A bond issue does little for the problem of plunging investment in Greece

Today brings a development which will no doubt be trumpeted across the media and it is explained by this from Reuters yesterday,

Greece will return to bond markets with a five-year issue “in the near future, subject to market conditions”, authorities said on Monday.

The sovereign has mandated BofA Merrill Lynch, Goldman Sachs International Bank, HSBC, J.P. Morgan, Morgan Stanley and SG CIB as joint lead managers for the transaction, according to a regulatory filing to the stock exchange.

The near future is today as we mull that in spite of its role in the Greek economic crisis Goldman Sachs is like the Barnacles in the writings of Charles Dickens as it is always on the scene where money is involved. As to why this is happening the Wall Street Journal explains.

Greece‘s borrowing costs have dropped to a four-month low, and Athens plans to raise up to $3.4 billion in a bond sale.

Although it is not turning out to be quite as cheap as the 3.5% hoped for.

Greece Opens Books For New 5 Year Bond, Initial Guidance For Yield 3.75-3.875% – RTRS Source ( @LiveSquawk)

Why are investors buying this?

The obvious objection is the default history of Greece but in these times of ultra low yields ~3.8% is not be sniffed at. This is added to by the Euro area slow down which could provoke more ECB QE and whilst Greece does not currently qualify it might as time passes. In the mean time you collect 3.8% per annum.

Why is Greece offering it?

This is much more awkward for the politicians and media who trumpet the deal because it is a bad deal in terms of financing for Greece. It has been able to borrow off the European Stability Mechanism at not much more than 1% yield for some time now. Actually its website suggests it has been even cheaper than that.

0.9992% Average interest rate charged by ESM on loans (Q1 2018)

Past borrowing was more expensive so the overall ESM average is according to it 1.62%. So Greece is paying a bit more than 2% on the average cost of borrowing from the ESM which is hardly a triumph. Even worse the money will have to be borrowed again in five years time whereas the average ESM maturity is 32 years ( and may yet be an example of To Infinity! And Beyond!).

So there is some grandstanding about this but the real reason is escaping from what used to be called the Troika and is now called the Institutions. The fact the name had to be changed is revealing in itself and I can understand why Greece would want to step away from that episode.
As we move on let me remind you that Greece has borrowed some 203.8 billion Euros from the ESM and its predecessor the EFSF.

The economy

We can see why the Greek government wants to establish its ability to issue debt and stay out of the grasp of the institutions as we note this from Kathimerini.

Greek Prime Minister Alexis Tsipras announced an 11 percent increase in the minimum wage during a cabinet meeting on Monday, the first such wage hike in the country in almost a decade.

Actually the sums are small.

The hike will raise the minimum wage from 586 to 650 euros and is expected to affect 600,000 employees. He also said the government will scrap the so-called subminimum wage of 518 euros paid to young employees.

There are two catches here I think. Firstly in some ways Greece is competing with the Balkan nations which have much lower average wages than we are used to. Also this reverses the so-called internal competitiveness model.

The standard mimimum monthly wage was slashed by 22 percent to 586 euros in 2012, when Greece was struggling to emerge from a recession.

A deeper cut was imposed on workers below 25 years, as part of measures prescribed by international lenders to make the labour market more flexible and the economy more competitive.

Productivity

Here we find something really rather awkward which in some ways justifies the description of economics as the dismal science. Let me start with a welcome development which is the one below.

The seasonally adjusted unemployment rate in October 2018 was 18.6% compared to 21.0% in October 2017 and 18.6% in September 2018 ( Greece Statistics Office)

But the improving labour market has not been matched by developments elsewhere as highlighted by this.

we documented that employment had started to lead output growth in the early days of the SYRIZA government. Since such a policy is unsustainable, we have to include in any consistent outlook that this process reverses and output starts leading employment again – hence restoring positive productivity growth. ( Kathimerini)

That led me to look at his numbers and productivity growth plunged to nearly -5% in 2015 and was still at an annual rate of -3% in early 2016. Whilst he says we “have to include” an improvement the reality is that it has not happened yet as this year has seen two better quarters and one weaker one. We have seen employment indicators be the first sign of a turn in an economy before but they normally take a year or so to be followed by the output indicator not three years plus. This reminds us that Greek economic growth is nothing to write home about.

The available seasonally adjusted data
indicate that in the 3rd quarter of 2018 the Gross Domestic
Product (GDP) in volume terms increased by 1.0% in comparison with the 2nd quarter of 2018, while
in comparison with the 3rd quarter of 2017, it increased by 2.2%.

If it could keep up a quarterly rate of 1% that would be something but the annual rate is in the circumstances disappointing. After all the decline was from a quarterly GDP of 62 billion Euros at the peak in 2009 whereas it is now 51.5 billion. So the depression has been followed by only a weak recovery.

More debt

I looked at the woes of the Greek banks yesterday but in terms of the nation here is the Governor of the central bank from a speech last week pointing to yet another cost on the way to repairing their balance sheets

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

Comment

Whilst I welcome the fact that Greece has finally seen some economic growth the problem now is the outlook. The general Euro area background is not good and Greece has been helped by strong export growth currently running at 7.6%. There have to be questions about this heading forwards then there is the simply woeful investment record as shown by the latest national accounts.

Gross fixed capital formation (GFCF) decreased by 23.2% in comparison with the 3rd quarter of 2017.

The scale of the issue was explained by the Governor of the central bank in the speech I referred to earlier.

However, in order to increase the capital stock and thus the potential output of the Greek economy, positive net capital investment is indispensable. For this to happen, private investment must grow by about 50% within the next few years. In other words, the Greek economy needs an investment shock, with a focus on the most productive and extrovert business investment, to avoid output hysteresis and foster a rebalancing of the growth model in favour of tradeable goods and services.

Yet as we stand with the banks still handicapped how can that happen? Also if we return to the productivity discussion at best it will have one hand tied behind its back by as the lack of investment leads to an ageing capital stock. So whilst the annual rate of economic growth may pick up at the end of 2018 as last year quarterly growth was only 0.2% I am worried about the prospects for 2019.

It should not be this way and those who created this deserve more than a few sleepless nights in my opinion.

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Has the Bank of England forgotten about its currency reserves?

We are in the season for a raft of UK economic data although at the moment markets are being driven by Brexit developments, or rather the apparent lack of them. One consequence of this was a nearly 2 cent fall versus the US Dollar to below US $1.26 and around a 1 cent fall versus the Euro to below 1.11. I await the exact numbers on the change in the trade weighted or effective exchange rate index but the move was such that we saw something that under the old rule of thumb was equivalent to a 0.25% Bank Rate cut. That reminded me of this from early April ( no not the 1st…) 2016 in City AM.

Britain’s foreign currency reserves reached a new record high last month, passing $100bn (£70.5bn) for the first time, as the UK looks to be building a buffer to defend the pound against the prospect of a currency crisis ahead of the EU referendum.

 

Another $4.5bn in reserves was acquired in March, taking the total amount held to $104.2bn and fuelling speculation that the Treasury and Threadneedle Street are getting their ducks in a row to deal with wild swings in the value of sterling around the time of the referendum.

Actually the Bank of England has been building up its foreign exchange reserves in the credit crunch era and as of the end of October they amounted to US $115.8 billion as opposed as opposed to dips towards US $35 billion in 2009. So as the UK Pound £ has fallen we see that our own central bank has been on the other side of the ledger with a particular acceleration in 2015. I will leave readers to their own thoughts as to whether that has been sensible management or has weighed on the UK Pound £ or of course both?!

But my fundamental point is to enquire as to under what circumstances would the Bank of England intervene to support the currency? This is what it is officially for.

The EEA was established in 1932 to provide a fund which could be used for “checking undue fluctuations in the exchange value of sterling”.

This, in my opinion could not contrast much more with the UK Gilt market which has surged due to expectations, or fears if you prefer of more QE bond buying from the Bank of England. It does not get reported much but the UK ten-year Gilt now yields a mere 1.24%.

Labour Market

Productivity

Yesterday our official statistician’s produced some research which backed up a long-running theme of my work.

Productivity gap narrows

As a reminder I wrote this back on January 18th on the subject.

I have regularly argued that it is very likely we have miss measured productivity and therefore the crisis will to some extent fade away……..If we go back to the peak headlines where for example the Bank of England argued we were some 19% below where we would have been projecting pre crisis trends we are left wondering how much is due to miss measurement?

Or in musical terms we need some Imagination

Could it be that it’s just an illusion
Putting me back in all this confusion
Could it be that it’s just an illusion now?

That was partly in response to some new work by Diane Coyle suggesting that the telecoms sector had in fact seen more growth than the official statistics recorded. Regular readers will not be surprised to learn that the official response was a somewhat woeful tweaking of the numbers to give basically the same answer as before,

But now there has been a new development.

Historically each country has used the best data available to it, but the OECD’s working paper shows that, when using a more consistent method to compare total hours worked, the UK’s labour productivity improves significantly relative to other countries. For example, the UK’s productivity gap with the US would reduce by about 8 percentage points from 24% to 16% when adopting the simple component method approach.

I do not know about you but when I compare numbers I always look to do them on as “like for like” basis as possible and find it not a little breathtaking that this has not been done before. But the good news is that it has now.

Not everyone’s numbers improve as for example Greece sadly gains little. Oh and if I was looking at these numbers I would be thinking of words like “offshoring” and phrases like “Gross National Product” about the stellar performances of Luxembourg and Ireland.

A clear signal was of course given earlier this year by the Office of Budget Responsibility going bearish on productivity trends.

Good news on wages

Here we go.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.3%, both excluding and including bonuses, compared with a year earlier.

As we welcome this let us take the rare opportunity to congratulate the Bank of England on beginning to look correct. After all this has come after many years of pain for it. The official view tells us this about real wages.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 1.0% excluding bonuses, and by 1.1% including bonuses, compared with a year earlier.

The catch is that the number above relies on an inflation number called CPIH which is dragged lower by the use of Imputed Rents. If we switch to the previous measure CPI real wage growth falls to 0.7% or so as the depressing influence of Imputed Rents falls out of the data. If we use RPI then rather than real wage growth we find that it is at least no longer falling. Can anybody think why the establishment does not like the RPI measure? Apart from when it is used in their own defined benefit pensions I mean.

The numbers for October on its own provided some further cheer as at 3.9% it even exceeded RPI by 0.6% as the numbers were pulled higher by the service sector (4.2%).

Employment continues to grow as well.

There were an estimated 32.48 million people in work, 79,000 more than for May to July 2018 and 396,000 more than for a year earlier.

Not so good was the rise in unemployment for men of 27,000 and I am putting it like that as female unemployment fell by 7,000. It was due to a shift out of the inactivity sector so we will have to wait to see what it really means.

Comment

There is a lot to consider right now but let us remind ourselves that producers of official statistics need to consume a slice of humble pie every now and then. Yesterday saw two clear examples of this with the large revision to UK trade especially ( surprise,suprise ) for the services sector and then a solid chunk of the productivity gap faded away. Or rather the perceived productivity gap. The latter had been on my mind Sunday evening because as I went for a run around Battersea Park after 8 pm and noted the shop selling Christmas trees was still open. Great for consumers but bad for one way at least of measuring productivity.

But left me leave you with the question of the day. When would Mark Carney and the Bank of England actually use our currency reserves?

 

 

 

UK wage growth rises but awkwardly productivity falls

It is hard not to have a wry smile as we note that Tuesday is now the day that the official UK labour market data is released. This is because Members of Parliament apparently need 24 hours to digest it before Prime Ministers Questions on Wednesday lunchtime. Hopefully it is leading to an improvement in the standard of debate. Meanwhile the Bank of England was on the case yesterday and it started well for the absent-minded professor Ben Broadbent as he remembered to turn up at CNBC. So what did he tell us? From Reuters.

Broadbent also said the BoE had seen signs of pay pressure strengthening.

“We’ve certainly seen stronger figures, not just in the official data but in many of the pay surveys, than we’ve seen for many years,” he said.

“I, certainly the (Monetary Policy Committee)… always believed that the same old rules applied — that as the labor market tightened you would begin to see faster wage growth, and that’s indeed what we’ve seen.”

Whether that will continue depends on whether the economy continues to grow enough so that the labor market keeps tightening, Broadbent said.

Deputy-Governor Broadbent is for once telling us the truth or at least some of it. We have seen some signs of pay growth in nominal terms and he has clung to the “same old rules” like a drowning man clings to a piece of wood. But what he does not tell CNBC viewers if that it is certainly not the “same old scene” that Roxy Music sang about. The new scene has seen Bank of England guidance on an unemployment rate that should see wages rising drop from 7% to 4.25%. They have been like a centre forward who strides into the penalty area and shoots only for the ball to go out for a throw-in. Or to put it another way wages growth should now be above 5% as opposed to there being hopes of a rise above 3%. There is a world of difference here if we consider what the impact of some genuine real wage growth would have on people’s circumstances and the economy generally.

As to actual evidence the view of the Bank of England Agents for the third quarter was this.

Employment intentions remained positive in most sectors except for consumer services, which weakened slightly. Recruitment difficulties remained elevated. Average pay settlements were a little higher than a year ago, in a range of 2½%–3½%. Growth in total labour costs picked
up due to the increase in employers’ pension auto-enrolment contributions, the Apprenticeship Levy, and ad hoc payments to retain staff with key skills.

Firstly let me note that several of you pointed out ahead of time the likely implications of pension auto-enrolment on wage growth.

Immigration

The impact of this on wage growth has been contentious in that the establishment view in both economics and officially is that immigration has not reduced wage growth. Yet the Financial Times last week more than hinted that the reverse may not be true.

Some companies are expecting it will become even more difficult to recruit once the UK leaves the EU because the government is proposing a new immigration regime that lets some high skilled workers into the UK but places curbs on untrained labour. After years of sluggish wage growth, low unemployment is now starting to hit companies’ profits: JD Wetherspoon, Royal Mail and Ryanair have recently complained about rising labour costs.

As many of the replies point out perhaps they need to increase wages which is awkward for those who argued that immigration has not depressed pay growth.

Today’s Data

There was some better news.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.2% excluding bonuses, and by 3.0% including bonuses, compared with a year earlier.

As you can see total pay growth reached 3% which will help real wages although not as much as we are told.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.9% excluding bonuses, and by 0.8% including bonuses, compared with a year earlier.

That is because the official measure of inflation or CPIH uses Imputed Rents and is therefore inappropriate to use as a wage deflator. Why not use CPI well real wage growth then falls to more like 0.7% for regular pay and 0.5% for total pay. If we use the Retail Price Index or RPI then real wage growth pretty much disappears. So in fact whilst any real wage growth is welcome the reality is that it is depending on the redefinitions of or as it is officially put “improvements” in the measurement of inflation.

Was it productivity?

Perhaps not because we know GDP growth picked up to 0.6% on a quarterly basis but look at hours worked.

Between April to June 2018 and July to September 2018, total hours worked increased (by 10.7 million) to 1.04 billion. This reflected an increase of 23,000 in the number of people in employment and an increase in average weekly hours worked, particularly by those working full-time,

So an increase of a bit more than 1%. So in terms of a direct link no although it may have been driven previous changes. Thus the answer to those hoping to find an oasis of productivity gains is definitely maybe.

Output per hour – Office for National Statistics’ (ONS’) main measure of labour productivity – decreased by 0.4% in Quarter 3 (July to Sept) 2018. This follows a 0.5% increase in the previous quarter (Apr to June) 2018. In contrast, output per worker increased by 0.5%.

Underemployment

We got a little bit of a clue yesterday from the UK Deputy Statistician Jonathan Athow who blogged on employment.

The share of people working very short hours – fewer than six hours a week – is very low, around 1.5 per cent, or a little over 400,000 people out of the 32.4 million people in work. This is down from around 2 per cent in the early to mid-1990s. The next category – from 6 to 15 hours a week – has also shrunk as a share of employment over the same period of time.

So measuring that might give us a clue to wage pressure as it is a signal of reducing underemployment. However it cannot be the full picture as otherwise wage growth would be more like the 1990s and I wonder how much of a role the rise in self-employment has had in this?

Comment

The good news is that the UK has some wage growth but the not so good news is that it remains relatively weak. Also the last three months have gone 3.3%,3.1% and now 2.8% which is a trend in the opposite direction! The last number was influenced by the annual rate of pay growth in the financial sector falling to 1.2% in September. So fingers crossed as we note that there is still a long road ahead.

£493 per week in constant 2015 prices, up from £490 per week for a year earlier, but £29 lower than the pre-downturn peak of £522 per week for February 2008.

At the current rate of progress we will get back to the previous peak by inflation measurement “improvements” rather than wage growth.

Also let me remind you that the self-employed and those in smaller businesses are not counted in the wages data. So let us mull some of the other issues.

employed (has worked at least one hour in the last two weeks);

It is hard not to think of  the Yes Prime Minster critique of labour market data as you read that. Also think of the issues involved in extrapolating this into the whole labour force.

As noted above, all of this information comes from our Labour Force Survey. Every three months, we ask approximately 90,000 randomly selected people for a few minutes of their time to respond to our Labour Force Survey interviewers face-to-face or over the phone.

I wonder how many do respond?

 

 

UK employment looks strong but wage growth less so

Today brings us a consequence of yesterday;s discussion as we analyse the latest wages numbers which are entwined with the productivity situation. These days the causality is invariably assumed to be from productivity to wages but there is this about Henry Ford from National Public Radio in the US.

 $5 a day, for eight hours of work in a bustling factory.

That was more than double the average factory wage at that time, and for U.S. workers it was one of the defining moments of the 20th century.

Which led to this.

”It was an absolute, total success,” Kreipke says. “In fact, it was better than anybody had even thought.”

The benefits were almost immediate. Productivity surged, and the Ford Motor Co. doubled its profits in less than two years. Ford ended up calling it the best cost-cutting move he ever made.

Some combination of positive and lateral thinking led Henry Ford to quite a triumph as we mull whether anyone would have that courage today. Perhaps some do but they are on a smaller scale and get missed.

Also there is the issue that some advances take us backwards in some respects as research from Princeton in the US quoted by regis told us this.

In their aggressive scenario, the world stock of robots will quadruple by 2025. This would correspond to 5.25 more robots per thousand workers in the United States, and with our estimates, it would lead to a 0.94-1.76 percentage
points lower employment to population ratio and 1.3-2.6 percent lower wage growth between 2015 and 2025.

This type of analysis is usually nose to the grindstone stuff however or if you like a type of micro economics where the measured effects are likely to look bad as robots replace people and the loss of usually skilled jobs leads to lower average wages. PWC have given a more macro style analysis a go. From the Guardian.

Artificial intelligence is set to create more than 7m new UK jobs in healthcare, science and education by 2037, more than making up for the jobs lost in manufacturing and other sectors through automation, according to a report.

A report from PricewaterhouseCoopers argued that AI would create slightly more jobs (7.2m) than it displaced (7m) by boosting economic growth. The firm estimated about 20% of jobs would be automated over the next 20 years and no sector would be unaffected.

In essence it comes down to this assumption.

as real incomes rise

Some may be wondering if “as society becomes richer” necessarily leads to that especially after a period where policies like QE have led to wealth rising via higher asset prices but real incomes have struggled in many places and real wages in the UK have fallen. The truth is that we are unsure and analysis on both sides mostly depends on the assumptions behind it. You pretty much get the answer you looked for.

What are wages doing?

Actually UK wage growth has been if we allow for the margin of error looks to have been pretty stable so far in 2018.

Between March to May 2017 and March to May 2018, in nominal terms, regular pay increased by 2.7%, slightly lower than the growth rate between February to April 2017 and February to April 2018 (2.8%).

Between March to May 2017 and March to May 2018, in nominal terms, total pay increased by 2.5%, slightly lower than the growth rate between February to April 2017 and February to April 2018 (2.6%).

Whilst there is a small fall on this basis we see that from February to May total pay growth has gone 2.6%, 2.5%, 2.6% and now 2.5%. By the standards of these numbers that is remarkably stable. This poses a question for the Bank of England as there is not much of a sign of annual wage growth there.

If we move to real wages we find that most of the change we have seen has come from falling inflation.

Between March to May 2017 and March to May 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain increased by 0.4% and total pay for employees in Great Britain increased by 0.2%.

Actually they are being a little disingenuous there as people might think that this refers to the CPI inflation measure whereas later they explain that it is CPIH ( H=Housing) with its fantasy imputed rents. This flatters the numbers as the latter keeps giving lower inflation readings and this is before we get to the Retail Price Index or RPI which would have real pay still falling.

The output gap

Today’s quantity numbers for the UK labour market were good again.

There were 32.40 million people in work, 137,000 more than for December 2017 to February 2018 and 388,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.7%, higher than for a year earlier (74.9%) and the highest since comparable records began in 1971.

Also whilst we do not have a formal measure of underemployment like the U-6 measure in the United States it looks as though it is improving too as Chris Dillow points out.

Big drop in the wider measure of joblessness in Mar-May (unemp+part-timers wanting f-t work + inactive wanting a job) – down from 4.51m to 4.35m

Yet the continuing good news does not seem to be doing much for wages. We get surveys telling us they are picking up but the official data is either missing it or it is not happening. If we go through that logically then is wage growth is taking place it must be in the ranks of the self-employed or smaller companies ( the various official surveys only go to companies with a minimum of ten or in some cases 20 employees).

Productivity

This looks to have improved because the economy was growing through this period albeit nor very fast but hours worked did this.

the number of people in employment increased by 137,000  but total hours worked fell slightly (by 0.3 million) to 1.03 billion. This small fall in total hours worked reflected a fall in average weekly hours worked by full-time workers.

An odd combination in some ways as why take on more staff whilst reducing hours? But the optimistic view is that employers were expecting a rise in demand and were getting ready for it. Whatever the reason recorded productivity looks to have risen.

Comment

There is quite a bit to consider here. If we look back to 2007 we see total pay growth fluctuating around 5% and making a heady 7.3% in February. But before that there were plenty of 4% numbers. Now we occasionally break the 3% barrier but the last time if we use the three-month average was in the summer of 2015. So much for “output gap” style analysis so beloved by the Ivory Towers and the Bank of England.

As to the possible Bank of England move in August today’s numbers are unlikely to change your mind. Those arguing for a rise will look at the strong employment situation and those against will note the slight fading of wage growth. Which will an unreliable boyfriend go for?

What we need are better data sources and let me ask for two clear changes. We need wages data which at least tries to cover the self-employed and smaller businesses. We also need to be much clearer about what full-time employment is. As we stand we are in danger of failing the Yes Minister critique.

Sir Humphrey Appleby: If local authorities don’t send us the statistics that we ask for, then government figures will be a nonsense.

James Hacker: Why?

Sir Humphrey Appleby: They will be incomplete.

James Hacker: But government figures are a nonsense anyway.

Bernard Woolley: I think Sir Humphrey want to ensure they are a complete nonsense. ( The skeleton in the cupboard via IMDb)

 

 

 

 

Can robots rescue the UK from its productivity problem?

This is an issue which bedevils economists especially those who project straight lines into the future and their forecasts were left at a dizzying altitude by the impact of the credit crunch. The Bank of England puts it like this.

From 2007, 10-year average productivity growth was negative for the first time in almost a century.  Overall, it was the worst decade since the late 18th century.

What it goes onto say is that for the first 3-4 years things were normal in terms of a recession but it was after this that the change happened in that it did not then recover and go forwards. There are a couple of times ( 1761 & 1781 ) where we did worse but as I have pointed out before if I had data telling me things were going badly in the industrial revolution I would keep rechecking the data. Such as we understand it here is the past.

10-year productivity growth averaged 0.7% in the 19th century and 1.4% in the 20th

That research was from April but earlier this month the Bank Underground blog returned to the subject again.

 In its latest Inflation Report, the Monetary Policy Committee forecasts productivity growth to be a little faster than its average in recent years, as increases in investment begin to feed through, but still only half the rate seen before the financial crisis.

That reads rather like the MPC ( Monetary Policy Committee) taking out a bit of an each way bet. Or maybe a response of sorts to the Labour party proposal to give it a target for productivity growth.

Bank’s Agents

For those unaware these are the employees of the Bank of England who do their best to keep it in touch with the state of play in the economy.

In total, about 30 Agents have discussions with around 9000 businesses per annum, including most of the UK’s largest companies, as well as thousands of SMEs, covering all sectors of the economy.

They may not realise the significance of their opening salvo.

companies chose recruitment over business investment.

Those familiar with my work will know that these leads into two themes of mine. One is that labour productivity was very likely to have been affected by the way that employment has performed so well in the credit crunch era and pretty much by definition in the period when it rose before output did. Second comes something inconvenient for the economics profession in that it wanted the UK to be more like Germany in maintaining employment in a recession which happened. The latter is rather awkward for the idea of the Bank of England Ivory Tower being tasked with improving productivity.

Along the way I note an implication for the immigration debate in this below.

Strong growth of labour availability was associated with low real wages growth. Many of our contacts recruited additional staff, sometimes to handle sales growth but often to improve non-price competitiveness – for example to raise levels of service and marketing. Low real wages growth made these actions affordable

There are other factors at play as well as the picture is complicated as for a start correlation does not prove causation but the Ivory Towers seem to reject any such thought out of hand. Whatever the cause this is one of the stories of the credit crunch.

 So we observed that the composition of the economy and workforce pivoted towards lower value-added services and jobs, resulting in downward pressure on average wages and productivity levels

What about investment?

In essence this was often put on the back burner but now things seem to be changing according to the Bank Agents.

The Bank’s Agents’ recent experience is that, increasingly, the focus of many companies is turning to investment in labour-saving plant and machinery to raise productivity and alleviate resource bottlenecks.

Why might this be?

Often the benefits from investment in new plant and machinery include a reduction in the need for labour.  Higher labour costs shorten the payback period and incentivise such investment.

I find this intriguing because if we look at the current situation we see that real wages have until recently been falling and are currently flat at least in broad terms. So what we are seeing here if the Agents are right is employers expecting higher wages in the future and therefore responding with what we might call labour-saving investment. This includes an area where up until now the UK has been regarded as weak.

 Robotic technologies in particular are being deployed in a mix of manufacturing and service industries, at relatively low-cost and often with payback periods of less than five years. Usually, the working life of the equipment being deployed is greater than five years, making the investment extremely attractive.

We are given many examples of the use of robotics although I think that self-service tills are stretching the point somewhat. Also what could go wrong with the example below?

Looking into the future, restaurant and bar staff may be gradually replaced through automation and self-service beer pumps.

But on other side of the coin some reviewing their investment and pension savings may be grateful for any signs of intelligence at play.

an example being the use of artificial intelligence to assist institutional investors.

Comment

It is nice to see a part of the Bank of England being upbeat about the UK economy especially as it is the part that has its nose to the ground as opposed to in the clouds.

 However, the frequency of cases where contacts are looking to address rising costs and poor productivity suggests to us that whole-economy productivity growth should soon start to recover.

Lets hope so although in my opinion things were not as bad as some claimed due to this.

The fact that examples are becoming more common across sectors suggests that the recent slowdown of labour supply growth may be followed by a sustained productivity recovery

I have argued plenty of times that the strong employment performance of the UK economy has affected productivity and further that in many areas I do not think you can measure it at all. But higher labour supply does look like it reduced both productivity growth and real wage growth as well as reducing investment.

Also there is a very powerful reply to the post which I can only echo 100%.

One comment I heard recently was “Why would you invest in business when housing returns 8%”. ( Ed Mackenzie )

This of course will be like red-hot cinders for the Bank of England as its modus operandi in the credit crunch era has been to get house prices rising again via a litany of policies. On this road to nowhere it has contributed to a fall in UK productivity.

The implication being that the high returns on assets were dwarfing returns from capital investment.

Whatever happens next there are considerable advances in robotics to be seen.

 

Good news for UK GDP and maybe even productivity trends

Rather aptly on GDP ( Gross Domestic Product ) day the UK received some good economic news as from a land down under the clock ticked past midnight.

Prime Minister Malcolm Turnbull will on Friday confirm that — as reported last week by Fairfax Media — Britain’s BAE Systems has won a hard-fought contest to help Australia with the $35 billion program to build nine new frigates to be named the Hunter class. ( Sydney Morning Herald)

According to Save the Royal Navy around a third of the contract is up for grabs with the rest being in Australia mostly Adelaide.

BAES will now have to conduct an extensive round of negotiations with many potential suppliers in Australia and globally. The exact break down of benefits to UK manufacturers is obviously not yet available but the Rolls Royce prime movers and the David Brown gearboxes will be UK-made. Overall economies of scale across the supply chain will help reduce both construction and through-life costs for both nations.

The success puts the UK and BAES in good position to compete for an even larger order from Canada and there are some suggestions that if we win we should call it the Commonwealth class. Still let us not get too carried away but it has been decades since we had success in terms of naval exports on this scale.

Still whilst we are looking at good news for GDP let us take in this morning’s data as well.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 4 (Oct to Dec) 2017 and Quarter 1 (Jan to Mar) 2018; the 0.1 percentage points upward revision since the second estimate reflects improvements to the measurement of construction output.

So a case of entente cordiale as we move to the same rate of growth as France albeit by a different route as we have revised up they have revised down. Also this brings into play three themes of which as we note the first quarter of 2017 was revised up as well the issue of (under) measuring the first quarter remains. That is something we share with the US. Next comes my theme that the UK GDP growth trajectory is of the order of 0.3% per quarter. Finally the one sad aspect here is yet more trouble with the construction series which is what “improvement” is defined as in my financial lexicon for these times.

Construction output was estimated to have decreased by 0.8% in Quarter 1 2018, revised upwards from negative 2.7% in the second estimate of GDP.

Seeing as the construction numbers were originally estimated at -3.3% there is quite a problem here. I have discussed this many times as we have seen a large company transferred in from services as a “quick fix” and meddling with the deflator too but we remain in a type of groundhog day. Now as we cannot produce reliable quarterly estimates what could go wrong with switching to a monthly series for GDP as we are about to do?

Productivity

Regular readers will be aware that I think that a fair bit of the UK’s so-called productivity crisis is down to miss measurement. This is to some extent confirmed by a speech by the Bank of England’s Chief Economist Andy Haldane yesterday. After stumbling in the dark he has realised this.

The first and most important point to make is that the UK does not lack for innovative, high-productivity companies…..Their productivity is world-leading,
their technology world-beating, their managers and workers world-renowned. They are inspirational.

However in the UK they are forming their own type of island.

Fact three is that the productivity gap between the top- and bottom-performing companies is materially larger
in the UK than in France, Germany or the US. In the services sector, the gap between the top- and
bottom-performing 10% of companies is 80% larger in the UK than in our international competitors .
This productivity gap has also widened by far more since the crisis – around 2-3 times more – in
the UK than elsewhere.

Looked at in this way we are doing well.

There are more UK companies in the upper tail than in
Germany, with its much-vaunted industrial reputation, and France. The top 10% of UK companies have
levels of productivity at least 100% above the median.

Returning to my view I think that the concept of productivity only applies to certain sector of the economy as how do you measure it in say a haircut? Sometimes when service is involved faster is not necessarily better it is worse.

Along the way we discover why Andy Haldane has changed his economic views.

The short answer appears to be because the UK is, on many dimensions, a global innovation hub……..The UK is the largest magnet for tech talent in Europe.

This is really rather awkward for the man who brought us “Sledgehammer QE” and wanted a 0.1% Bank Rate. Of that more later as with his usual forecasting skill Andy chose yesterday to emphasis the success of England on the football field.

And then, of course, there is the World Cup. Without wishing to tempt fate, England’s recent sporting
success on the football field (and cricket pitch) has probably added to that feel-good factor among
England-supporting consumers.

Once I read this I should have immediately bet on England losing to Belgium! Anyway returning to this theme Andy was keen to do some ( let’s face it badly needed) cheerleading for himself and by default his ongoing campaign to be the next Governor of the Bank of England,

The MPC has also undertaken asset purchases amounting to almost £½ trillion since 2009. This has
provided additional monetary stimulus to the UK economy, at its peak equivalent to a further reduction in
interest rates of up to around 2.5 percentage points.

I do not know if he stopped for an expected round of applause at this point or after this attempt to present himself and his colleagues as a set of economic super heroes.

Without these measures, we estimate the economy would have been around 8% smaller and unemployment 4 percentage points higher.

A more accurate response would have been to laugh after all Andy would have thought it was with him as opposed to the reality of it being at him.

Comment

The last day or so has seen some better economic news for the UK and this continued in this morning’s money supply data.

The total amount of money held by UK households, businesses and non-intermediary other financial corporations (NIOFCs) (Broad money or M4ex) increased by £19.6 billion in May

This balanced out April’s dip.

 Smoothing through the recent volatility by taking a two-month average suggests money has increased broadly in line with its recent average.

The annual rate of growth of 4% means that should we achieve our inflation target of 2% then we can expect economic growth of 2% towards the end of this year and early next. The flaw in this is the oil price and of course the impact of the Unreliable Boyfriend on the UK Pound £.

The less satisfactory situation is something that Chief Economist Haldane is less keen to emphasis which is that if you apply a “Sledgehammer” to the monetary system then the UK’s history tells you to expect this.

Annual growth of consumer borrowing, excluding mortgages, slowed a little in May to 8.5%

Remember that is on top of double-digit annual growth rates.

Meanwhile those who have followed my critiques of imputed rent and its impact on the inflation numbers and GDP since 2012 or so may like to note this. From the economics editor of the Financial Times for whom it is apparently good enough for the former factors but not for measuring productivity.

Only if you include owner occupied imputed rents, which anyone sensible who does this sort of thing excludes.

Still if you apply that much more widely he and I agree for once.

Can the Bank of England improve productivity?

This morning has brought a reminder of a challenge to the Bank of England,

Labour has said it will set the Bank of England a new 3 per cent target for productivity growth but refused to specify when this should be achieved. John McDonnell, shadow chancellor, will on Wednesday launch Labour’s final report on the UK’s financial system. ( Financial Times)

Reading this raised a wry smile as of course the reforms of Governor Carney reduced productivity by changing the output of the Monetary Policy Committee from 12 meetings a year to 8. But I think we all know they are likely to overlook that one.

Why?

The interim report was published in December and hammered out a familiar beat about UK productivity.

UK productivity has stagnated since the financial crisis of 2007/08. Real output per hour worked rose
just 1.4% between 2007 and 2016 . Within the G7, only Italy performed worse (-1.7%). Excluding the UK, the G7 countries have experienced a 7.5% productivity increase over this period, led by the US, Canada and Japan.

Also there is this.

In addition, the ‘productivity gap’ for the UK – the difference between output per hour in 2016 and
its pre-crisis trend – is minus 15.8%. The productivity gap for the G7 ex-UK countries is minus 8.8%.

I have been consistently dubious about “productivity gap” type analysis for several reasons. Firstly some economic activity and hence productivity before the credit crunch was just an illusion or a type of imagination. Otherwise we would not have had a credit crunch. Also the simple reality is that we have ups and downs not just ups.

Added to that is the problem of international comparisons. Let me illustrate that with some official data from the Office for National Statistics.

The UK’s long-running nominal productivity gap with the other six G7 economies was broadly unchanged in 2016: falling from 16.4% in 2015 to 16.3% in 2016 in output per hour worked terms.

Yet there are clearly problems with this as I note we are doing better than Japan which is a strong exporting nation.

On a current price gross domestic product (GDP) per hour worked basis, UK productivity in 2016 was: above that of Japan by 8.7%, with the gap narrowing from 10.0% in 2015

Also we have apparently done much better than Italy in the credit crunch era by getting worse relative to them!

lower than that of Italy by 10.5%, with the gap widening from 9.6% in 2015

Or if you prefer I think the comparison with France tells us the most if we recall that our economies are much more similar than we often like to admit and yet we are.

lower than that of France by 22.8%, with the gap widening from 22.2% in 2015

Thus we can only conclude that the numbers are not giving us the full picture. For example I think it is the UK’s success with employment that has to some extent worsened recorded productivity.

Also the Financial Times is in error on the data.

Productivity growth has never exceeded 3 per cent a year in Britain.

I think there is a clue in the phrase Industrial Revolution which challenges that! Or more recently there was over 6% in 1940 and 41 or 5% in 1968 in terms of total factor productivity according to FRED the database of the St.Louis Fed.

How would this happen?

A basic problem is identified which I agree with.

UK banks have helped to create a distorted economy. Lending is flowing into unproductive sectors.

This goes further.

As a central bank sitting at the heart of
the UK financial system, the Bank of England needs to be playing an active, leading role, ensuring banks
are helping UK companies to innovate. Flow of funds analysis shows that banks are diverting resources
away from industries vital to the future of this country.

Here I depart a little as I think that the Bank of England should set an environment to help banks change but it is not its role to centrally direct. I do agree with the last sentence as for example I have written many times about how the Funding for Lending Scheme pumped up UK mortgage lending rather than business lending.

One way this occurs is that banks have to put much more capital aside for business lending than they do for mortgage lending or unsecured lending. Also on the demand side for business lending there is a feature which my late father ( who was a small business owner) really,really,really,really ( h/t Carly Rae Jepson)  hated. Here is Dan Davies on Medium pointing out the reality here.

Because, historically, a very high proportion of business lending in the British market has been mortgage-lending-in-disguise. The business loan is usually secured, and usually additionally secured by a charge over the owner’s house.

He hints at some hope for the future but have I clearly pointed out yet that my father hated this feature with a passion? Changes though will need to be throughout the Bank of England infrastructure as the Bank Underground blog has in my view lost the plot as well.

Combining this with firm accounting data, we estimate that a £1 rise in the value of the homes of a firm’s directors leads the average firm in our sample to invest 3p more and increase their total wage bill by 3p.

Yes house prices raise both investment and wages. You might wonder with house prices soaring in recent years compared to almost any other metric it did not trouble anyone that investment and wages are not following it! But instead taking the numbers above with the ones below mean it is apparently a triumph.

This is because the homes of firm directors are worth £1.5 trillion………..Combined with the microeconometric evidence that firms invest 3p more for every £1 increase in the value of their director’s homes, this implies that nominal business investment would rise by around £4.5 billion (0.03*150); an increase of about 2.8%.  By a similar calculation, a 10% increase in real estate prices would increase the total nominal wages paid by firms by 0.8% due to the homes of firm directors.

Thus the answer to life the universe and everything is not 42 as one might reasonably argue especially on international towel day but it is at least according to all echelons of the Bank of England higher house prices. It is time for some PM Dawn to cool us down.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “Why?” is the question that’s on your mind
But reality used to be a friend of mine

Comment

There is a lot to consider here as there is a fair bit of nuance. You see there are areas which can be improved I think. Firstly there are the barriers to business lending around supply ( risk capital requirements) and demand ( having to pledge your home). Next there are changes caused ironically by the higher house prices the Bank of England is so keen on. From Dan Davies again.

we’ve got a generation of young adults coming through who neither own houses, nor have any realistic aspirations to do so. Residential housing as an asset has been more or less completely financialised, and now needs to be seen as part of the pension savings industry .

So the future for millennials is very different and as banks are unlikely to be accepting avocados on toast or otherwise as security this is on its way.

And if you have a generation of businesspeople who don’t own houses, and who therefore can’t be fit into the historic template of British small business lending, then you’ve got the impetus for a total reinvention of small business finance in the UK.

Thus the Bank of England does need to get in tune with Tracy Chapman.

Don’t you know
They’re talkin’ bout a revolution
It sounds like a whisper.

Can it under its present leadership? I very much doubt it but for all the hot air it produces there is an opportunity under the new Governor next year to really drive things forwards. After all he or she hopefully will not be connected to a policy like QE which via its support of zombie banks in particular has worsened productivity.

Meanwhile on a lighter note Financing Investment also suggests this.

Moving some Bank of England functions to Birmingham.

This would help justify HS2 to some extent. But I also recall this from Yes Prime Minister. Here is the Chief of the Defence Staff on relocation.

You can’t ask senior officers to live permanently in the North!  The wives would stand for it for one thing. Children’s schools. What about Harrods? What about Wimbledon? Ascot? Henley? The Army & Navy club? I mean civilisation generally, it is just not on…….Morale would plummet.

Mind you there was some hope

I suppose other ranks can be, junior officer perhaps