The UK Public Finances give the UK economy a positive message

The focus returns to the UK economy today and as the sunshine pours through my windows let us remind ourselves of one of its strengths. From the BBC.

Ed Sheeran was the big winner at this year’s Billboard Awards, held in Las Vegas.

The singer took home four awards: top artist, top radio songs artist, top song sales artist and top hot 100.

Yes it was overall a good weekend for those of the ginger persuasion as we got a reminder of a successful part of our economy. From the UK Music website.

The UK music industry grew by 6% in 2016 to contribute £4.4 billion to the economy, a major new report reveals today…….Successful British acts including Ed Sheeran, Adele, Coldplay, Skepta and the Rolling Stones helped exports of UK music soar in 2016 by 13% to £2.5 billion.

Millions of fans who poured into concerts ranging from giant festivals like Glastonbury to small bars and clubs pushed the contribution of live music to the UK’s economy up by 14% in 2016 to £1 billion.

There was a time that the success of the industry was frittered away by the use of Columbian marching powder but of course in a masterstroke that is now added to the GDP numbers. Although exactly how to measure this is a mystery to me and when I have checked appears to be something of a mystery to our statisticians too. As Fleetwood Mac would put it “Oh Well!”

Bank of England

No doubt Governor Mark Carney will be cheered by this week;s headlines assuming of course he has spotted them. From Graeme Wearden of the Guardian

FTSE 100 hits record high as US and China call a trade war truce 🇺🇸🇨🇳

Perhaps he will take the opportunity when he gives evidence to Parliament today to claim yet more wealth effects from higher asset prices as following that headline yesterday the FTSE 100 has pushed even higher to 7868 this morning. This would be in not dissimilar fashion to the way that the Bank of England has done so with house prices after it made a policy switch back in the summer of 2012 to explicitly boost them with the Funding for Lending Scheme. Of course a full exposition of the state of play in the equity market would need to allow for dividends and inflation.

Meanwhile the last week has seen the Bank of England and Mark Carney hit troubled water again on this issue of what we might call “woman overboard”. This is where the intelligent one ( Kristin Forbes) did not want a second term and the much less intelligent one ( Minouche Shafik)  had to be made a Dame to cover up her early departure. That is before we get to this. From the BBC

Charlotte Hogg has spoken of learning lessons after the “mistake” that ended her career at the Bank of England.

A former deputy governor – and tipped to take the top job – she says in her first interview that the experience made her a “different kind of leader”.

Somehow the BBC economics editor Kamal Ahmed seems to have forgotten the way she broke the rules she had set and the implied effort to in essence ride it out in a manner suggesting such rules were not for “one of us”. Also it is hard to know where to start with this.

Since her resignation in March 2017, Ms Hogg has remained out of the public eye.

It is a lesson in the way the UK establishment operates as I note the daughter of a baroness and a Viscount has the chutzpah to tell us this.

As a leader of Visa, I want it to be a more diverse organisation.

This was combined with an even more important issue that her lack of knowledge about monetary policy was no barrier to being appointed to the Monetary Policy Committee (MPC) for what Sir Humphrey Appleby would no doubt call “One of Us”.

As to Governor Carney I do hope that the Treasury Select Committee will grill him on his Forward Guidance. Here he is from August 2013 on the BBC.

So that people watching this at home, so that people running businesses here across the United Kingdom can make decisions about whether they are investing or spending with greater certainty about what’s going to happen with interest-rates.

What this has meant in practice is that the Unreliable Boyfriend has regularly promised interest-rate rises but these have not turned up.However when the opportunity came to cut interest-rates he did so immediately. Even that went wrong and had to be reversed after long enough had been left to try to avoid it looking too embarrassing.

Oh and they could also ask how he seems so often to talk for the whole MPC when the other eight members are supposed to be of independent mind especially the four external members?

Public Finances

These have been performing pretty well recently and this morning’s data continued on this happier theme.

Public sector net borrowing (excluding public sector banks) decreased by £1.6 billion to £7.8 billion in April 2018, compared with April 2017; this is the lowest April net borrowing since 2008.

The last bit is of course going to be true every time now until the next downturn but behind it has been a consistent stream of improvements  which have contradicted some of the other data which have been weaker. For example receipts from Income Tax were strong rising from £11.4 billion last year to £12.8 billion this. Even VAT rose a little from £11.2 billion to £11.5 billion which may suggest that the more apocalyptic surveys on retail sales have been exaggerated. Also debt costs fell which seems likely to reflect the fading of the rate of inflation as the main player here will be the impact of the Retail Price Index on index-linked debt costs.

The good news continued if we look back for some more perspective although you may note not very everyone as my first rule of OBR club hits another winner.

Public sector net borrowing (excluding public sector banks) in the latest full financial year (April 2017 and March 2018) was £40.5 billion; that is, £5.7 billion less than in the previous financial year (April 2016 to March 2017) and £4.7 billion less than official (OBR) expectations; this is the lowest net borrowing since the financial year ending March 2007.

So we have passed the time which regular readers will recall saw the economy apparently improve but the public finances struggle to one where the tables have been reversed. If April was any guide then the Income Tax data suggests a better economic situation than we have seen elsewhere and was quite an improvement on 2017/18 when it struggled. But of course one month;s figures are unreliable.

More problems for the Bank of England

The 2017/18 financial year saw a rise in UK debt costs of £5.9 billion which will essentially be the rise in inflation ( RPI) triggered by the fall in the UK Pound £ after the EU leave vote. This is an actual cost often ignored of the Bank of England not only “looking through” the likely inflation rise but adding to it with its Bank Rate cut and Sledgehammer QE of August 2016.

Also there is something rather embarassing in terms of number-crunching.

n compiling debt estimates for March 2018, there was an error in the treatment of data for the Asset Purchase Facility (APF), which incorrectly recorded the data relating to two events in the compilation process:the closure of the Term Funding Scheme in February 2018….the maturation of a tranche of gilts held by the APF.

Okay so what?

However, correcting this error has reduced PSND ex as at the end of March 2018 by £11.0 billion, equivalent to 0.5 percentage points as a ratio of GDP.

Comment

The news from the UK Public Finances is good and was particularly so in April. In addition we were told that the last financial year was around £2 billion better than we had previously calculated. So we now qualify for the Stability and Growth Pact in something of an irony and face the issue of what happens next? We have seen economic stimulus via the ongoing deficits but also austerity for many as funds have been switched between areas and different groups sometimes hurting the poorest. Of course we are several years already behind the planned surplus.

Maybe the numbers tell us we are doing better economically than some of the others although there is a catch and that is the way the numbers have been manipulated. Many of you will recall the Royal Mail pension fund saga where adding future liabilities supposedly improved the public finances and the housing associations who have blown into and then out of the numbers like tumbleweed in the wild west. More recently there is the issue of Bank of England involvement.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,583.2 billion at the end of April 2018, equivalent to 75.8% of GDP, a decrease of £10.5 billion (or 2.8 percentage points as a ratio of GDP) on April 2017.

Meanwhile over at the Treasury Select Committee

 

 

 

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An expansion of fiscal policy in the Euro area might help to keep Italy in it

After the action or in many ways inaction at the Bank of England last week there was a shift of attention to the ECB or European Central Bank. Or if you prefer from Governor Mark Carney to President Mario Draghi. This is because tucked away in a rather familiar tale from him in a speech in Florence was what you might call parking your tanks on somebody else’s lawn. It started with this.

One is the ECB’s OMTs, which can be used when there is a threat to euro area price stability and comes with an ESM programme. The other is the ESM itself.

Actually rather contrary to what Mario implies Outright Monetary Transactions or OMTs were never required as the ECB instead expanded its bond puchases via the Quantitative Easing programme which is ongoing currently at a flow of 30 billion Euros a month. One might also argue the European Stability Mechanism has caused anything but in Greece however the fundamental point is that via such mechanisms monetary policy has slipped under and over and around the border into fiscal policy. For example after the progress in the coalition talks in Italy the financial media has moved onto articles about the Italian national debt being un affordable when in fact the factor that has made it affordable is/are the 342 billion Euros of it that the ECB has purchased. The Italy of 7% bond yields at the time of the Euro area crisis would not have reached now in the same form whereas the current Italy of around 2% yields has.

But there is more than tip-toeing onto the fiscal lawn below.

So, we need an additional fiscal instrument to maintain convergence during large shocks, without having to over-burden monetary policy. Its aim would be to provide an extra layer of stabilisation, thereby reinforcing confidence in national policies.

As no doubt you have already recognised that particular lawn has been mined with economic IEDs as Mario then implicitly acknowledges.

And, as we have seen from our longstanding discussions, it is certainly not politically simple, regardless of the shape that such an instrument could take: from the provision of supranational public goods – like security, defence or migration – to a fully-fledged fiscal capacity.

The only one of those that is pretty non contentious these days is the security issue and that of course is because of the grim nature of events in that area. However the movement of ECB tanks onto the fiscal lawn continued.

But the argument whereby risk-sharing may help to greatly reduce risk, or whereby solidarity, in some specific circumstances, contributes to efficient risk-reduction, is compelling in this case as well, and our work on the design and proper timeframe for such an instrument should continue.

All of that is true and just in case people missed it then the ECB broadcasted it from its social media feeds as well.

Why has Mario done this?

One view might be that as he approaches the end of his term he feels that he can do this in a way he could not before. Another ties in with a theme of this website which is to use the words of Governor Carney that monetary policy may not be “maxxed out” but there are clear signs of fatigue and side-effects. Mario may well have had a sleepless night or two as he thinks of his own recent words about the Euro area economy.

When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators.

Where this fits in with my theme is that this is happening with an official deposit rate of -0.4% and not only an enormously expanded balance sheet but ongoing QE. Thus the sleepless nights will be when Mario wonders what  to do if this also turns out to be ongoing? The two obvious monetary responses have problems as whilst what economists call the “lower bound” has proved to be yet another mirage that is so far and plunging further into the icy cold world of negative interest-rates increases the risk of a dash to cash. The second response which ties in with the issue of policy in Germany is that the ECB is running out of German bunds to buy so firing up the QE operation again is also problematic.

Fiscal Policy

The problem puts Mario on an Odyssey.

And if you’re looking for a way out
I won’t stand here in your way.

In terms of economic theory there is a glittering prize in view here but sadly it only shows an example of what might be called simple minds. This is because at the “lower bound” for interest-rates in a liquidity trap  fiscal policy will be at its most effective according to that theory. So far go good until we note that the “lower bound” has got er lower and lower. There was of course the Governor Carney faux pas of saying it was at 0.5% and then not only cutting to 0.25% but planning to cut to 0.1% before the latter was abandoned but also some argued it was at 0% and of course quite a bit of the world is currently below that.

So Mario is calling for some fiscal policy and as so often all eyes turn to Germany which as I have pointed out before is operating fiscal policy but one heading in the opposite direction as I pointed out on the 20th of November.

Germany’s federal budget  surplus hit a record 18.3 billion euros ($21.6 billion) for the first half of 2017.

This poses various problems as I then pointed out.

With its role in the Euro area should a country with its trade surpluses be aiming at a fiscal surplus too or should it be more expansionary to help reduce both and thus help others?

As you can see Mario is leaving the conceptual issue behind and simply concentrating on his worries for 2018. This of course is standard Euro area policy where changes come in for an emergency and then find themselves becoming permanent. Although to be fair they are far from alone from this as I note that Income Tax in the UK was supposed to be a temporary way of helping to finance the Napoleonic wars.

Comment

This speech may well turn out to be as famous as the “Whatever it takes ( to save the Euro) one. In terms of his own operations Mario has proved to be a steadfast supporter of it but the monetary policy ammunition locker has been emptied. It is also true that it means he has been something of a one-club golfer because the Euro area political class has in essence embraced austerity and left Mario rather lonely. Now his time is running out he is in effect pointing that out and asking for help. Perhaps he is envious of what President Trump has just enacted in the United States.

There are clear problems though. We have been on this road before and it has turned out to be a road to nowhere in spite of many talking heads supporting it. In essence it relies in the backing of Germany and it has been unwilling to allow supranational Eurobonds where for example Italy and Greece could borrow with the German taxpayer potentially on the hook. If anything Germany seems to be heading in the direction of being even more fiscally conservative.

If we look wider we see that at the heart of this is something which has dogged the credit crunch era. If you believe one of the causes of it was imbalances well the German trade surplus has if anything swelled and now it is adding fiscal surpluses to that. Next if we look more narrowly there are the ongoing ch-ch-changes in Mario’s home country Italy. From the Wall Street Journal.

Both parties vowed to scrap or dilute an unpopular pension overhaul from 2011 that steadily raises the retirement age. Economists say the parties’ fiscal promises, if enacted in full, would greatly add to Italy’s budget shortfall, likely breaking EU rules that cap deficits at 3% of gross domestic product. Italy’s public debt, at 132% of GDP, is the EU’s highest after Greece.

So is it to save the Euro or to keep Italy in it?

Is the Bank of England on a road to another Bank Rate cut?

Yesterday was a rather extraordinary day at the Bank of England and in some respects lived up to the Super Thursday moniker although by no means in the way intended. The media dropped that phrase at exactly the wrong moment. The irony was that for once they may have done the right thing in not raising interest-rates but what this exposed was the ineptitude and failures of their past rhetoric promises and hints. The regime of Forward Guidance can not have been much more of a failure as it found itself being adjusted yet again.

the MPC judges that an ongoing, modest tightening of monetary policy over the forecast period will be
appropriate to return inflation sustainably to its target at a conventional horizon.

Let us mark the obvious problem with the use of ongoing when the Bank Rate is still at the emergency level of 0.5% the Term Funding Scheme is at circa £127 billion and we have £435 billion of QE Gilt holdings and look at what they said in February and the emphasis is mine.

The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report,

So the timing element was wrong and so was the amount which doesn’t really leave much does it?

But things got worse at the press conference because in his attempt to explain this Governor Carney exposed Forward Guidance as an emperor with no clothes. In an exchange with Harry Daniels of LiveSquawk Governor Carney told us that his words were really only for financial markets and implied that they were big enough boys and girls to make their own views. He then contrasted with the ordinary person clearly implying they would not. Seeing as Forward Guidance was supposed to connect with the ordinary person and business Governor Carney torpedoed his own ship there. Also when he later tried to claim people and businesses do listen to him he unwittingly admitted he had misled them,

The people we speak to first and foremost are households and businesses across the country. [They] don’t trade short-sterling. They are not fixated on whether we raise rates on May 10 or at the end of June ( The Times).

They might reasonably have been fixated on his rate rise rhetoric back in June 2014 after all if they could have nearly taken out a couple of 2-year fixed-rate mortgages since then to protect themselves against the interest-rate rises which never happened.

A bizarre element was added on the issue of him talking at 6 pm to the BBC when many UK markets are closed as the Governor tried to claim it was okay because some markets such as the UK Pound £ were traded 24/7. This of course did not address at all the ones that are closed or the lack of liquidity at such times in the ones that are.

Weather or whether?

This got the blame.

The MPC’s central assessment is that it largely reflects the former, and that the underlying pace of growth remains more resilient than the headline data suggest.

The problem here is of course if they really believed that then they should have raised interest-rates! Also it directly contrasted with what our official statisticians had told us a few hours before.

Today’s figures support previous estimates showing the economy was very sluggish in the first quarter of 2018, with little impact overall from the bad weather.

Unreliable Boyfriend

This subject was raised several times and one of them got a rather bizarre response.

Shade from MC: “The only people who throw that term [unreliable boyfriend] at me are in this room” ( @birdyworld )

We do not even need to look beyond the boundaries of this website to know that such a statement is untrue and even the BBC uses the term. The Governor had opened the press conference by shiftily looking around the room before as several people rather amusingly suggested to me talking out of both sides of his mouth. Indeed the man formerly praised for his good looks and for being a rock star central banker seems to have lost the female vote too if this from Blonde Money is any guide.

Carney the ever unreliable boyfriend

There was an alternative view which I doubt the Governor will prefer.

The people outside the room say “who are you” ( @birdyworld )

Especially as it is from someone who thinks he has done a good job.

Wages

There was another odd turn here as Governor Carney went into full Ivory Tower mode and said that the Monetary Policy Committee only looked at regular wages. As it is not that frequent an event let me echo the words of Danny Blanchflower on this subject.

idiotic – workers only care about what is in their pay packet – so you take out the part of pay that varies and then tell us what is left doesn’t vary No other country in the world uses such a dumb measure.

Even worse the Governor tried to say that wages had progressed in line with the forecasts of the Bank of England but this is only if you cherry pick the data. For example the latest month for which we have figures is February and if you take the Governor’s line and look at private-sector regular pay the annual rate of increase was 3%. However if you look at pay across the economy ( and as it happens the private-sector)the annual rate of increase was 2.3%. Will people ignore what was once called “the pound in your pocket” and instead break up the notes and coins into separate piles?

The absent-minded professor

Ben Broadbent is called into play at the press conferences if the going gets tough. His role is twofold being partly to expound widely on minor details to waste time and in a related effort to make the viewers and attendees drowsy if not numb. Sadly I was not that to point out that his rhetoric on Asia ignored Japan where many fear a contraction in the first quarter GDP data due you guessed it to the weather.

He has also been on the Today programme this morning on BBC Radio Four. This seems unwise as people have just got up and do not want to be sent back to sleep but if we move on from that there is this.

BoE’s Broadbent: Message Is That Rate Hikes Will Be Gradual ( @LiveSquawk )

How long can you keep saying that when in net terms there have not been any?

It is entirely the sensible thing to do, to wait to see whether we are right that the economy will bounce back from here, and for me the decision was straightforward

So it was the weather or it wasn’t? Moving on from that is the contrast with August 2016 when Ben appeared somewhat panic-stricken and could not cut rates fast enough where was the waiting for a ” bounce back from here,” then Ben? He also wanted to cut further in November 2016 before of course even he was calmed by the actual data.

On a deeper level I would just like to point out that it was wrong to move Professor Broadbent from being an external member to an internal one. Otherwise external member of the MPC may be influenced by potential sinecures from the Governor which makes their existence pointless.

Comment

The road to a Bank Rate cut and possibly more QE Gilt purchases is simple and it merely involves the current weak patch for the economy persisting. As I have pointed out before the monetary growth numbers have been weakening which suggests the summer and early autumn may not be that good. It is also true that more than a few of our trading partners are seeing a weaker phase too as for example we saw this from France on Wednesday.

Manufacturing output fell sharply over the first
quarter of 2018 (−1.8%)

That leaves it with a similar position to the UK where a better phase seems to have ended at least for now. We know from August 2016 that it will not take much more of this for the Bank of England to look at easing policy in sharp contrast to the nearly four years of unfulfilled Forward Guidance about rises.

I don’t care if you never come home,
I don’t mind if you just keep on
Rowing away on a distant sea,
‘Cause I don’t love you and you don’t love me. ( Eric Clapton)

Meanwhile the consequences continue to build up.

Forty-somethings are now almost twice as likely to be renting from a private landlord than they were 10 years ago.

Rising UK house prices have left many middle-age workers unable to afford a first home,  ( BBC )

 

 

 

 

The unreliable boyfriend has tripped over his own feet again

Today brings the “unreliable boyfriend” centre stage as we come to the moment when he gave Forward Guidance that he will raise interest-rates. Of course he would not be the unreliable boyfriend if things did not look very different by the time the event arrived! Sadly that has been the history of Bank of England Forward Guidance under Governor Mark Carney which has been anything but. From the initial false start of flagging up an unemployment rate of 7% that was supposed to be like the “train in the distance” sung about by Paul Simon but actually then arrived at high-speed it has been an error strewn path. Reuters have put it like this.

The BoE governor’s guidance on the path for interest rates has repeatedly been knocked off course by surprises in the economy, hence the accusation of unreliability from a lawmaker.

Care is needed as there are always going to be surprises and in a way that is a good thing as fans of the novel Dune will know. But there are themes that can be got right and sadly Governor Carney grasped the wrong stick right from the beginning. If we think back to yesterday’s article on Japan its unemployment rate of 2.5% is relevant here as tucked away in the original Forward Guidance was the Bank of England saying the natural rate of unemployment ( which some take as the equilibrium one and others even as a guide to full employment) was 6.5% The utter hopelessness of this view is shown by looking at the UK unemployment rate or even worse the Japanese one. Or if you prefer the natural rate in the UK has been 6%,5.5% then 4.5% and more recently 4.25% which illustrates the words of Oliver Hardy.

That’s another fine mess you’ve got me into

Sadly I do see teachers on social media referring to such views at the Bank of England and fear for what their students are being taught.

Also of course the media do need to keep their place in the pecking order for questions at press conferences and interviews which I think we should keep in mind as we read this from Reuters.

Drab data show Bank of England’s Carney a ‘sensitive boyfriend’

The data view was highlighted here.

Carney’s highlighting last month of “mixed” economic signals shocked investors who had bet the BoE would raise rates to a new post-financial-crisis high of 0.75 percent on May 10.

Since then, almost all the gauges of Britain’s economy have disappointed. Financial markets now point to a less than 10 percent chance of a rate hike on Thursday, compared with 90 percent a month ago.

Britain’s economy barely grew in the first three months of 2018 and bad weather was not the only reason why, official statisticians said last month.

Today’s data

The opening salvo was again drab.

In March 2018, total production was estimated to have increased by 0.1% compared with February 2018.Manufacturing fell by 0.1% in March 2018 compared with February 2018.

Maybe the weather had an impact but not a large one according to our official statisticians. If we look for some perspective we find ourselves continuing the recent theme of a slowing down economy.

>In the three months to March 2018, the Index of Production increased by 0.6% compared with the three months to December 2017, due mainly to a rise of 2.5% in energy supply; this was supported by rises in mining and quarrying of 2.2% and manufacturing of 0.2%.

It is kind of an irony that we find a positive impact from the weather! Although of course for domestic consumers this is a cost and a likely subtraction from other output for those whose budgets are tight.

If we step back and consider the credit crunch era then unless you raise the counterfactual to heroic levels then the £435 billion of QE and an emergency interest-rate of 0.5% seem to have failed here.

Since then, both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 5.1% and 0.8% respectively in the three months to March 2018.

Construction

The news here was better but only in the context of not being quite as bad as we had previously thought.

Construction output continued its recent decline in the three-month on three-month series, falling by 2.7% in March 2018, the biggest fall seen in this series since August 2012.

Here there was much more likely to have been an adverse impact from the weather and the recent pattern has been grim. However the overall picture is rather different to that shown by the production sector.

Construction output peaked in December 2017, reaching a level that was 30.3% higher than the lowest point of the last five years, April 2013. Despite the month-on-month decrease in March 2018, construction output remains 22.7% above this level.

If we consider monetary policy then supporters of the QE era have a case for arguing that there was a boost here from easy monetary policy and perhaps the Funding for Lending Scheme which did so much to reduce mortgage rates. So the implicit bank bailout did help one sector perhaps. The catch comes with the slow down as it was already happening before the Bank Rate rise last November and of course the Term Funding Scheme only ended in February. Even in the wildest dreams of Mark Carney and he has had some pretty wild ones monetary policy does not act that quickly.

Trade

Here the news was ( fortunately) better.

The UK total trade deficit (goods and services) narrowed £0.7 billion to £6.9 billion in the three months to March 2018, due mainly to falling goods imports from non-EU countries.

Even data over 3 months is not entirely reliable but the longer data was better too.

In the 12 months to March 2018, the total trade deficit narrowed £13.3 billion to £26.6 billion due to 9.2% export growth exceeding 6.4% growth for imports.

There is some genuine good news for the UK economy there in the growth achieved by our exporters. Because of our long-running trade deficit we need export growth to exceed import growth for us to make any progress. Also I am pleased to point out that earlier this week news appeared that confirmed my theme that our services exports have been badly measured and if we put more effort into recording them we were likely to get some good news.

provisional revisions to the UK trade balance range from a downward revision of £1.2 billion to the total trade deficit (goods and services) in 2001 to an upward revision of £9.8 billion in 2016 (Table 1). The £9.8 billion upward revision to the total trade deficit in 2016 means the deficit has been revised from £40.7 billion to £30.9 billion

As you can see the ch-ch-changes make quite a difference. If we factor in the impact of the lower UK Pound £ since the EU leave vote the narrative shifts somewhat. My opinion is that we have had long-running deficits but they have not been as bad as the numbers produced. As ever care is needed because do we really know this even now.

The main driver of the revision in 2016 came from improvements made to methods used to estimate net spread earnings, which feed into exports of services. The net spread earnings improvement revised trade in services exports back to 2004.

Well done to the Office for National Statistics for making a new effort something I asked for in my response to the Charlie Bean review. Of course the former Bank of England Governor Mervyn King was always keen on some rebalancing although it did not happen on poor Mervyn’s watch. By poor I do not mean financially poor as I am sure Baron King of Lothbury will be enjoying the benefits of his RPI-linked pensions as well as his other work.

Comment

The simple fact is that if we look at past Forward Guidance from the Bank of England then its conventional view would be moving towards a Bank Rate cut rather than a rise today. So yet again it has tripped over its own feet. The only factor heading in the other direction is the higher price of crude oil ( Brent Crude is over US $77 as I type this) which will push inflation higher further down the line. Although of course such influences are usually described as “temporary” however long they last and thereby get ignored.

An actual cut would be silly because as I have pointed it before the drop in the UK Pound £ since the unreliable boyfriends latest public U-Turn has been the equivalent of a 0.5% Bank Rate cut as it is. You could argue that would aid a Bank Rate rise but with monetary and economic data slowing I think that now would be a case of bad timing and I am someone who wants Bank Rate back up between 1.5% and 2% to provide a better balance between savers and depositors.

I would not worry too much about Governor Carney’s future though as those at the top of the establishment have a Teflon coating. After his role in the Libor scandal you might think that ex Bank of England Governor Paul Tucker should be in obscurity if not jail and yet apparently his thoughts are valuable. From the Brookings Institute.

Paul Tucker, drawing from his 33 years as a central banker, says that Congress should be much more specific about the objectives it wants the Federal Reserve to achieve and the Fed should try harder to explain what it’s doing

Tucker’s Luck?

Me on Core Finance TV

youtu.be/GtrmZbRPTgY

Wages finally rise in Japan but are such small rises the future for us too?

This morning has brought news from the land of the rising sun or Nihon. Actually it is news that much of the media has been churning out over the Abenomics era when they have tried to report wage growth when there has not been any. However today the Ministry of Labor published some better news of the real variety.

Nominal cash earnings rose 2.1 percent year-on-year in March, the fastest annual gain since June 2003. It followed a revised 1.0 percent gain in February.

Regular pay, which accounts for the bulk of monthly wages, grew 1.3 percent in the year to March, the biggest gain since July 1997, while special payments jumped 12.8 percent as many firms offered their employees end-of-the-year bonuses.

Overtime pay, a barometer of strength in corporate activity, rose an annual 1.8 percent in March versus a revised 0.4 percent increase in February. (Reuters)

As you can see these numbers are something of a landmark in the lost decade era as we note the best overall earnings numbers since 2003 and the best regular pay data since 1997. Overtime pay was up too which is intriguing as the Japanese economy has not had the best start to 2018 and may even have shrunk in the first quarter ending a run of growth. Maybe this year Japanese employers are actually fulfilling their regular promises to raise wage growth.

Care is needed in that this is only one monthly number but after some revisions we see that 2018 so far has recorded annual wage growth of 1.2%,1% and 2.1%. These are low numbers but in the context are a shift higher. This can be explained if we look at the index for such numbers which is still only 101.9 after being set at 100 in 2015. We get an idea as it was 100 in 2014 as well and 100.6 in 2016 and 101 in 2017. Also we need to be aware that the main months for pay in Japan come in June/July and particularly December as for example pay in December is around double that for March but for now let us move on with a flicker of spring sunshine.

Is this the revenge of the Phillips Curve?

No doubt it is party time at the Ivory Towers although many may not have spotted this yet as of course news reaches them slowly. However I am still something of a “party pooper” on this subject as it still does not really work. Here is a tweet from a discussion I was involved in yesterday.

As you can see the state of play is very different between the American situation which we have looked at many times and the Japanese one. Female participation in the labour force changed with the onset of the lost decade era and male participation has picked up in the era of Abenomics although it had started around the beginning of the credit crunch.

If we look at the Abenomics impact I will let you decide if a major swing is good or bad. You see in the age group 55-64 the female participation rate is up by 10.2% in the past 6 years and the male one by 6.6%. I have written in the past that Japan looks after it older citizens well but there have been more and more suggestions that this is if not forced due to difficult circumstances. From the Independent on the 23rd of April.

For decades prior to this trend, it was a tradition for families and communities to care for their older citizens, but a lack of resources is making that harder to do so.

With the older population feeling more and more isolated as a result of this, women especially have turned to a life of crime in the hope that prison will provide them with a refuge and a home.

Returning to conventional economics there is also this to consider.

The number of unemployed persons in March 2018 was 1.73 million, a decrease of 150 thousand or 8.0% from the previous year.   The unemployment rate, seasonally adjusted, was 2.5%. ( Japan Statistics Bureau).

These are extraordinary numbers as it was 3.9% in 2007 so it has been singing along with Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

We cannot rule out the possibility it will fall even further as it was 2.4% in January. Also it is being combined with rising employment.

The number of employed persons in March 2018 was 66.20 million, an increase of 1.87 million or 2.9% from the previous year.

Inflation

I though I would add this into the mix as it provides something of an irony. The view of the Bank of Japan has been for so long that an annual inflation rate of 2% is just around the corner. Yet in its last report it lost the faith.

In terms of the outlook for prices, most members shared the view that the year-on-year rate of change in the CPI was likely to continue on an uptrend and increase
toward 2 percent, mainly on the back of the improvement in the output gap and the rise in medium- to long-term inflation expectations.

And later this.

the momentum of
inflation was not yet strong enough to achieve the price stability target of 2 percent at an
early stage.

Of course now with an oil price of US $77 for a barrel of Brent Crude they may see an inflationary push bringing them nearer to their objective. Of course they think inflation at 2% per annum is a good thing whereas I do not. After all even the recent better wage data would leave real wages flat in such a scenario.

We will have to see if oil prices remain here but for now the news just coming through that Saudi Arabia has intercepted two ballistic missiles seems set to support it.

Comment

Let me start with some good news for Japan which is that on what used to be called the Misery Index it is doing very well. It used to add the unemployment rate ( 2.5%) to the inflation rate ( 1%) and as you can see it is rather low. Very different to the double-digit numbers from the UK when it was a popular measure.

But for economic theory and for the Phillips Curve in particular this is much less satisfactory.  This comes partly from asking where has it been? Let me hand you over to the Bank of Japan.

(1) the actual unemployment rate had been substantially below 3.5 percent, which had formerly been regarded as the structural unemployment rate,

So wage growth should have been surging for ages and it has not. Now we face a situation which may be more like a cliff-edge that the smooth Phillips Curve. This is because on every measure Japan has been approaching full employment and in the mad world of economics 101 has in fact passed it.

(2) the recruitment rate of new graduates and the employment rate of women had risen
considerably.

In fact if you look at the demographic situation full employment seems set to be lower than it was due to the aging population as so far rising participation has offset it. But here is the rub if participation had not changed then unemployment would be below 2% now as we are left wondering what level would generate some real wages growth?

Meanwhile if we look back at the US participation data there were some chilling responses as to the cause. They looked at something which has troubled us before on here.

https://www.bbc.co.uk/programmes/b09yfqsy#play

 

Millennials need lower UK house prices rather than £10,000

This morning the attention of Mark Carney and the Bank of England will have been grabbed by this from the Halifax Building Society.

On a monthly basis, prices fell by 3.1% in April, following a 1.6% rise in March, reflecting the
volatility in the short-term monthly measure.

Those who watched the ending of the Lord of the Rings on television over the bank holiday weekend may be wondering if this is like when the eye of Sauron spots that the ring of power is about to be thrown into the fires of Mount Doom? More on the Bank of England later as of course it meets today ready for its vote on monetary policy tomorrow although we do not get told until Thursday.

If we step back for some perspective we see this.

House prices in the latest quarter (February-April) were 0.1% lower than in the preceding
three months (November-January), the third consecutive decline on this measure

This means that we have fallen back since the apparent boom last October and November when the quarterly rate of growth reached 2.3%. Now we see that over the past three months it has gone -0.7%,-0.1% and now -0.1%.

Moving to annual comparisons we are told this.

Prices in the last three months to April were 2.2% higher than in the same three months a year earlier, down from the 2.7% annual growth recorded in March.

Again the message is of a lower number.

What have we learnt?

Whilst the monthly number is eye-catching this is an erratic series as going from monthly growth of 1.6% to -3.1% shows. Even the quarterly numbers saw falls last year at this time but then recovered as we mull a seasonal effect. But for all that as we look back we do see a shift from numbers of the order of 5% annual growth to numbers of the order of 2%. Of course that is the inflation target or would be if the UK establishment allowed house prices to be in the inflation index rather than keeping it out of them so it can claim any rise as wealth effects. Personally I see the decline in the rate of house price inflation as a good thing as for example the last three months has seen it much more in line with the growth in UK wages.

What does the Halifax think looking ahead?

They are not particularly optimistic.

“Housing demand has softened in the early months of 2018, with both mortgage approvals and completed home sales
edging down. Housing supply – as measured by the stock of homes for sale and new instructions – is also still very
low. However, the UK labour market is performing strongly with unemployment continuing to fall and wage growth finally picking up. These factors should help to ease pressure on household finances and as a result we expect
annual price growth will remain in our forecast range 0-3% this year.”

In terms of detail we are pointed towards this.

Home sales fell in March. UK home sales dropped by 7.2% between February and March to 92,270 –
the lowest level since May 2016.

And looking further down the chain to this.

Housing market activity softens in March. Bank of England industry-wide figures show that the
number of mortgages approved to finance house purchases – a leading indicator of completed house
sales – fell for the second consecutive month in March to 62,914 – a drop of 1.4%. Approvals in the
three months to March were 1.7% higher than in the preceding three months, further indicating a
subdued residential market.

So the fires of the system are burning gently at best.

The UK establishment responds

Of course so much of the UK economic system is built on rising house prices so we should not be surprised to see the establishment riding to the rescue. Here is the Financial Times on today’s report from the Intergenerational Commission and the emphasis is mine.

After an exhaustive, two-year examination of young Britons’ strained living standards and the elderly’s concerns about health and social care, the commission recommended a £10,000 “citizen’s inheritance” for 25-year-olds to help them buy their first home or reduce their student debt, lower stamp duty for people moving home and billions more spent on health in a report published on Tuesday.

Nobody at this august institutions seems to ever stop and ask the question as to why so much “help” is always needed? The truth is that it is required because house prices are too high. They of course turn a not very Nelsonian blind eye to that reality. Also the bit about creating the money seems rather vague.

The commission said the government could find the money needed to fund the additional public expenditure by introducing new taxes on property and wealth.

Indeed the lack of thought in this bit is frightening especially when we see the role of who said it.

Carolyn Fairbairn, CBI director-general and a member of the commission, said: “The idea that each generation should have a better life than the previous one is central to the pursuit of economic growth. The fact that it has broken down for young people should therefore concern us all.”

No challenging of all about can or should we grow if it means draining valuable resources and sadly no doubt soon we will get more global warming rhetoric from the same source. Then to correct myself on the issue of taxes we do get some detail and it is something that the establishment invariably loves.

The bulk of the additional tax measures came from a proposal for a new property tax, with annual rates of 1.7 per cent of the capital value of a home for any properties worth more than £600,000 and 0.85 per cent on values below that.

What sort of mess is that? You inflate house prices and tell people they are better off. Then you make the mess even worse by taxing many on gains they have not taken! A clear cash flow issue for many who may have a more expensive property but still live in it. This will be especially true for the retired living on a pension.

Oh and £10,000 won’t go far will it? So this is something that will plainly go from bad to worse.

Also some advice to millennials. Should you ever get this £10,000 don’t pay off your student debt as that looks to be something likely to be written off road to nowhere style in the end anyway.

Comment

If we start with millennials I do think that times are troubled but the real driving factor affecting them is this.

Those in their late 20s and early 30s were the first generation not to have higher pay on average than people of the same age 15 years earlier, according to the commission.

We are back to wages again which the establishment of course then shouts look over here and moves to house prices. But then it has a problem because its claim that there has been little or no inflation faces this inconvenient reality.

With the prospect of more time spent renting from private landlords, the average millennial spent 25 per cent of their income on housing, compared with roughly 17 per cent for baby boomers when they were younger, a figure that subsequently fell for that generation as their incomes rose sharply in the 1980s and 1990s.

So we have higher prices and payments without having much inflation! It is a scam which the establishment continue with their claim that housing inflation can be measured using imputed rents. Even worse they measure rents badly and may be underestimating the rises by around 1% per annum.

Now we can return to Mark Carney and the Bank of England who no doubt feel like they have heat stroke when they read of house price falls. This is because of the enormous effort they have put into this area of which the latest was the Term Funding Scheme which ended in February.  It started in August 2016 and UK Bank Rate is the same now at the emergency rate of 0.5% but we can measure its impact on mortgage rates. You see according to the Bank the last 3 months before it saw new business at 2.39% twice and then 2.3% whereas now it has gone 1.96%,2.02% and now 2,04%. So an extra Bank Rate cut just for mortgages.

Now if we factor that into house prices would it be churlish to suggest it may have raised them by the £10,000 the Intergenerational Commission wants to gift to millennials?

 

 

 

The economy of Italy continues to struggle

It is past time for us to revisit the economy of Italy which will no doubt be grimly mulling the warnings of a Euro area slow down from ECB ( European Central Bank) President Draghi and Italians will be hoping that their countryman was not referring to them.

When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators.

We know that Bank of Italy Governor Visco will have given his views but at this stage we have no detail on this.

 All Governing Council members reported on the situation of their own countries.

This particularly matters for Italy because its economic record in the Euro era has been poor. One different way of describing those has been released this morning by the Italian statistical office.

In March 2018, 23.134 million persons were employed, +0.3% over February. Unemployed were 2.865 million, +0.7% over the previous month.

Employment rate was 58.3%, +0.2 percentage points over the previous month, unemployment rate was 11.0%, steady over February 2018 and inactivity rate was 34.3%, -0.3 percentage points in a month.

Youth unemployment rate (aged 15-24) was 31.7%, -0.9 percentage points over the previous month and youth unemployment ratio in the same age group was 8.3%, -0.3 percentage points over February 2018.

The long-term picture implied by an unemployment rate that is still 11% is not a good one as we note that even in the more recent better phase for Italy it has not broken below that level. Actually Italy has regularly reported that it has ( to 10.8% or 10.9%) but the number keeps being revised upwards. Now whether anyone really believed the promises of economic convergence given by the Euro founders I do not know but if we look at the unemployment rate released by Germany last week there have to be fears of divergence instead,

The adjusted unemployment rate was 3.4% in March 2018.

The database does not allow me to look back to the beginning of the Euro area but we can go back to January 2005. Since then employment in Italy has risen by 722,000 but unemployment has risen by 977,000 which speaks for itself.

If we look at the shorter-term it is hardly auspicious that unemployment rose in March although better news more in tune with GDP ( Gross Domestic Product) data in 2017 is the employment rise.

Manufacturing

The warning from ECB President Draghi contained this.

 Sharp declines were experienced by PMI, almost all sectors, in retail, sales, manufacturing, services, in construction.

We can say that this continued in the manufacturing sector according to the Markit PMI.

The recent growth slowdown of the Italian
manufacturing sector continued during April as
weaker domestic market conditions limited order
book and production gains. Business sentiment
softened to an eight-month low.

The actual number is below.

declined for a third successive month
in April to reach a level of 53.5 (from 55.1 in
March). The latest PMI reading was the lowest
recorded by the survey since January 2017.

So a fall to below the UK and one of Mario’s sharp declines which seems to be concentrated here.

The slowdown was centred on the intermediate
goods sector, which suffered a stagnation of output
and concurrent declines in both total new orders
and sales from abroad.

If we try to peer at the Italian economy on its own this is hardly reassuring.

There were widespread reports of a
softening of domestic market conditions which
weighed on total order book gains.

Also it seems a bit early for supply side constraints to bite especially if we look at Italy’s track record.

“On the contrary, anecdotal evidence in recent
months has pointed to global supply-side
constraints as a factor limiting growth, and these
issues in April were exacerbated by increased
weakness in domestic market conditions

GDP

This morning’s official release is a bit of a curate’s egg so let us go straight to it.

In the first quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2017 and by 1.4 per
cent in comparison with the first quarter of 2017.

So the good news is that the last actual quarterly contraction was in the spring of 2014 and since then there has been growth. But the problem is something we have seen play out many times. From February 12th 2016.

The ‘good’ news is that this is above ‘s trend growth rate of zero

It is also better than this from the same article.

The number below was one of the reasons why the former editor of the Economist magazine Bill Emmott described it as like a “girlfriend in a coma”.

between 2001 and 2013 GDP shrank by 0.2%. (The Economist)

So better than that but the recent experience in what has been called the Euroboom brings us back to my point that Italy has struggled to maintain an annual economic growth rate above 1%. The latest numbers bring that to mind as the annual rate of GDP growth has gone 1.8%, 1.6% and now 1.4%. The quarterly numbers have followed something of a Noah’s Ark pattern as two quarters of 0.5% has been followed by two of 0.4% and now two of 0.3%. Neither of those patterns holds any reassurance in fact quite the reverse.

Why might this be?

There are many arguments over the causes of the problems with productivity post credit crunch but in Italy it has been a case of Taylor Swift style “trouble,trouble,trouble” for some time now. From the Bank of Italy in January and the emphasis is mine.

Over the period 1995-2016 the performance of the Italian
economy was poor not only in historical terms but also and more importantly as compared with its
main euro-area partners. Italy’s GDP growth – equal to 0.5 per cent on an average yearly basis against
1.3 in Germany, 1.5 in France and 2.1 in Spain – was supported by population dynamics, entirely due to
immigration, and the increase in the employment rate, while labor productivity and in particular TFP
gave a zero (even slightly negative) contribution,

Comment

The main issue is that the economy of Italy has barely grown in the credit crunch era. If we use 2010 as our benchmark for prices then the 1.5 trillion Euros of 1999 was replaced by only 1.594 trillion in 2017. So it is a little higher now but the next issue is the decline in GDP per capita or person from its peak. One way of looking at it was that it was the same in 2017 as it was in 1999 another is that the 28700 Euros per person of 2007 has been replaced by 26,338 in 2017 or what is clearly an economic depression at the individual level.

It is this lack of growth that has led to the rise and rise of the national debt which is now 131.8% of annual GDP. It is not that Italy is fiscally irresponsible as its annual deficits are small it is that it has lacked economic growth as a denominator to the ratio. Thus it is now rather dependent on the QE bond purchases of the ECB to keep the issue subdued. Of course the best cure would be a burst of economic growth but that seems to be a perennial hope.

Looking ahead deomgraphics are a developing issue for Italy. From The Local in March.

Thanks to the low number of births, the ‘natural increase’ (the difference between total numbers of births and deaths) was calculated at -134,000. This was the second greatest year-on-year drop ever recorded.

On this road a good thing which is rising life expectancy also poses future problems.

As to the banking system well we have a familiar expert to guide us. So far he has had an accuracy rate of the order of -100%!