What next in terms of interest-rates from the Bank of England?

There is much to engage the Bank of England at this time. There is the pretty much world wide manufacturing recession that affected the UK as shown below in the latest data.

The three-monthly fall in manufacturing of 1.1% is because of widespread weakness with 11 of the 13 subsectors decreasing; this was led by food, beverages and tobacco (2.0%) and computer, electronic and optical products (3.5%).

The recent declines have in fact reminded us that if all the monetary easing was for manufacturing it has not worked because it was at 105.1 at the previous peak in February 2018 ( 2015 = 100) as opposed to 101.4 this August if we look at a rolling three monthly measure. Or to put it another way we have seen a long-lasting depression just deepen again.

Also at the end of last week there was quite a bounce back by the value of the UK Pound £. Much of that has remained so far this morning as we are at 1.142 versus the Euro. Unfortunately the Bank of England has been somewhat tardy in updating its effective exchange rate index but using its old rule of thumb I estimate that the move was equivalent to a 0.75% rise in interest-rates. Actually there was another influence as the Gilt market fell at the same time with the ten-year yield rising to 0.7% on Friday.

Enter Dave Ramsden

I note that Sir David Ramsden CBE is now Dave but more important for me is the way that like all Deputy Governors these days he is a HM Treasury alumni.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017.

On a conceptual level there seems little point in making the Bank of England independent from the Treasury and then filling it with Treasury insiders. So the word independent needs to be in my financial lexicon for these times.

However Dave is in the news because he has been interviewed by the Daily Telegraph. So let us examine what he has said.

The UK’s “speed limit” for growth has been so damaged by uncertainty over Brexit that it could hamper the Bank of England’s ability to help a weak economy with lower interest rates, deputy Governor Sir Dave Ramsden warned today.

There are several issues raised already. For example the “speed limit” follows quite a few failures for the Bank of England Ivory Tower, There was the output gap failure and the Phillips Curve but all pale into insignificance compared to the unemployment rate where 4.25% is the new 7%. As to the “speed limit” of 1.5% for GDP growth then as we were at 1.3% at the end of the second quarter in spite of the quarterly decline of 0.2% seen Dave seems to be whistling in the wind a bit.

Also the issue of the Bank of England helping the economy with lower interest-rates has two issues. The first is that interest-rates were slashed but we are where we are. Next the responsibility for Bank Rate being at 0.75% is of course with Dave and his colleagues. That is also inconsistent with the claims of Governor Mark Carney that the 0.25% interest-rate cut and Sledgehammer QE of August 2016 saved 250,000 jobs.

Productivity

Dave’s main concern was this.

He said he was more cautious over the economy’s growth potential thanks to consistent disappointments on productivity, which sank at its fastest pace for five years in the three months to June.

For those who have not seen the official data here it is.

Labour productivity, as measured on an output per hour basis, fell by 0.5% compared with Quarter 2 (Apr to June) 2018. This follows two consecutive quarters of zero growth.

The problem with this type of thinking is that it ignores the switch to services which has been taking place for decades as they are areas where productivity is often hard to measure and sometimes you would not want at all. After my knee operation I had some 30 minute physio sessions and would not have been pleased if I was paying the same amount for twenty minutes!

Next comes the issue of the present contraction in manufacturing which will be making productivity worse. This is before we get to the issue that some of the claimed productivity gains pre credit crunch were an illusion as the banking sector inflated rather than grew.

Wages

Dave does not seem to be especially keen on the improvement in wage growth that has seen it rise to an annual rate of above 4%.

The critical economic ingredient has lagged since the crisis as businesses cut back investment spending, dampening the UK’s ability to produce more, fund sustainable pay rises and be internationally competitive. Company wage costs “are picking up quite significantly, which will drive domestic inflationary pressure”, he added.

Not much fun there for those whose real wages are still below the previous peak.We get dome further thoughts via the usual buzz phrase bingo central bankers so love.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth, because I think supply potential, the speed limit of the economy, is also slowing through this period. That comes through for me pretty clearly in the latest productivity numbers.

News of the Ivory Tower theoretical conceptual failure does not seem to have arrived at Dave’s door.

Policy Prescription

In a world of “entrenched uncertainty” – a likely temporary extension to the UK’s membership if the Prime Minister complies with the Benn Act – “I see less of a case for a more accommodative monetary position,” Sir Dave said.

Also taking him away from an interest-rate cut was this.

Sir Dave – who refused to comment on whether he had applied to replace outgoing Governor Mark Carney – said the MPC would also have to take account of the recent £13.4bn surge in public spending unveiled by Chancellor Sajid Javid in last month’s spending review. The Bank estimates that will add 0.4 percentage point to growth.

Comment

In the past Dave has tried to make it look as though he is an expert in financial markets perhaps in an attempt to justify his role as Deputy Governor for that area. Unfortunately for him that has gone rather awry. If he looked at the rise in the UK ten-year Gilt yield form 0.45% to 0.71% at the end of last week or the three point fall in the Gilt future Fave may have thought that his speech would be well timed. Sadly for him that has gone all wrong this morning as the Gilt market has U-Turned and as the Gilt future has rallied a point the ten-year yield has fallen to 0.62%

So it would appear he may even have negative credibility in the markets. Perhaps they have picked up on the tendency of Bank of England policymakers to vote in a “I agree with Mark ( Carney)” fashion. His credibility took quite a knock back in May 2016 when he described consumer credit growth of 8.6% like this.

Bank Of England’s Ramsden Says Weak Consumer Credit Data Was Another Factor That Made Me Fear UK Consumption Growth Could Slow Further, Need To Wait And See ( @LiveSquawk )

In terms of PR though should Sir Dave vote for an interest-rate cut he can present it as something he did not want to do. After all so much central banking policy making comes down to PR these days.

Podcast

 

 

 

Good news on UK real wage growth reminds us they are still in a depression

One of the features of the UK economic recovery post credit crunch has been the strong growth in employment. This has had the very welcome side effect of bringing unemployment down to levels that on their own would make you think we have fully recovered. However yesterday produced a flicker of a warning on this subject from the official survey on well-being.

Expectations for higher unemployment for the year ahead have been climbing and are now higher than at any point for the past five and a half years.

Of course with so many elements of the media and “think tanks” singing along with REM it is hard to know whether people actually think this or feel they should.

It’s the end of the world as we know it
It’s the end of the world as we know it

Intriguingly though the next line includes the words “I feel fine” which were also replicated at a time ( Brexit D-Day 1.0 ) you might nor expect this.

Anxiety in the UK remained stable in the year ending March 2019, with no significant decrease in the proportion of people who reported the highest anxiety ratings.

Meanwhile the Bank of England will be expecting the economy to improve.

Net financial wealth per head increased by 3.0% for the quarter ending March 2019 compared to the same quarter a year ago, led by increases in equity and investment fund shares.

The only disappointment for it will be that it has not managed to keep house prices rising in real terms as well.

Unemployment

If we stay with that this morning’s release shows that the expectations had at least some basis in reality.

The UK unemployment rate was estimated at 3.9%; lower than a year earlier (4.0%); on the quarter the rate was 0.1 percentage points higher.

So there was a nudge higher in the unemployment rate. I have looked into the numbers as the release is shall we shall a bit light in this area. The rise in unemployment was by 37,000 to 1,329,000 but there is a nuance to this.

90,000 people from economic inactivity to unemployment

This is for a different time period as we are comparing the first three months of this year with the latest three but you can see that the shift is people joining the labour force. Over this period it is just about treble the change in unemployment of 31,000.

How can this be? We find it in the definition of employment that includes those above retirement age as over the same period it has risen by 104,000 which as the ordinary employment level only rose by 34,000 then 70,000 “retirees” have found work.

Nuance

I have pressed the numbers hard here so do not take them to the last thousand. But in a broad sweep it looks as though more “retirees” have looked for work and many of them have found jobs. But some others have not and because they are looking for work have been switched from not being in the numbers to raising both unemployment numbers and the rate. Awkward.

So we are not sure what this actually tells us.

Employment

I have stolen my own thunder to some extent in the previous section but these numbers were good again and took us to a joint record high in employment rate terms of 76.1%. But let me go wider as I have above as we reached what ELO might call A New World Record. Or rather a UK record because if we include those above retirement age we have a new record employment rate of 61.6% and have 32.8 million.

The catch is that whilst some of this is good in terms of older people being heathier and able to work some will be forced to by needing the money and we have no way of determining the split. Also there was this.

There were an estimated 896,000 people (not seasonally adjusted) in employment on zero-hour contracts in their main job, 115,000 more than for a year earlier, but 8,000 fewer than the same period in 2016. This represents 2.7% of all people in employment for April to June 2019.

So a rise in a number which had been falling and again we lack the nuance. These contracts suit some people but others only take them because it is all they can get and we do not know the split. Frankly to my mind if you do not get work in a week or maybe only a few hours then the numbers should be discounted into “full-time equivalents.”

Oh and there was something which contradicted a lot of the rhetoric we see flying around.

EU nationals working in the UK increased by 99,000 to 2.37 million.non-EU nationals working in the UK increased by 34,000 to 1.29 million

Wages

These were a bright spot.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 3.7% for total pay (including bonuses) and 3.9% for regular pay (excluding bonuses).

If we look at total pay the monthly pattern has improved going, £530,£534,£536 and now £538 for weekly wages. Pay in construction has risen at an annual rate of 5.9% although the monthly pattern was better in April and May than June. The fly in the ointment is the public sector which had a really good April due to the rise in the minimum wage and this.

Public sector annual pay growth has accelerated to 3.9% and is now at its highest since May 2010; this is driven in large part by the health and social work sub-sector in which the timing of pay rises for some NHS staff is different in 2019 compared with 2018.

As April drops out of the three monthly average next time we could see quite a dip in this area.

Real Wages

The official view is this.

In real terms (after adjusting for inflation), total pay is estimated to have increased by 1.8% compared with a year earlier, and regular pay is estimated to have increased by 1.9%.

Sadly it is not that good as they use the imputed rent driven CPIH for this measure. As an example of the issue RPI was 1% higher in June. So if we split this down the middle real wage growth is 1.3%.

This sort of thing matters and let me highlight it with this.

For June 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at:

  • £505 per week in nominal terms
  • £469 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£460 per week), but £4 (0.8%) lower than the pre-recession peak of £473 per week for April 2008

The equivalent figures for total pay are £499 per week in June 2019 and £525 in February 2008, a 5.0% difference.

Firstly on both readings that is a depression. But many press the regular pay numbers which ignores the fact that the depression has been raging most in bonus pay. If we move to total pay we see why many people think they are poorer, it is because they are. That is before we get to the highly favourable inflation measure used here.

Comment

There is an element of good UK bad UK here so let me start with the good. Employment growth has been excellent and so overall has been the fall in unemployment. This month’s rise in the latter may be older people thinking they can get a job which many are but those that do not now count as unemployed. Wage growth is now pretty good and in fact is stellar for the credit crunch period.

The other side of the coin is that real wages are still in a depression and even at current rates of growth with take around 3 years to get back to the previous peak. Also if you have rising employment and falling (-0.2% GDP) you get this.

Data from the latest labour market statistics and GDP first quarterly estimate indicate that output per hour fell by 0.6% compared with the same quarter in the previous year….Output per worker in Q2 2019 also fell by 0.1%, compared with the same quarter in the previous year. This was the result of employment (1.3%) growing faster than gross value added (1.2%).

 

HM Treasury has mounted a successful takeover of the Bank of England

We have an opportunity to find out what policymakers at the Bank of England are thinking today especially as the speech I am about to analyse keys with the latest economic news. Sir David Ramsden who prefers to be called Dave has given a speech in Inverness, so let us give him some credit for venturing forth from London. However before we get to the economics there is a systemic problem highlighted by it and him so let’s get straight to it.

when I became Chief Economic Adviser at
the Treasury in 2007.

Let me add to that with this from the Bank of England website.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017. He was responsible for advising on UK macroeconomic policy and was the Government’s representative of the meetings of the Bank’s Monetary Policy Committee. Previous to that he held a number of civil service roles including leading the Treasury work advising on whether the UK should join the Euro.

Now let me remind us all that the changes in 1997 were supposed to make the Bank of England independent, and what that meant was independent of Her Majesty’s Treasury. As you can see Dave is steeped in it. This is common amongst the Deputy-Governor’s as both Ben Broadbent, Jon Cunliffe and Sam Woods are also alumni of HM Treasury. As you can see independence was a temporary feature which HM Treasury saw as a challenge. This is a big deal when we look at policies like QE which is presented as one body (treasury) being different from the other (central bank ) whereas it is really smoke and mirrors.

The economy

Productivity

Here is an area where I broadly agree.

Much of the apparent growth in finance sector productivity before the crisis reflected profits on the risky lending that led to the crisis itself. Indeed the way finance sector output is measured meant that the rate of bank balance sheet expansion translated directly into the measured
contribution of the finance sector to productivity growth.

It is rare to see any sort of even implied criticism for “The Precious” so we should welcome this. Also you may note there is also implied criticism of the concept.

The UK manufacturing sector is now much
more productive as a result – but is also smaller.

I do not know if he thinks of it like this but if the sector which is most likely to be productive is getting smaller and being replaced by services there is a clear issue.

Moving to policy we get a clue from this view from Dave who says he expects a lower level of productivity growth than this..

This judgement is embedded in
our Inflation Report forecasts, where we now assume productivity growth of around 1%.

This means that he has a downbeat view on prospects for the UK economy.

Since productivity growth is a key determinant of how fast the economy can sustainably grow –
what I just described as the economy’s “speed limit” – that also means that, all else equal, I am a little more
pessimistic about future GDP growth.

Brexit

There is a two-way swing here where we get plenty of excuses but the reality is or rather was this.

And GDP turned out to be robust: it has grown by around 1% more than we predicted in August
2016, immediately after the referendum.

However Dave when looking ahead seems to be concentrating on a familiar area, can you spot it?

We have evaluated what effect of a worst case
disorderly scenario, featuring much lower GDP, higher inflation and unemployment and much lower house
prices, would be on the core banking system,

However his view on the problems of unexpected events did get some support from this morning’s release from the UK motor industry or SMMT.

British car manufacturing output plummeted by almost half in April, according to figures published today by the Society of Motor Manufacturers and Traders (SMMT).

70,971 cars rolled off production lines in the month, down -44.5% year on year as factory shutdowns, rescheduled to mitigate against the expected uncertainty of a 29 March Brexit, took effect in many plants across the UK.

That frankly was a shambles after so many promises that March 29th would be the day and yet it went past like any other. the catch of course was that planning was wrong-footed. Some of it will be caught up as we pass the dates where there would have been shut downs anyway but the central issue of a possible exit date remains. This was a clear fail for the UK government.

Labour Market

This has been a very difficult area for the Bank of England as anybody who recalls the original version of Forward Guidance which guided us towards an unemployment rate of 7% being significant for interest-rate increases. How did that go?

Employment growth has remained historically strong, with unemployment falling to 3.8%.

So really rather well for the unemployed and the economy overall. As to increases in interest-rates, not so much, as we in fact started with a cut and have managed in net terms one increase to 0.75%. The claims by Governor Carney that this has not been a debt fuelled boom seem somewhat at odds with this from Deputy-Governor Ramsden.

Consumption has instead been funded, perhaps less
sustainably, by a historically low household saving ratio.

He can’t quite bring himself to say debt can he? Perhaps though he is still chastened by the response to his claim that unsecured credit growth was weak when it was growing at an annual rate of 8.3%.

Also if we reflect on where the speech was given then according to the criteria originally set out for Forward Guidance Scotland should now have interest-rates considerably higher than they are.

And unemployment is at 3.2%, even lower than the already record-breaking UK rate of 3.8%. In the Highland
region it was 3.0% in the most recent data.

Put that in your output gap and smoke it. The Ivory Towers have shown what we might call remarkable intellectual flexibility here. After all the Bank of England has been telling us spare capacity has been “broadly used up” for about five years now.

There was some more welcome news this morning. From the BBC.

The number of low-paid workers dropped by 200,000 last year, with 120,000 of them aged between 21 and 30, the Resolution Foundation said.

It said the introduction of the National Living Wage had “significantly” reduced low pay.

Comment

There are several issues here. Let me start with the Treasury one which matters because pretty much everyone I have met from there suffers from being part of what I can only describe as a hive mind. Moving onto interest-rates we see some curious contradictory statements from Deputy-Governor Ramsden. First he is in the raising crew.

Demand,in terms of GDP growth, has exceeded growth in supply such that spare capacity in the economy has been,
broadly speaking, used up. Reflecting that, and its implications for domestic inflationary pressure, the MPC
has raised Bank Rate twice; it now stands at 0.75%.

The cut seems to have been redacted but anyway suddenly we might go in either direction.

There are scenarios where the balance of those factors
would mean looser monetary policy was appropriate, and other scenarios where it would be appropriate to
tighten. In other words the response would not be automatic and could go either way: rates could go up or
down as the situation demands.

The one scenario we do not get is talk outright of a cut which is odd because if you look at the thinking on the speech that looks the most likely outcome.

Me on The Investing Channel

UK wage growth shows the first sign of weakness for a while

Today brings the UK labour market into focus as we hope for more good news. However we have seen over the past day or so some reminders that the credit crunch era left long lasting scars for some. In isolation the UK has recovered well in terms of employment and getting people back to work but has done much less well overall in terms of what they are paid for it. In particular the Resolution Foundation has taken a look at one rather unfortunate group.

This report looks at the specific fortunes of the “crisis cohort” those who left education between 2008 and 2011. By analysing outcomes for those unfortunate enough to enter the labour market in the aftermath of the 2008-09 recession, this paper estimates how severe an impact
the downturn had on people who left education in its midst, and how long-lasting these effects were.

These individuals were of course guilty of nothing and were only involved via an accident of the timing of their birth. The Resolution Foundation discovered these effects.

We find that people starting their careers in the midst of a downturn experience a reduction in real hourly pay of around 6 per cent one year after leaving education, and that compared to people who left education in better economic conditions their wages do not recover for up to 6 years. For those with lower levels of education, the chance of being in work falls by over 20 per cent, while for graduates the chance of being in a low paying occupation rises.

The find something which resonates with past Bank of England research on this subject.

The chance of a graduate working in a lowpaid occupation rose by 30 per cent, and remained elevated a full seven
years later. Indeed, we find that people ‘trading down’ in terms of the occupations they enter after leaving education, coupled with pay restraint in mid-paid roles, are main drivers of poor pay outcomes for those entering
the labour market in a recession.

The issue I have with this is that we are looking at a period when being a graduate was not what it had been in the past due to the expansion of numbers in the Blair era. So that may well also have been in play but not fully considered. Whatever the cause there was a strong effect on wages.

This helps explain why the impact on pay was more enduring in the recent downturn. People’s hourly wages took 50 per cent longer to recover (to the rates of pay enjoyed by those leaving education outside the downturn).

Thus not only did wages fall they took longer to recover to levels seen by those lucky enough not to start work and graduate as the credit crunch hit. A clear issue for thos affected.

However we did get one thing right in the sense that pre credit crunch we wanted to be what was considered to be more Germanic. In this instance that meant more flexible wages ( as in potentially down) in return for a better employment trajectory.

On the other hand, youth unemployment did not rise as high as in the early 1990s, and came down much faster.

Many now seem to have forgotten that as it has turned out to be a success but at a price in terms of wages especially for those unlucky enough to be born at the wrong time. Although as this from BBC economics correspondent Andy Verity illustrates some are keener on lower unemployment than others.

The unemployment rate is now down to 3.8%. But is lower unemployment always a good thing? Not necessarily – if eg you’re a business and you can’t get the staff.

Today’s Data

The drumbeat of the UK data series for around the last seven years continues to beat out its tune.

Estimates for January to March 2019 show 32.70 million people aged 16 years and over in employment, 354,000 more than for a year earlier. This annual increase of 354,000 was due entirely to more people working full-time (up 372,000 on the year to reach 24.11 million). Part-time working showed a small fall of 18,000 on the year to reach 8.59 million……..The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.6%) and the joint- highest figure on record.

The bass line was in tune as well.

For January to March 2019, an estimated 1.30 million people were unemployed, 119,000 fewer than for a year earlier and 914,000 fewer than for five years earlier…….

the estimated unemployment rate: for everyone was 3.8%; it has not been lower since October to December 1974 (for men was 3.9%; it has not been lower since March to May 1975, for women was 3.7%, the lowest since comparable records began in 1971)

As you can see the unemployment performance is a case of lets hear it for the girls.

Also as I regularly get asked here is the other category.

The UK economic inactivity rate was estimated at 20.8%, lower than for a year earlier (21.1%) and close to a record low.

Wages

Here there was a more nuanced version of better news.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.2%, before adjusting for inflation, and by 1.3%, after adjusting for inflation, compared with a year earlier.

If we put to one side for a moment the attempt to sugar coat the real wages numbers, there is a fading of nominal wage growth here. We should welcome the fact that the annual rate of growth is still above 3% but there is an issue as it has fallen back from 3.5%. Why? Well weekly wages peaked at £530 in January and fell to £529 in February and £528 in March. Various areas contributed to this as the annual rate of pay growth in finance fell from 5% to 1.8% over the same period and growth in the wholesaling,retail and hotel sector actually went negative ( -0.3%). This was due to weak and in some cases negative bonus payments ( I am not sure how that works…) being recorded so it is a case of what that space.

I did say I would return to real wage growth and let me present it in chart form to illustrate the issue.

Those who have had a hard time in the credit crunch provide yet another reason to make the case for an RPI style measure of inflation I think. It also shows that choosing your inflation measure is a genuinely big deal and something that establishment’s love to manipulate.

Comment

One of the ironies of the credit crunch era is that the economics establishment regularly gets worked up about things it wanted. Of course some of those reporting the situation are too young to remember that but not all. We see that we got the better employment situation we wanted but that especially for those who joined the job market at what turned out to be the wrong time real wages shifted onto a lower path from which they have yet to recover. Sadly the main response from government has been to try to change the numbers via the use of the fantasies involved in Imputed Rents which are never paid, rather than dealing with reality. Also the way that the self-employed are ignored in the wages data is becoming a bigger and bigger issue.

4.93 million self-employed people (15.1% of all people in employment), 180,000 more than a year earlier.

As to the current situation it may no longer be quite so Goldilocks as whilst employment growth continues we face the possibility that wage growth is slowing again. Perhaps in spite of its many fault as a measure it is related to this.

In contrast, output per worker in Quarter 1 2019 increased by 0.7% compared with the same quarter in the previous year.

If you want the full picture it is the difference between the two numbers here.

It indicates that in Quarter 1 2019, all three economic indicators were above their pre-downturn levels, with GDP being 12.7% higher while both hours and employment were equally 10.2% higher.

Putting all this another way it is yet another punch hammered home on output gap style theories which must now be in boxing terms on the canvas again. What happened to the three knockdowns and you are out rule?

 

 

 

 

Can Portugal continue its economic success story?

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

What about more recently?

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

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

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

 

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

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

 

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

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

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

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

Unemployment

This is perhaps the clearest signal of better times.

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

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

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

Looking Ahead

The Bank of Portugal tells us this.

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

Let us start with the good news within this.

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

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

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

National Debt

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

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

Comment

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

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

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

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

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

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

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

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

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

 

 

 

Will the UK labour market data prove to be a better guide than GDP again?

It was a week or so ago that we took an in-depth view on UK productivity and yesterday the Financial Times was on the case. As ever they open with what is their priority.

Britain is the only large advanced economy likely to see a decline in productivity growth this year, according to new research, a development the Bank of England governor has blamed on Brexit.

There are a few begged questions here as for example the particularly weak period for UK productivity was in 2013/14 well before Brexit and in fact late 2017 or so was a relatively good period for it. The next part is more soundly based I think.

The figures from the Conference Board, a US non-profit research group, highlight the productivity crisis that has struck the UK since the financial crash of 2008-09, with the slowdown worse than in any other comparable country.

Indeed we have had a problem here but I am afraid that the Conference Board then gets a little carried away as it veers towards Fake News territory.

Britain is now in its tenth year of feeble labour productivity growth, Bart van Ark, chief economist of the Conference Board, said. “The UK is a consistent story of slow output growth, slow employment growth and slow productivity growth,” he warned. “Not even employment is growing quickly any more.”

The UK employment performance is something we follow month by month and has been really good since about 2012 so I am afraid that Bart is barking up the wrong tree. If we look at matters from the perspective of the UK employment rate it has risen from 70.1% at the end of 2011 to 76.1% now. On a chart going back to 1971 there is only one period where it rose faster ( 87-89) and that sadly then led to a bust.

Here are the numbers from the Conference Board and you may spot the holes in this yourselves.

The Conference Board figures show that the UK’s annual growth in output for every hour worked fell from 2.2 per cent between 2000 and 2007 to 0.5 per cent between 2010 and 2017. Last year, productivity growth achieved that figure again but with a buoyant jobs market and weak output growth, it is likely to fall to only 0.2 per cent in 2019.

So the “Not even employment is growing quickly any more” is also a “buoyant jobs market”! I note that rather than being hit by Brexit as originally claimed productivity last year was in line with the post credit crunch average, We end up with an expected weak 2019 leading to low productivity growth. If that makes you fear for Italy and Germany which at the moment have worse output prospects than us well apparently not.

The average equivalent growth rate in several dozen other mature economies is expected to be 1.1 per cent, said the Conference Board.

If we use the OECD and compare ourselves in 2018 we did better than Italy ( -0.2%) Spain ( -0.3%) and Germany (0%) but worse than France (0.6%) albeit only slightly.

Investment

This has been a troubled area recently for the UK economy as the Brexit uncertainty has seen a drop in business investment. But it would seem that if we ever get over that hill money will be arriving from different quarters.

The United Kingdom has snatched the top spot in a survey that ranks how attractive countries are as investment destinations over the coming year.

Despite “continued uncertainty stemming from its intention to leave the European Union”, the UK knocked the United States off its perch, which it had held since 2014, according to the data conducted by accountancy firm EY. ( Daily Telegraph)

Of course that is a different definition of investment usually focusing more on the financial sector.

Today’s Data

Unfortunately for the rhetoric of the Conference Board above but fortunately for UK workers our official statisticians have released this.

Estimates for December 2018 to February 2019 show 32.72 million people aged 16 years and over in employment, 457,000 more than for a year earlier. This annual increase of 457,000 was due entirely to more people working full-time (up 473,000 on the year to reach 24.15 million)……The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.4%) and the joint-highest figure on record.

If we compare the annual rate above to the latest three-monthly one we see that job growth may even have sped up.

The level of employment in the UK increased by 179,000 to a record high of 32.72 million people in the three months to February 2019.

Considering the level of employment we are now at then this are pretty impressive numbers. If we switch to hours worked they are up by 2.1% on a year ago which again is strong. As GDP growth seems lower there may well be an issue here again for productivity growth but not for the opposite to the reason given by the Conference Board.

Wages

In the period since the quantity numbers for the UK economy turned for the better we have waited quite a long time for the quality or wages numbers to also do so. But more recently we have seen better news.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.5%, before adjusting for inflation, and by 1.6%, after adjusting for inflation, compared with a year earlier.

If we look at the more comprehensive category we note that bonuses are pulling up the numbers which may be a hopeful sign. As to the real wage figures whilst I believe we now have some growth sadly it is not as high as claimed due to the flaws in the inflation number used. For some perspective the Retail Prices Index grew by 2.5% in the year to February as opposed to the 1.8% recorded by the Imputed Rent influenced CPIH. So real wage growth is more like 1% I would argue.

If we look at the month of February alone then we see that at 3.2% the number is lower but the monthly numbers are erratic. The growth has been pulled higher by the construction sector which has seen wages rise by 4.6% over the year to February and pulled lower by manufacturing which saw growth of a mere 1.9%. Although it was not an especially good February for them a factor in the overall rise in UK wage growth has come from the public-sector where the circa 1% of a couple of years ago has been replaced by 2.6% over the three months to February.

Comment

As ever there is much to consider here. The picture presented by our official statisticians is as good as it has been for quite some time. With employment at these high levels in some ways it is a surprise it continues to rise at all. For wages the picture is different but is now brighter than it has been for some time. Although if we look for perspective there is still if not a mountain quite a hill to climb.

For February 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at: £465 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £8 lower than the pre-recession peak of £473 per week for March 2008.

Using a more realistic inflation measure than the officially approved CPIH only makes the perspective darken along the lines sung about by Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

Moving to productivity I would remind readers of my analysis of the subject from the 5th of this month. As to the Conference Board analysis well the idea of UK employment growth being weak has had a bad 7 years and there is an irony as of course it has been that pushing productivity growth lower. Looking ahead will the labour market numbers prove to be a better guide to the economic situation than the output or GDP ones like in 2012? Only time will tell…….

Less welcome is the new way of presenting the numbers which frankly is something of a mess.

The UK productivity puzzle is mostly a result of outdated economics and statistics

Today has brought us two flashes of indirect insight on the issue of productivity and what has become called the productivity puzzle. In case you are wondered what that is here is the OECD from August last year.

Since the start of the Great Recession, labour productivity growth has been weak in the United Kingdom, weaker than in many other OECD countries. The productivity shortfall, defined as the gap between actual productivity and the level implied by its pre-crisis trend growth rate, was nearly 20% for output per hour at the end of 2016.

I am dubious about measures which use the bubbilicious boom for their trend but Ivory Towers love that. Also there is clearly an issue to consider and the OECD had a go at a breakdown.

Most of the UK productivity underperformance is structural rather than cyclical. Half of the productivity shortfall is explained by non-financial services (with information and communication being the largest contributor), a fourth by financial services, and another fourth by manufacturing, other production and construction.

Clearly the 5% productivity shortfall explained by the financial sector needs a much more thorough investigation as the ongoing weak state of the banks is due to the fact that their position was over reported on the pre crisis boom and thus so was productivity. Or as the OECD put it.

its steep increases in the run-up to the crisis.

But they do at least manage a minor swipe at the Zombie business era that has been supported by central bank QE.

weak corporate restructuring have both held back productivity improvements in the manufacturing sector.

Output Gap

Economic theory has had a real problem with this and let me give an example from Japan this morning. The Ivory Towers will tell you that wages should be soaring due to a tight labour market with unemployment at 2.3% and a number of jobs to applicants at a more than forty-year high. Meanwhile back on Earth.

Labour cash earnings dropped 0.8 per cent from a year ago, the ministry reported on Friday, compared with projections for them to advance 0.9 per cent. The reading for January was revised down to -0.6 per cent from 1.2 per cent………..

Real wages, which are adjusted for inflation, fell 1.1 per cent, compared with economists’ median forecast of 0.8 per cent.

The real wages figure for January was revised down to -0.7 per cent from 1.1 per cent. ( Business Times)

As you can see the output gap theory has had another complete failure as wages have failed to increase. This makes us mull productivity which is supposed to be strongly linked to wage growth and real wage growth especially. Also I am afraid we have another problem with official statistics as there has been a major revision after clear flaws were discovered such as only a third of the businesses in Tokyo with over 500 employees that were claimed to be sampled actually were. That adds to the problems seen elsewhere with official Japanese data such as the GDP numbers which is completely the opposite of stereotypes.

UK House Prices

These are beginning to offer a more hopeful perspective. The reason why I argue this is that in my opinion way too much economic effort in the UK has gone towards the housing sector where in many areas substantial capital gains have been available via owning a house. This led for quite some time to the boom in the buy-to-let sector and took both investment, attention and effort from other parts of the economy. This was fed by the various “Help To Buy” policies of the government and the multitude of efforts by the Bank of England to reduce mortgage rates and raise mortgage lending to get house prices higher.

Thus the numbers from the Halifax this morning are welcome as they show that things have slowed down.

The average UK house price is now £233,181 following a 1.6% monthly fall in March…….The more stable measure of annual house price growth rose slightly to 3.2% and is still within our expectation for the year.

You need to go through their numbers carefully to get to that as the monthly UK house prices series of the Halifax has become very erratic and has now gone 2.5%, -3% ,6% and now -1.6%. We thought the 5.9% rise in February was extraordinary at the time yet we now discover it was 6%! If we look at March compared to a year ago we see that there has been a 2.4% rise which seems to reflect better the numbers we get from elsewhere.

As to the overall reliability of the Halifax data well let me quote anteos who commented on the last set of numbers from them as follows.

So, just as the annual indicie was heading towards negative territory, up comes a 5.9% increase.
Very similar to Decembers figures which were then reversed the following month. If I was a betting man, a big negative value will pop up next month.

Chapeau.

Productivity Data

There was something of an irony as I searched for the update here.

404 – The webpage you are requesting does not exist on the site

That was not entirely hopeful for productivity as the UK Office for National Statistics and leads into the official enquiry into out data which is ongoing. Sadly the leadership seem lost in a world of click bait and telling us that tractor production is rising. When we got the numbers they posed another problem.

Labour productivity for Quarter 4 (Oct to Dec) 2018, as measured by output per hour, decreased by 0.1% compared with the same quarter a year ago; this is the second successive quarterly fall following the decrease of 0.2% seen for the previous quarter.

If we look back it is the fall in the third quarter which is the most concerning as GDP growth was particularly strong at 0.7%. For the year just gone we had some growth but not much.

In 2018, labour productivity measured as output per hour grew by 0.5% compared with the previous year, with increases in both services and manufacturing of 0.8% and 0.3% respectively.

This meant that the overall picture in the credit crunch era is this.

Labour productivity increased by 0.3% in Quarter 4 2018 compared with the previous quarter. This increase left productivity 2.0% above its pre-downturn peak in Quarter 4 2007,

So not much allowing us to update the OECD style analysis above.

Productivity in Quarter 4 (Oct to Dec) 2018, as measured by output per hour, was 18.3% below its pre-downturn trend – or, equivalently, productivity would have been 22.5% higher had it followed this pre-downturn trend.

Comment

The first problem with the productivity puzzle is whether we can measure it with any degree of accuracy. As we have seen from the Japanese wages and UK house price data above both official and private-sector data have serious issues. This spreads wider and in my opinion is highlighted by this.

In Q4, public service productivity increased by 0.8% on the previous quarter, driven by unusually strong growth in output (1.3%)

It is my opinion that we have very little idea about public sector output and therefore even less about its productivity. Also there are areas we might not always be keen on higher productivity. Returning to the numbers I helped Pete Comley with some technical advice when he wrote his book on inflation and here is what he discovered about the government sector.

The upshot of that review is that estimates inflation on government expenditure no longer use real cost inflation (like wage increases, rises in raw materials costs, etc.) but instead use measures of quality (such as the number of GCSE grades A-C) to calculate the deflator.

So that is a mess.

Also there is a clear problem with the concept of productivity in the services sector. This is because we are often measuring intangible things rather than the tangible of manufacturing. The extraordinary changes for example in the world of information and communications are mostly only captured if there is a price change. I note the paper from Diane Coyle and others that suggested even these were wrong and the situation was much better ( lower prices and higher output). Also I have pointed out before as well as giving evidence to the Sir Charles Bean enquiry, that the UK trade release has at most a couple of pages on services out of the 30 or so with no geographical or sectoral breakdown. This matters even more as we rebalance towards services with growth in the index of services some 21% over the past decade.

Also there has been a shift towards self-employment which makes the numbers less reliable as we know even less about that area.

Finally it would be nice for us to get some capital productivity figures to compare with the labour ones.

Me on The Investing Channel