was okay. However it came with a bad number for April.

Monthly GDP growth was negative 0.4% in April 2019, as the production sector and manufacturing sub-sector contracted.

If we look into this we find that we should have been expecting it.

Monthly growth in production was negative 2.7% in April, driven by manufacturing, which contracted by 3.9%.

Why? Well the UK motor industry or SMMT had already told us this.

UK car production falls -44.5% in April with 56,999 fewer units built in extraordinary month. UK commercial vehicle manufacturing declines -70.9% in April, with 2,162 units produced. British engine manufacturing falls -23.4% in April as UK car plant Brexit shutdowns affect demand.

These fed into the wider data and were half the April fall in manufacturing. Actually nearly all the manufacturing categories fell with only wood and paper and electrical equipment showing some growth and they were small amounts.

If we look at the trend we see a different perspective.

Rolling three-month growth in the production sector was 0.7% in April 2019, while manufacturing increased by 1.2%. Within manufacturing, the two largest positive contributors to growth were manufacture of food products and pharmaceutical products. Monthly growth in production was negative 2.7% in April, driven by manufacturing, which contracted by 3.9%.

Or to put it another way it fits this nursery rhyme.

Oh, The grand old Duke of York,
He had ten thousand men;
He marched them up to the top of the hill,
And he marched them down again.

And when they were up, they were up,
And when they were down, they were down,
And when they were only half-way up,
They were neither up nor down.

Are the numbers inconsistent?

Yes they are as the quarterly and monthly numbers are more different than you might think for two reasons.

high growth into February 2019 raised output significantly above the level of output seen in the months November 2018 to January 2019. Despite the declines in March and April, the average output of the current three months is still above that of the previous three months.

Also the quarterly numbers ( Q1,  Q2 etc.) benefit from the other two ways of calculating GDP which are the income and expenditure data.  So it might be better to call them Gross Value Added to distinguish them.

Comment

We have learnt quite a bit today. The first point is the the failure of the UK government and Parliament over Brexit has real word consequences. Remainers will argue we should not be leaving and Brexiters will say we would now be getting on with it. This way round we have had the side-effects headlined by the motor industry changing the date of its annual shut downs without in the end there being any reason for it. So it just looks incompetent.

Moving to the broad trend that remains in line with my argument that the trajectory is of the order of the UK growing by about 0.3% to 0.4% per quarter. The danger is that the trade war issue and signs of slow downs elsewhere build up. For example last week saw interest-rate cuts from two of the competitors at the cricket world cup, with India and Australia playing yesterday. Also there is a warning as economic growth in the services sector seems to have slowed.

Maybe we are seeing the beginnings now of a response to the lower bond yields. As I have been suggesting they will impact fixed-rate mortgage costs.

The average two-year fixed rate has fallen by 0.03% from 2.52% in January 2019 to 2.49% this month, while the average five-year fixed rate decreased by 0.09% from 2.94% to 2.85% over the same period. ( Moneyfacts )

Podcast

 

 

Manufacturing and Production help to drive UK GDP growth

Today brings us up to date with the latest monthly data on the UK economy. the problem with this is as I feared that the numbers are in practice rather erratic.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018.

Actually December recorded a -0.4% GDP growth rate so if you take the figures literally there was quite a wild swing. More likely is that some industries do not conform to a regular monthly pattern in the way we have seen the UK pharmaceutical industry grow overall but with a boom and bust pattern on a monthly basis.

There are areas where we see two patterns at once in the UK economy. For example Tesco has produced good figures already this morning.

Tesco has reported a 28.8% rise in full-year pre-tax profits to £1.67bn with revenue at the supermarket rising 11.2% to £63.9bn ( Sky News)

On the other hand this week has already seen this.

Ailing department store chain Debenhams has been rescued by its lenders after falling into administration.

Three years ago, the 166-strong chain was worth £900m, compared with £20m as of this week. ( BBC News)

Sadly the BBC analysis seems to avoid this issue highlighted by the Financial Times.

Debenhams troubles stem partly from a period of private equity ownership at the start of the millennium, when CVC, Merrill Lynch and TPG sold off freehold property, added debts and paid themselves large dividends.

It looks a case of asset-stripping and greed followed by over expansion which was then hit by nimbler retailers and the switch to online sales. Without the asset-stripping it would be still with us. Meanwhile the BBC analysis concentrates on Mike Ashley who put up £150 million and offered an alternative. I am no great fan of his business model with its low wages and pressure on staff but he does at least have one.

Wages

Speaking of wages there are several strands in the news so let us start with the rather aptly named Mr. Conn.

The chief executive of Centrica, the owner of British Gas, received a 44% pay rise for 2018, despite a difficult year in which the company imposed two bill increases, warned on profits and announced thousands of job cuts.

Iain Conn received a total pay package worth £2.4m last year, up from £1.7m in 2017, according to Centrica’s annual report. His 2018 packet was bolstered by two bonuses, each worth £388,000.  ( The Guardian )

Yet on the other side of the ledger we see things like this. From The Guardian.

Waterstones staff told how they have had to back on food in order to afford rent as they travelled across the country to deliver a 9,300-signature petition to the chain’s London headquarters, calling for the introduction of a living wage.

Mind you we seem to be making progress in one area at least.

Golden goodbyes for public sector workers will be capped at £95,000 in a clamp down on excessive exit payments, the government has confirmed. ( City-AM)

Although I note that it is something planned rather than already done, so the modern-day version of Sir Humphrey Appleby will be doing his or her best to thwart this. Here is his description of the 7 point plan to deal with such matters.

This strategy has never failed us yet. Since our colleagues in the Treasury have already persuaded the Chancellor to spin the process out until 2008, we can be sure that, by then, there will be a new chancellor, a new prime minister and, quite possibly, a new government. At that point, the whole squalid business can be swept under the carpet. Until next time.

As for payoffs it is the ones for those at the top who are quite often switching jobs which need to stop as often it is merely a name change of their employer.

Today’s GDP data

This was good in the circumstances.

Monthly GDP growth was 0.2% in February 2019, after contracting by 0.3% in December 2018 and growing by 0.5% in January 2019. January growths for production, manufacturing, and construction have all been upwardly revised due to late survey returns.

As you can see December was revised up as was January although not enough in January to raise it by 0.1%. But it is an erratic series so let us step back for some perspective.

UK gross domestic product (GDP) grew by 0.3% in the three months to February 2019

Whilst we do not yet have the March data regular readers may recall that the first quarter in the UK ( and in the US at times) can be weak so this is better than it may first appear.

As ever services were in the van as we continue to rebalance in exactly the opposite direction to that proclaimed by the former Bank of England Governor Baron King of Lothbury.

The services sector was the largest contributor to rolling three-month growth, expanding by 0.4% in the three months to February 2019. The production sector had a small positive contribution, growing by 0.2%. However, the construction sector contracted by 0.6%, resulting in a small negative contribution to GDP growth.

Inside its structure this has been in the van.

The largest contributor to growth was computer programming, which has performed strongly in recent months.

Production

Thanks to the business live section of the Guardian for reproducing this from my twitter feed.

One possible hint is that production numbers for Italy and France earlier have been strongish, will the UK be the same?

It turned out that this was so.

Production output rose by 0.6% between January 2019 and February 2019; the manufacturing sector provided the largest upward contribution, rising by 0.9%, its second consecutive monthly rise……In February 2019, the monthly increase in manufacturing output was due to rises in 11 of the 13 subsectors and follows a 1.1% rise in January 2019; the largest upward contribution came from basic metals, which rose by 1.6%.

In the detail was something I noted earlier as pharmaceutical production was up by 2.5% in the last 3 months which put it 4.3% higher than a year ago in spite of a 0.1% fall in February.

But whilst this was a welcome development for February the overall picture has not been of cheer in the credit crunch era.

Production and manufacturing output have risen since then but remain 6.1% and 1.9% lower respectively for the three months to February 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Things have been singing along with The Beatles since late 2012.

I have to admit it’s getting better (Better)
It’s getting better

but overall we are left mulling the John Lennon counter at the end of this line.

A little better all the time (It can’t get no worse)

Comment

This morning’s numbers were strong in the circumstances and confirm again my theme that we are growing at around 0.3/4% per quarter. Yet again the prediction in the Sunday Times that there would be no growth turned out to be a reliable reverse indicator. Of course there are fears for March after the Markit PMI business survey so as ever we await more detail.

As to stockpiling this has become an awkward beast because I see it being put as the reason for the growth, although if so why did those claiming this not predict it. Anyway I have done a small online survey of what people have been stockpiling.

Okay inspired by and her stockpiling of Scottish water we have from paracetamol for her dad for scare stories and dog has been burying treats

Meanwhile one area which has been troubled for many years continues to rumble on.

The total trade deficit (goods and services) widened £5.5 billion in the three months to February 2019, as the trade in goods deficit widened £6.5 billion, partially offset by a £0.9 billion widening of the trade in services surplus.

Perhaps there was some stockpiling going on there although as any departure from the European Union seems to be at Northern Rail speed those stockpiling may now be wondering why they did it?

 

 

How is it that even Germany needs an economic stimulus?

Sometimes we have an opportunity like the image of Janus with two heads to look at an event from two different perspectives. This morning’s trade data for Germany is an example of that. If we look at the overall theme of the Euro era then the way that Germany engineered a competitive devaluation by joining with weaker economies in a single currency has been a major factor in this.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 16.3 billion euros in February 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.1 billion euros), services (-1.1 billion euros), primary income (+6.2 billion euros) and secondary income (-7.9 billion euros). In February 2018, the German current account showed a surplus of 19.5 billion euros.

The large surplus which as you can see derives from its trade in goods feels like a permanent feature of economic life as it has been with us for so long. Also it is the bulk of the trade surplus of the Euro area which supports the value of the Euro although if we shift wider the Germany trade surplus is one of the imbalances which led to the credit crunch itself. So let us move on as we note an example of a currency devaluation/depreciation that has been quite a success for Germany.

What about now?

The theme of the last six months or so has shone a different perspective on this as the trade wars and economic slow down of late 2018 and so far this year has led to this.

Germany exported goods to the value of 108.8 billion euros and imported goods to the value of 90.9 billion euros in February 2019……After calendar and seasonal adjustment, exports were down 1.3% and imports 1.6% compared with January 2019.

We can add to that by looking at January and February together and if we do so on a quarterly basis then trade has reduced the German economy by a bit over a billion Euros. Compared to last year the net effect is a bit under four billion Euros.

One factor in this that is not getting much of an airing is the impact of the economic crisis in Turkey. If look at in from a Turkish perspective some 9% of imports come from Germany ( h/t Robin Brooks) and the slump will be impacting even though if we switch to a German view the relative influence is a lot lower.

Production

On Friday we were told this.

+0.7% on the previous month (price, seasonally and calendar adjusted)
-0.4% on the same month a year earlier (price and calendar adjusted)

There was an upwards revision to January and if we look back we see that the overall number peaked at 108.3 last May fell to 103.7 in November and was 105.2 in February if we use 2015 as our benchmark. So there has been a decline and we will find out more next month as March was a fair bit stronger than February last year.

Orders

These give us a potential guide to what is on its way and it does not look good.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in February 2019 a seasonally and calendar adjusted 4.2% on the previous month……..-8.4% on the same month a year earlier (price and calendar adjusted).

If we switch to the index we see that at 110.2 last February was the peak so that is a partial explanation of why the annual fall is so large as for example March was 108.6. But it is also true that this February saw a large dip to the weakest in the series so far at 101. 2 which does not bide well.

Also you will no doubt not be surprised to read that a decline in foreign orders has led to this but you may that it is orders from within the Euro area that have fallen the most. The index here was 121.6 last February as opposed to 104.6 this.

Forecasts

On Thursday CNBC told us this.

Forecasts for German growth were revised significantly downwards in a ‘Joint Economic Forecast’ collated by several prominent German economic research institutes and published Thursday, with economists predicting a meager 0.8% this year.

This is more than one percentage point lower than a prediction for 1.9% made in a joint economic forecast in fall 2018.

Although they should be eating a slice of humble pie after that effort last autumn.

The private sector surveys conducted by Markit were a story of two halves.

Despite sustained strong growth in services business activity in March, the Composite Output Index slipped from a four-month high of 52.8 in February to 51.4, its lowest reading since June 2013. This reflected a marked fall in goods production – the steepest since July 2012.

In terms of absolute levels care is needed as this survey showed growth when the German economy contracted in the third quarter of last year. The change in March was driven by something that was eye-catching.

Manufacturing output fell markedly and at the fastest
rate since 2012, with the consumer goods sector joining
intermediate and capital goods producers in contraction.

Comment

A truism of the Euro era is that the ECB sets monetary policy for Germany rather than for the whole area. Whilst that has elements of truth to it the current debate at the ECB suggests that it is “The Precious” which takes centre stage.

A debate on whether to “tier” the negative interest rates that banks pay on the idle cash they park at the ECB is now underway, judging by recent ECB comments and the minutes from the March meeting. ( Reuters)

There is a German element here as we note a Deutsche Bank share price of 7.44 Euros which makes any potential capital raising look very expensive especially to existing shareholders.. Also those who bought the shares after the new hints of a merger with Commerzbank have joined existing shareholders in having singed fingers. Maybe this is why this has been floated earlier.

The next frontier for stimulus at the ECB should include stock purchases, BlackRock’s Rick Rieder says

Will he provide a list? I hope somebody at least pointed out that the Japanese experience of doing this has hardly been a triumph.

It all seems not a little desperate as we see that ECB policy remains very expansionary at least in terms of its Ivory Tower models. It’s ability to assist the German economy has the problem that it already holds some 511 billion of German bonds at a time when the total numbers are shrinking, so there are not so many to buy.

This from Friday suggests that should the German government so choose there is plenty of fiscal space.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

That is confirmed by so many of Germany’s bond having a negative yield illustrated by its benchmark ten-year yield being 0% as I type this.

The catch is provided by my junkie culture economics theme. Why after all the monetary stimulus does even Germany apparently need more? In addition if we have been “saved” by it why is the “speed limit” for economic growth now a mere 1.5%?

They can tell you what to do
But they’ll make a fool of you ( Talking Heads )

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Deutsche Bank and Commerzbank will soon be telling us bigger is best

The weekend just gone has seen a surge in speculation about a matter we have been expecting for some time. It is this issue of solving the problem of a bank that is too big to fail by making it even bigger! Why might this be? Well let us go back a little more than two years to February 2nd 2017.

The bank’s net loss narrowed to 1.89 billion euros in the three months through December, from a loss of 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

As I pointed out it was not supposed to be like that as the background for banking was good.

As I look at this there is the simple issue of yet another loss. After all the German economy is doing rather well with economic growth of 1.9% in 2016 and the unemployment rate falling to 5.9% with employment rising. So why can’t Deutsche Bank make any money?

It has continually blamed “legacy issues” but we find if we advance two years and a bit in time that it is still in something of a morass. Actually in terms of those willing to back its future with their money things look much worse as the share price in February 2017 was 16.6 Euros according to my monthly chart as opposed to the 7.85 Euros as I type this. So one option which is a(nother) rights issue faces the problem that to do any good existing shareholders would be diluted substantially.

What is happening?

From Reuters.

Berlin is so worried about the health of Deutsche Bank that it pushed for a merger with rival Commerzbank even though it could open up a huge financial shortfall, a German official told Reuters.

As we wonder how huge is “huge”? Let us remind ourselves that the German public finances are in strong shape. Germany is running a fiscal surplus and has been reducing its national debt in both absolute and relative terms. Indeed as the last relative number of 61% of GDP (Gross Domestic Product) was for the third quarter of last year Germany may now qualify under the Maastricht Treaty rules. So it could borrow more to cover even a “huge” amount and as we stand can do so very cheaply with the ten-year bund yield a mere 0.07%.

I cannot say I have much faith in the explanation for the losses though as the QE bond buying of Mario Draghi and the ECB has created large profits for most European sovereign bondholders.

The German official said that any tie-up would likely result in a multi-billion-euro hole because a switch in bank ownership legally triggers a revaluation of assets such as government bonds.

They would be revalued at a market price which is typically lower than the one registered on the accounts. A second source, who is familiar with the talks, said they also expected a shortfall after the potential merger.

I think we will find it is other assets which will be causing the trouble and the explanation is something of a smokescreen. It also looks like there has been some “mark to fantasy” going on in the accounts which seems most likely to have taken place in illiquid bonds and derivatives.

As we continue our look don’t they mean 2008 (and maybe 2011/12) as well as 2016?

“In 2016 … Deutsche went to the brink,” said the first official. “They haven’t really got out of that hole…It’s legitimate to ask:… how dangerous is that with systematic relevance?”

This contrasts with the official rhetoric.

Deutsche Bank has said it is stable. Last month, as it announced a return to profit in 2018, its chief executive Christian Sewing said it was “on the right track” for growth and lower costs.

It would appear that Herr Sewing is unaware of the meaning of the phrase “the right track” provided by the Greek crisis where it led to people singing along to AC/DC.

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell.

Also as a reminder the IMF ( International Monetary Fund ) reported this back in the summer of 2016.

Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC (HSBA.L) and Credit Suisse (CSGN.S)………..The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures.

The story of the last decade is that the problems of Deutsche Bank have never really gone away and in fact have got worse when the economy got better. Should the present period of economic weakness continue then the heat will be not only be turned up a notch or two. As to the legality of all this then surely it should be blocked on competition grounds but when “the precious” is involved matters like that seem to disappear in a puff of smoke.

Meanwhile as Johannes Borgen pointed out at the end of last week maybe the ground has been tilled a little.

I have just realised that Germany passed a law to make redundancies easier for high earners. Those fat cat bankers at Deutsche must feel slightly nervous. How bad must the government want this deal, to make a law only to facilitate it…

The economy

This morning has brought more information on the ongoing economic slow down. From Germany Statistics.

 In January 2019, production in industry was down by 0.8% from the previous month on a price, seasonally and calendar adjusted basis and -3.3% on the same month a year earlier.

December was revised higher but in return January saw another fall meaning that the word temporary is being stretched again. As to the cause well here is a brake on things.

Automobile production fell by 9.2 percent on the month in January, separate data from the Economy Ministry showed. ( Reuters)

Also whilst the world economy will welcome a reduction in one of its imbalances the German one will be slowing because of this.

The foreign trade balance showed a surplus of 14.5 billion euros in January 2019. In January 2018, the surplus amounted to 17.2 billion euros.

According to BreakingTheNews this is hitting official forecasts.

Germany’s government lowered its gross domestic product (GDP) projections for the country in 2019 to 0.8%, Handelsblatt reported on Monday, quoting a confidential note sent by the Ministry of Finance.

Comment

This year has seen more than a few zombie banks return to the news like a financial version of hammer house of horror. We have seen Novo Banco ( Portugal) leaching from the state and a row of Italian banks as well as NordLB of Germany. But Deutsche Bank has returned and the situation is in many ways dominated by this from Reuters BreakingViews.

Lastly, how will a combined bank achieve a 10 percent return on its capital? Deutsche made a piddling 0.5 percent return in 2018 and Commerzbank a paltry 3.4 percent.

Putting it simply Deutsche Bank has not only lost its mojo it lacks any real form of business model. Commerzbank has made a little progress but only by escaping the supermassive black hole of investment banking as we note that a merger would bring it back within that area’s event horizon.

Or to put it another way it is hard to keep a straight face when this is presented as a way of helping with the issue of too big to fail

Deutsche Bank’s chairman Paul Achleitner is also an advocate for a merger that would create the eurozone’s second-largest bank with close to €1.9tn in assets. ( Financial Times)

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