In the future will all central banks buy equities?

As the weather shows a few signs of picking up in London it appears that one central banker at least has overheated listening to Glen Frey on the radio.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Yes it is our favourite “loose cannon on the decks” which is the Bank of England Chief Economist Andy Haldane. He has been quiet in recent times after his Grand Tour around the UK to take central banking to the people and get himself appointed as Governor was widely ignored. But he is back.

LONDON (Reuters) – The Bank of England is looking more urgently at options such as negative interest rates and buying riskier assets to prop up the country’s economy as it slides into a deep coronavirus slump, the BoE’s chief economist was quoted as saying.

The Telegraph newspaper said the economist, Andy Haldane, refused to rule out the possibility of taking interest rates below zero and buying lower-quality financial assets under the central bank’s bond-buying programme.

There is a lot going on there and certainly enough for him to be summoned to the Governor’s study to explain why he contradicted what the Governor had said only a few days before. Also as is his wont Andy had also contradicted himself.

“The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy,” he said in an interview. “How could we not be?”

So we have a lower bound for interest-rates but we are thinking of cutting below it? So it is not an effective lower bound then. I can help him out with just a couple of letters as calling it an ineffective lower bound would fix it. Of course Andy has experience of numbers slip-sliding away on his watch as the estimate of equilibrium unemployment has gone from 6.5% to around 4.25% ( it has got a bit vague of late) torpedoing his output gap theories. Even worse of course it will now be going back up. Time for him to move from Glen Frey to Kylie Minogue.

I’m spinning around
Move outta my way

Then there is Andy’s hint about buying equities.

buying lower-quality financial assets

He has a problem with those who recall him pointing out he does not understand pensions so he would not be a stock picker more a tracker man. Although of course in the UK in many ways that means the same thing. For example if we look at Astra Zeneca it was worth just under £108 billion at the beginning of this month and Royal Dutch Shell some £95 billion whereas if we those bandying for the number 100 slot we are between £3 and £3.5 billion. Then the FTSE 100 is over 80% of the all-share so by now I think you will have figured that yet again such a policy would benefit big business. Andy may not have done so as his “Sledgehammer QE” of 2016 dashed into such UK stalwarts as er Apple and Maersk. An error being repeated in the current operations.

Chair Powell

Chair Powell of the US Federal Reserve was interviewed on 60 Minutes yesterday which was likely to be more like 40 minutes when you allow for adverts. What did he say? Well after a really odd section on virology we got this burst of hype.

But I would just say this. In the long run, and even in the medium run, you wouldn’t want to bet against the American economy. This economy will recover. And that means people will go back to work. Unemployment will get back down. We’ll get through this. It may take a while. It may take a period of time. It could stretch through the end of next year. We really don’t know. We hope that it will be shorter than that, but no one really knows.

Eyes will have turned to the hint that it might be in 2022 as that begs a lot of questions as to what the Federal Reserve might do in the meantime. What about this for instance?

I continue to think, and my colleagues on the Federal Open Market Committee continue to think that negative interest rates is probably not an appropriate or useful policy for us here in the United States. ( Chair Powell)

“probably not” eh? That is leaving the door open to a change of mind. This is in spite of the fact that in central banking terms this is quite a damning critique ( as it involves an implicit criticism of other central banks).

The evidence on whether it helps is quite mixed.

Also as section which is just plain wrong.

PELLEY: So the banks would pay people to borrow money, essentially?

POWELL: Yes.

Let us now move onto what might be called the money shots.

POWELL: Well, there’s a lot more we can do. We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have. So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to.

The track record of central bankers using the phrase “no limit” is not good as the Swiss National Bank most famously found out. But there was more and the emphasis below is mine.

POWELL: Well, to begin, the one thing we can certainly do is we can enlarge our existing lending programs. We can start new lending programs if need be. We can do that. There are things we can do in monetary policy. There are a number of dimensions where we can move to make policy even more accommodative. Through forward guidance, we can change our asset purchase strategy. There are just a lot of things that we can do.

Comment

Central bankers are like gamblers on a losing streak desperately doubling down. You do not need to take my word for it as we can take a look at a country which has been enthusiastically buying equities for a while now, which is Japan. For example the Bank of Japan bought over 100 billion Yen’s worth as recently as Friday on its way to this.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

As of the last update the Bank of Japan had bought some 31.4 trillion Yen of equity ETFs. How is that going?

Japan fell into a technical recession in the first quarter for the first time since 2015

That is from the Financial Times. If you think that does not do justice to an economy 2% smaller than a year ago and seeing nominal GDP declines with a large national debt, well the FT is Japanese owned these days. Meanwhile back in the real world the lost decade(s) carries on.

Why would you copy that? Yet we seem likely to do so…..

Podcast on the UK Gilt Market

 

Economic growth German style has hit the buffers

Today gives us the opportunity to look at the conventional and the unconventional so let us crack on via the German statistics office.

WIESBADEN – The corona pandemic hits the German economy hard. Although the spread of the coronavirus did not have a major effect on the economic performance in January and February, the impact of the pandemic is serious for the 1st quarter of 2020. The gross domestic product (GDP) was down by 2.2% on the 4th quarter of 2019 upon price, seasonal and calendar adjustment. That was the largest decrease since the global financial and economic crisis of 2008/2009 and the second largest decrease since German unification. A larger quarter-on-quarter decline was recorded only for the 1st quarter of 2009 (-4.7%).

So we start with a similar pattern to the UK as frankly a 0.2% difference at this time does not mean a lot. Also we see that this is essentially what we might call an Ides of March thing as that is when things headed south fast. However some care is needed because of this.

The recalculation for the 4th quarter of 2019 has resulted in a price-, seasonally and calendar-adjusted GDP decrease of 0.1% on the previous quarter (previous result: 0.0%).

For newer readers this brings two of my themes into play. The first is that I struggled to see how Germany came up with a 0% number at the time ( and this has implications for the Euro area GDP numbers too). If they were trying to dodge the recession definition things have rather backfired. The second is that Germany saw its economy turn down in early 2018 which is quite different to how many have presented it. Some of the news came from later downwards revisions which is obviously awkward if you only read page one, but also should bring a tinge of humility as even in more stable times we know less than we might think we do.

Switching now to the context there are various ways of looking at this and I have chosen to omit the seasonal adjustment as right now it will have failed which gives us this.

a calendar-adjusted 2.3%, on a year earlier.

No big change but it means in context that the economy of Germany has grown by 4% since 2015 or if you prefer returned to early 2017.

In terms of detail we start with a familiar pattern.

Household final consumption expenditure fell sharply in the 1st quarter of 2020. Gross fixed capital formation in machinery and equipment decreased considerably, too.

But then get something more unfamiliar when we not we are looking at Germany.

However, final consumption expenditure of general government and gross fixed capital formation in construction had a stabilising effect and prevented a larger GDP decrease.

So the German government was already spending more although yesterday brought some context into this.

GERMAN FINANCE MIN. SCHOLZ: OUR FISCAL STIMULUS MEASURES WILL BE TIMELY, TARGETED, TEMPORARY AND TRANSFORMATIVE. ( @FinancialJuice )

As he was talking about June I added this bit.

and late…….he forgot late….

Actually they have already agreed this or we were told that.

Germany has approved an initial rescue package worth over 750 billion euros to mitigate the impact of the coronavirus outbreak, with the government taking on new debt for the first time since 2013.

The first package agreed in March comprises a debt-financed supplementary budget of 156 billion euros and a stabilisation fund worth 600 billion euros for loans to struggling businesses and direct stakes in companies. ( Reuters )

Warnings

There is this about which we get very little detail.

Both exports and imports saw a strong decline on the 4th quarter of 2019.

If we switch to the trade figures it looks as though they were a drag on the numbers.

WIESBADEN – Germany exported goods to the value of 108.9 billion euros and imported goods to the value of 91.6 billion euros in March 2020. Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports declined by 7.9% and imports by 4.5% in March 2020 year on year.

Ironically this gives us something many wanted which is a lower German trade surplus but of course not in a good way. A factor in this will be the numbers below which Google Translate has allowed me to take from the German version.

Passenger car production (including motorhomes) was compared to March 2019
by more than a third (-37%) and compared to February 2020 by more than a quarter (-27%)
around 285,000 pieces back.

The caveats I pointed out for the UK about seasonality, inflation and the (in)ability to collect many of the numbers will be at play here.

Looking Ahead

The Federal Statistics Office has been trying to innovate and has been looking at private-sector loan deals.

The preliminary low was the week after Easter (16th calendar week from April 13th to 19th) with 36.7% fewer new personal loan contracts than achieved in the previous week. Since then, the new loan agreements have ranged from around 30% to 35% below the same period in the previous year.

That provides food for thought for the ECB and Christine Lagarde to say the least.

Also in an era of dissatisfaction with conventional GDP and the rise of nowcasting we have been noting this.

KÖLN/WIESBADEN – The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 10.9% in April 2020 compared with March 2020. This was an even stronger decline on the previous month than in March 2020, when a decrease of -5.8% on February 2020 had been recorded, until then the largest month-on-month decline since truck toll was introduced in 2005.

That is quite a drop and leaves us expecting a 10%+ drop for GDP in Germany this quarter especially as we note that many service industries have been hit even harder.

Comment

I promised you something unconventional so let me start with this.

Covid-19 has uncovered weaknesses in France’s pharmaceutical sector. With 80 percent of medicines manufactured in Asia, France remains highly dependent on China and India. Entrepreneurs are now determined to bring France’s laboratories back to Europe. ( France24 )

I expect this to be a trend now and will be true in much of the western world. But this ball bounces around like Federer versus Nadal. Why? Well I immediately thought of Ireland which via its tax regime has ended up with a large pharmaceutical sector which others may now be noting. Regular readers will recall the times we have looked at the “pharmaceutical cliff” there when a drug has lost its patent and gone full generic so to speak. That might seem odd but remember there were issues about things like paracetamol in the UK for a bit.

That is before we get to China and the obvious issues in may things have effectively been outsourced to it. Some will be brought within national borders which for Germany will be a gain. But the idea of trade having a reversal is not good for an exporter like Germany as the ball continues to be hit. Perhaps it realises this hence the German Constitutional Court decision but that risks upsetting a world where Germany is paid to borrow and of course a new Mark would surge against any past Euro value.

 

India faces hard economic times with Gold and Liquor

Early this morning we got news on a topic we have been pursuing for several years now and as has become familiar it showed quite an economic slow down.

At 27.4 in April, the seasonally adjusted IHS Markit India
Manufacturing PMI® fell from 51.8 in March. The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago.

It caught my eye also because it was the lowest of the manufacturing PMI series this morning. Although some care is needed as the decimal point is laughable and the 7 is likely to be unreliable as well. But the theme is clear I think. Of course much of this is deliberate policy.

The decline in operating conditions was partially driven by
an unprecedented contraction in output. Panellists often
attributed lower production to temporary factory closures that were triggered by restrictive measures to limit the spread of COVID-19.

So that deals with supply and here is demand.

Amid widespread business closures, demand conditions were severely hampered in April. New orders fell for the first time in two-and-a-half years and at the sharpest rate in the survey’s history, far outpacing that seen during the global financial crisis.

So there was something of a race between the two and of course external demand was heading south as well.

Total new business received little support from international markets in April, as new export orders tumbled. Following the first reduction since October 2017 during March, foreign sales fell at a quicker rate in the latest survey period. In fact, the rate of decline accelerated to the fastest since the series began over 15 years ago.

The plunges above sadly have had an inevitable impact on the labour market as well.

Deteriorating demand conditions saw manufacturers drastically cut back staff numbers in April. The reduction in employment was the quickest in the survey’s history. There was a similar trend in purchasing activity, with firms cutting input buying at a record pace.

Background and Context

We learn from noting what had already been happening in India.

Real GDP or Gross Domestic Product (GDP) at Constant (2011-12) Prices in the year 2019-20 is estimated to attain a level of ₹ 146.84 lakh crore, as against the First Revised Estimate of GDP for the year 2018-19 of ₹ 139.81 lakh crore, released on 31st January 2020. The growth in GDP during 2019-20 is estimated at 5.0 percent as compared to 6.1 percent in 2018-19. ( MOSPI )

Things had been slip-sliding away since the recent peak of 7.7% back around the opening of 2018. So without the Covid-19 pandemic we would have seen falls below 5%. In response to that the Reserve Bank of India had been cutting interest-rates. I would have in the past have typed slashed but for these times four cuts of 0.25% and one of 0.35% in 2019 do not qualify for such a description.

Before that was the Demonetisation episode of 2016 where the Indian government created a cash crunch but withdrawing 500 and 1000 Rupee notes. This was ostensibly to reduce financial crime but also created quite a bit of hardship. Later as so much of the money returned to the system it transpired that the gains were much smaller than the hardship created.

For newer readers you can find more details on these issues in my back catalogue on here.

Looking Ahead

On April 17th the Governor of the RBI tried his best to be upbeat.

 India is among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent). In fact, this is the highest growth rate among the G 20 economies………For 2021, the IMF projects sizable V-shaped recoveries: close to 9 percentage points for global GDP. India is expected to post a sharp turnaround and resume its pre-COVID pre-slowdown trajectory by growing at 7.4 per cent in 2021-22.

He was of course running a risk by listening to the IMF and ignoring what the trade date was already signalling.

In the external sector, the contraction in exports in March 2020 at (-) 34.6 per cent has turned out to be much more severe than during the global financial crisis. Barring iron ore, all exporting sectors showed a decline in outbound shipments. Merchandise imports also fell by 28.7 per cent in March across the board, barring transport equipment.

On Friday the Business Standard was reporting on expectations much more in line with the trade data.

While acknowledging some downside risks from a lockdown extension in urban areas beyond 6 June, we maintain our GDP projection of 0% GDP growth for CY2020, and 0.8% for FY21,” wrote Rahul Bajoria of Barclaysin a report.

If we stay with that source then we get another hint from what caused the drop in share prices for car manufacturers today.

Shares of automobile companies declined on Monday as many firms reported nil sales in the month of April after a nationwide lockdown kept factories and showrooms shut.

At 10:11 AM, the Nifty Auto index was down 7.33 per cent as compared to 5.1 per cent decline in the Nifty50 index.

Monetary Policy

You will not be surprised to learn that the RBI acted again as the policy Repo Rate is now 4.4% and the Governor gave a summary of other actions in the speech referred to above.

 In my statement of March 27, I had indicated that together with the measures announced on March 27, the RBI’s liquidity injection was about 3.2 per cent of GDP since the February 2020 MPC meeting.

Those who follow the ECB will note he announced something rather familiar.

 it has been decided to conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenors up to three years for a total amount of up to ₹ 50,000 crores, to begin with, in tranches of appropriate sizes.

Oh and as we are looking at India by ECB I am referring to the central bank and not cricket.

If we switch to the money supply data we see that in the fortnight to April 10th the heat was on as M3 grew by 1.2% raising the annual rate of growth to 10.8%. But there was a counterpoint to this as there were heavy withdrawals of demand deposits with fell by 7.8% in a fortnight. We have looked before at the problems of the Indian banking sector and maybe minds were focused on this as the pandemic hit.

Gold

I am switching to this due to its importance in India and gold bugs there may be having a party as they read the Business Standard.

The sharp rise in the prices of gold —which almost doubled over the past one year —has been the only good for investors at a time when both equities and debt returns have been under pressure.

That price may be a driving factor in this.

India’s demand declined by a staggering 36 per cent during the January-March quarter, to hit the lowest quarterly figure in 11 years due to nationwide that has forced the closure of wholesale and retail showrooms.

Comment

The situation is made worse by the fact that India starts this phase as a poor country. Things are difficult to organise in such a large country as the opening of the Liquor Shops today has shown.

Long queues witnessed outside #LiquorShops in several parts of Chhattisgarh, people defy social distancing norms at many places: Officials ( Press Trust of India)

Also a problem was around before we reached the pandemic phase.

Armies of locusts swarming across continents pose a “severe risk” to India’s agriculture this year, the UN has warned, prompting the authorities to step up vigil, deploy drones to detect their movement and hold talks with Pakistan, the most likely gateway for an invasion by the insects, on ways to minimise the damage. ( Hindustan Times from March)

Now let me give you another Indian spin. The gold issue has several other impacts. No doubt the RBI is calculating the wealth effects from the price gain. However I think of it is another form of money supply as to some extent it has that function there. Also part of the gain is due to another decline in the Rupee which is at 75.6 to the US Dollar. Regular readers will recall it was a symbolic issue when it went through 70. This creates a backwash as it will make people turn to gold even more.

Let me finish with some good news which is that the much lower oil price will be welcome in energy dependent India.

Podcast

 

 

 

 

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

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

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

Industrial Production

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

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

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

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

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

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

The annual comparison just compounds the gloom.

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

Looking Ahead

Yesterday also saw bad news on the orders front.

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

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

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

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

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

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

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

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

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

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

The annual picture is below.

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

Monetary Policy

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

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

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

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

It wont make any difference

Fiscal Policy

The policy was explained by Reuters in late October.

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

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

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

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

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

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

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

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

Comment

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

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

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

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

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

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

 

 

Germany escapes recession for now but what happens next?

This morning has brought the economics equivalent of a cliffhanger as we waiting to see if Germany was now in recession or had dodged it. The numbers were always going to be tight. so without further ado let me hand you over to Destatis.

WIESBADEN – In the third quarter of 2019, the price-adjusted gross domestic product in Germany increased by 0.1% on the second quarter of 2019, after adjustment for seasonal and calendar variations.

So Germany has avoided what has become called the technical definition of recession which is two quarters of contraction in a row. However there was a catch.

According to the most recent calculations, taking into account newly available statistical information, the GDP was down 0.2% in the second quarter of 2019, which is 0.1 percentage points more than first published.

So like the UK the German economy shrank by 0.2% in the second quarter which means that over the half-year the economy was 0.1% smaller. Putting it another way the economy was at 107.20 at the end of the first quarter and at 107.03 at the end of the third quarter.

Just to add to the statistical party the first quarter saw growth revised higher to 0.5% so we have a pattern similar to the UK just weaker. As to the detail for the latest quarter we are told this.

positive contributions in the third quarter of 2019 mainly came from consumption, according to provisional calculations. Compared with the second quarter of 2019, household final consumption expenditure increased, and so did government final consumption expenditure. Exports rose, while imports remained roughly at the level of the previous quarter. Also, gross fixed capital formation in construction was up on the previous quarter. Gross fixed capital formation in machinery and equipment, however, was lower than in the previous quarter.

As you can see it was consumption which did the job which was presumably driven by the employment figures which remain strong.

Compared with September 2018, the number of persons in employment increased by 0.7% (+327,000). The year-on-year change rate had been 1.2% in December 2018, 1.1% in January 2019 and 0.8% in August 2019.

So rising employment albeit at a slowing rate and with it looks as though there has been solid real wage growth too.

 In calendar adjusted terms, the costs of gross earnings in the second quarter of 2019 rose by 3.2% year on year,

At that point inflation had slowed to 1.5% so as far as we know there has been both employment and real wage growth. So we might have expected consumption growth to be higher than it has been.

We are in awkward territory with the mention of exports because they do not count in the output version of GDP as they are sales hence they go in the expenditure version. So we look at production for overseas sales which is problematic as shown below.

Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 4.6% and imports by 2.3% in September 2019 year on year. After calendar and seasonal adjustment, exports were up 1.5% and imports 1.3% compared with August 2019.

But whilst that is good GDP counts this.

In September 2019, production in industry was down by 0.6% on the previous month and -4.3% on the same month a year earlier (price and calendar adjusted)

Now production is not the only source for exports as services are not in it but services will have had to had been booming so we need more information I think.

Statistical Humility

The analysis of GDP numbers to 0.1% is something I have warned about before. Let me illustrate with this from Sweden Statistics earlier.

Statistics Sweden is publishing revised statistics on the Labour Force Surveys (LFS) for the period July 2018 to September 2019, in which only half of the sample is used, due to an earlier identification of quality deficiencies……..this increases the uncertainty, particularly at a more disaggregated level.

You can say that again! Or to put it another way the unemployment rate of 7.4% in September is now reported as 6.6%. Now we all make mistakes and honesty is the best policy but an error of this size begs so many questions. It reminds me of the mistake made in Japan over the measurement of real wages which was in the same direction although of course had the opposite implication for the economy.

Whilst neither example was about GDP the same principles hold and in the case of Sweden I think the mistake is worse because unemployment is a much simpler concept.

Looking Ahead

This could not have been much more negative.

Business confidence across the German private sector
has slipped to the lowest since the global financial crisis,
according to the latest IHS Markit Global Business
Outlook survey. Output of goods and services is on
average expected to fall slightly over the next 12 months,
while firms have signalled their intention to cut
workforce numbers for the first time in ten years.
Concerns about future profits are meanwhile reflected
in a negative outlook for capital spending (capex).

Now Markit have not had a good run on Germany as they have signalled growth when there has not been any so I am not sure where this takes us? Where there might be some traction is in this bit as we have noted already that employment growth is slowing.

now these latest figures point to private sector workforce numbers actually falling over the coming year.

As to other areas the example is mixed. For now the news seems bad and you will have probably guessed the area.

“By the end of 2022, Mercedes-Benz Cars plans to save more than 1 billion euros in personnel costs. To this end, jobs are to be reduced,” the company said in a statement.

“The expanded range of plug-in hybrids and all-electric vehicles is leading to cost increases that will have a negative impact on Mercedes-Benz Cars’ return on sales,” it added. ( thelocal.de )

Looking further ahead there is potentially some better news on the horizon.

Tesla’s chief executive, Elon Musk, has said Berlin will be the site of its first major European factory as the carmaker’s expansion plans power ahead.

“Berlin rocks,” Mr Musk said, adding Tesla would build an engineering and design centre in the German capital.

Tesla previously said it aimed to start production in Europe in 2021.

The moves come as the firm, which has also invested heavily in a Chinese factory, faces intensifying competition in the electric vehicle industry.

Comment

Let me start with this just released by the Financial Times.

Learning to love negative interest rates……..As evidence accumulates the naysayers case becomes less convincing.

So Germany should be booming right? After all it not only has an official deposit rate of -0.5% but it also has a benchmark bond yield of -0.3%. Yet the economy had a burst of growth and has now pretty much stagnated for a year. So actually it is the case for negative interest-rates which has got weaker. No doubt more of the same “medicine” will be prescribed.

We find ourselves observing what has become a two-speed economy where the services sector is struggling to make up for the declines in the manufacturing sector or if you like they are turning British. There are deeper questions here as for example how much manufacturing will remain in the West?

Also the money supply situation which has been helpful so far in 2019 may be turning lower for the Euro area as a whole.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

So for now there is not much sign of a turn for the better and if we stick to annual GDP growth as our measure that will be focused on the first quarter next year as there is a 0.5% reading to be replaced.  Germany must have its fingers crossed for the end of the trade war.

The Investing Channel

 

 

Is Hong Kong in a recession or a depression now?

Some days an item of news just reaches out and grabs you and this morning it has come from the increasingly troubled Hong Kong. We knew that there would be economic consequences from the political protests there but maybe not this much.

The Census and Statistics Department (C&SD) released today (October 31) the advance estimates on Gross Domestic Product (GDP) for the third quarter of 2019.     According to the advance estimates, GDP decreased by 2.9% in real terms in the third quarter of 2019 from a year earlier, compared with the increase of 0.4% in the second quarter of 2019.

The commentary from a government spokesman confirmed various details.

marking the first year-on-year contraction for an individual quarter since the Great Recession of 2009, and also much weaker than the mild growth of 0.6% and 0.4% in the first and second quarters respectively. For the first three quarters as a whole, the economy contracted by 0.7% over a year earlier. On a seasonally adjusted quarter-to-quarter comparison, the fall in real GDP widened to 3.2% in the third quarter from 0.5% in the preceding quarter, indicating that the Hong Kong economy has entered a technical recession.

The concept of recession first switched to technical recession meaning a minor one ( say -0.1% or -0.2% GDP growth) but now seems to encompass what is a large fall. Time for Kylie again I guess.

I’m spinning around
Move outta my way

A clue to the change is the way that the year so far has fallen by 0.7% in GDP terms. If we look back we see that annual GDP growth of 3.8% slowed a little to 3% from 2017 to 18. But the quarterly numbers have been falling for a while. In annual terms GDP growth was 2.8% in the third quarter of 2018 but then only 1.2% in the last quarter and then going 0.6%, 0.4% and now -2.9% this year.

The Details

If we take the advice of Kylie and start breaking it down we see this.

Gross domestic fixed capital formation decreased significantly by 16.3% in real terms in the third quarter of 2019 from a year earlier, compared with the decrease of 10.8% in the second quarter.

Investment has taken quite a dive as this time last year it was increasing at an annual rate of 8.6%. Indeed the private-sector full stop took a fair hammering.

private consumption expenditure decreased by 3.5% in real terms in the third quarter of 2019 from a year earlier, as against the 1.3% growth in the second quarter.

The one bright spot was government expenditure.

     Government consumption expenditure measured in national accounts terms grew by 5.3% in real terms in the third quarter of 2019 over a year earlier, after the increase of 4.0% in the second quarter.

Is it too cheeky to suggest that at least some of this will be police overtime? So far it is not increased unemployment payouts

     The number of unemployed persons (not seasonally adjusted) in July – September 2019 was 120 300, about the same as that in June – August 2019 (120 600). The number of underemployed persons in July – September 2019 was 41 500, also about the same as that in June – August 2019 (41 000).

The flickers of acknowledgement of the present troubles were in the employment not the unemployment numbers.

 Total employment decreased by around 8 200 from 3 863 600 in June – August 2019 to 3 855 400 in July – September 2019. Over the same period, the labour force also decreased by around 8 500 from 3 984 200 to 3 975 700.

Also does the labour force fall suggest some emigration?

However you spin it the commentary is grim.

As the weakening economic conditions dampened consumer sentiment, and large-scale demonstrations caused severe disruptions to the retail, catering and other consumption-related sectors, private consumption expenditure recorded its first year-on-year decline in more than ten years. The fall in overall investment expenditure steepened amid sagging economic confidence.

Trade

This added to the woes as you can see below.

Over the same period, total exports of goods measured in national accounts terms recorded a decrease of 7.0% in real terms from a year earlier, compared with the decrease of 5.4% in the second quarter. Imports of goods measured in national accounts terms fell by 11.1% in real terms in the third quarter of 2019, compared with the decline of 6.7% in the second quarter.

Ironically this looks like a boost to GDP from a tale of woe. This is because the fall in imports ( a boost to GDP) is larger than the fall in exports. This situation reverses somewhat in the services sector presumably mostly due to lower tourism revenue.

Exports of services dropped by 13.7% in real terms in the third quarter of 2019 from a year earlier, following the decline of 1.1% in the second quarter. Imports of services decreased by 3.8% in real terms in the third quarter of 2019, as against the increase of 1.3% in the second quarter.

Looking Ahead

That was then and this is now so what can we expect?

Looking ahead, with global economic growth expected to remain soft in the near term, Hong Kong’s exports are unlikely to show any visible improvement. Moreover, as the adverse impacts of the local social incidents have yet to show signs of abating, private consumption and investment sentiment will continue to be affected. The Hong Kong economy will still face notable downward pressures in the rest of the year.

If we look at the results from the latest official quarterly business survey and note what happened in the third quarter then we get a proper Halloween style chill down the spine.

 For all surveyed sectors taken together, the proportion of respondents expecting their business situation to be worse (32%) in Q4 2019 over Q3 2019 is significantly higher than that expecting it to be better (7%).  When compared with the results of the Q3 2019 survey round, the proportion of respondents expecting a worse business situation in Q4 2019 as compared with the preceding quarter has increased to 32%, against the corresponding proportion of 17% in Q3 2019.

According to the South China Morning Post then prospects for China continue to weaken.

The manufacturing purchasing managers’ index (PMI), released by the National Bureau of Statistics (NBS) on Thursday, stood at 49.3 in October, down from 49.8  in September.  The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – came in at 52.8 in October, below analysts’ expectations for a 53.6 reading. The figure was also down from September’s 53.7, dropping to its lowest level since February 2016.

As to Japan there seems to be little hope as the Bank of Japan just seems lost at sea now.

As for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

Comment

As you can see the situation in Hing Kong is clearly recessionary and the size of it combined with the fact that it looks set to continue means it is looks depressionary as well. There has been a monetary respone but this of course only represents maintenance of the US Dollar peg.

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) that the Base Rate was adjusted downward by 25 basis points to 2% with immediate effect according to a pre-set formula.  The decrease in the Base Rate follows the 25-basis point downward shift in the target range for the US federal funds rate on 30 October (US time).

As to the guide provided by the narrow money supply there is this.

The seasonally-adjusted Hong Kong dollar M1 decreased by 0.5% in September and by 3.4% from a year earlier, reflecting in part investment-related activities.

However you spin it people are switching from Hong Kong Dollars to other currencies.

The Investing Channel

 

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

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

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

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

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

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

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

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

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

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

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

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

UK GDP

This brought some welcome news.

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

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

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

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

The shift to Services

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

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

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

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

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

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

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

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

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

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

August

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

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

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

Comment

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

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

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

So what? Go and look at the supporting data

 

The Investing Channel

Is this the manufacturing recession of 2019?

The year so far has seen increasing focus on a sector of the economy that has been shrinking in relative terms for quite some time. Actually in the credit crunch era it has in some places shrunk in absolute terms as this from my home country illustrates.

Production and manufacturing output have risen since then but remain 7.1% and 3.1% lower, respectively, for July 2019 than the pre-downturn peak in February 2008.

This means that it is now a little over 10% of total UK GDP and so it is completely dwarfed by the services sector which is marching on its way to 80%.Thus we have a context that the current concern about a recession is odd in the sense that we have in fact been in a depression as output more than a decade later is below the previous peak.Yet there is much less concern over that.

We learn more from the detail of the breakdown from the official analysis of the period 2008-18.

The recovery of the manufacturing sector from the 2008 recession has been heavily dependent upon four out of the 24 industries; manufacture of food, motor vehicles, other transport equipment and repair of machinery………..Without the positive impact of these four industries, the Index of Manufacturing in Quarter 4 (Oct to Dec) 2018 would still be below its lowest value during the 2008 recession.

There is always a danger in any analysis that excludes the things that went up but we do learn that there has been quite a shift. Also a lot of the sector has been in an even worse depression than the average. Then we have the situation where two of the fantastic four currently have problems to say the least.

However caution is required as I so often observe and today it is highlighted by this.

The pharmaceutical industry was a strong performer during the recession; at the industry’s highest point in April 2009 the industry had grown by 22% since Quarter 1 (Jan to Mar) 2008. However, the industry would steadily decline from this point over the decade and would finish in Quarter 4 (Oct to Dec) 2018 23% below its Quarter 1 2008 value, though some of this decline is due to business restructuring.

Something looks wrong with that and if I was in charge I would be looking further as to whether this is/was really like for like. For newer readers I looked because in recent times the pharmaceutical sector has been a strength in the data albeit with erratic swings.

The United States

If we now switch from an underlying issue of depression in some countries to the more recent one of recession well this from the Institute of Supply Management or ISM yesterday upped the ante.

Manufacturing contracted in September, as the PMI® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. This is the lowest reading since June 2009, the last month of the Great Recession, when the index registered 46.3 percent.

This seemed to catch out quite a few people and led to some extraordinary responses like this on CNBC.

“There is no end in sight to this slowdown, the recession risk is real,” Torsten Slok, chief economist at Deutsche Bank said in a note Tuesday after the report.

I agree on the recession risk but “no end in sight”? That applies more to the problems Deutsche Bank itself faces. If we switch to the detail there are some clear things to note which is that is showed a more severe contraction and that the “Great Recession” klaxon was triggered. Furthermore the trade war influence was impossible to avoid.

ISM®’s New Export Orders Index registered 41 percent in September, 2.3 percentage points lower compared to the August reading of 43.3 percent, indicating that new export orders contracted for the third month in a row. “The index had its lowest reading since March 2009 (39.4 percent).

The news reached the Donald and his response was to sing along with “It wasn’t me ” by Shaggy.

As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!

So far this has not reached the official output numbers. Here is the August announcement from the Federal Reserve.

Manufacturing production increased 0.5 percent, more than reversing its decrease in July. Factory output has increased 0.2 percent per month over the past four months after having decreased 0.5 percent per month during the first four months of the year.

Putting it another way the output level in August was 105.2 which was the same as March. So according to the official data the only impact it has picked up is an end to growth if we try to look through the monthly ebbs and flows.

The World

There is a survey conducted on behalf of JP Morgan which yesterday told us this.

National PMI data signalled deteriorations in overall business conditions in 15 of the countries covered. Among the larger industrial regions, growth was registered in both the US and China. In contrast, Japan saw further contraction while the downturn in the euro area deepened. The rate of decline in the eurozone was the fastest in almost seven years, mainly due to a sharp deterioration in the performance of Germany.

They showed a slight improvement to 49.7 but there is the issue of the US where JP Morgan thinks there has been growth whereas the ISM as we have just observed does not. Here is the Markit PMI view on a possible reason.

Divergence is possibly related to ISM membership skewed towards large multinationals. IHS Markit panel is representative mix of small, medium and large (and asks only about US operations, so excludes overseas facilities)

Financial markets hit the ISM road and were probably also influenced by this from Bloomberg.

Results were disastrous for leading Asian automakers such as Toyota Motor Corp. and Honda Motor Co., which each suffered double-digit declines that were worse than analysts expected. While a fuller picture will emerge Wednesday when General Motors Co (NYSE: GM). and Ford Motor (NYSE:F) Co. are due to report, the poor performance suggests that overall deliveries of cars and light trucks could come in worse than the 12% drop anticipated by analysts, based on six estimates.

Comment

There are various strands to this of which the first is the motor industry. In the credit crunch era it has seen a lot of support ranging from “cash for clunkers” style operations to much cheaper credit. In the UK it is often cheaper to buy via credit that to pay up front which is part of the theme that has seen this according to the Finance and Leasing Association.

 Over 91% of all private new car registrations in the UK were financed by FLA members.

That seems to be wearing off so we were due something of a dip and that has been exacerbated by the diesel crisis where buyers have understandably lost faith after the dieselgate scandal and the ongoing emissions issue.

Politicans are regularly on the case which was highlighted in the UK by the “march of the makers” claim of former Chancellor George Osbourne. Whilst there was some growth it was hardly a march and now we have President Trump pushing manufacturing as part of MAGA but more latterly giving it a downwards tug with his trade war.

Then there is the issue of green policies which have to lead to less manufacturing but get deflected onto talk of more solar panels and windmills and the like. On that road the depression theme returns.

 

Is Germany the new sick man of Europe?

The last twelve months have seen quite a turn around in not only perceptions about the performance of the German economy but also the actual data. With the benefit of hindsight we see that there was a clear peak at the end of 2017 when after a year of strong economic growth ( 0.6% to 1.2% quarterly) the annual rate of Gross Domestic Product or GDP growth reached 3.4%. Then things changed and quarterly growth plunged to 0.1% as 2018 opened as quarterly growth fell to 0.1%.

Actually there was a warning sign back then because looking at my post from the 3rd of January 2018 I reported on the good news as it was then but also noted this.

Although there was an ominous tone to the latter part don’t you think?! We have also learnt to be nervous about economic all-time highs.

This was in response to this from the Markit PMI.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

Actually back then we did not know how bad things were because the GDP numbers were wrong as the Bundesbank announced yesterday.

In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%).

So as you can see we have something else to add to the issues with GDP as in this instance it completely missed the turn in the German economy. The GDP data in fact misled us.

If we move forwards to April 25th last year we see the Bundesbank had seen something but blamed the poor old weather.

The Bundesbank expects the German economy’s boom to continue, although the Bank’s economists predict that the growth rate of gross domestic product might be distinctly lower in the first quarter of 2018 than in the preceding quarters.

The “boom to continue” then went in annual economic growth terms 2.3%, 2.1%, 1.1%, 0.6%,0.9% and most recently 0.4%.If we switch to the actual level it is not much of a boom to see GDP rise from 106.04 at the end of 2017 to 107.03 at the end of the second half of 2019.

Looking Ahead

The Bundesbank has changed its tone these days or if you prefer has been forced to change its tone so let us dip into yesterday’s monthly report.

“The domestic economy is still doing well; the weaknesses have so far been concentrated in industry and exports. International trade disputes and Brexit are important reasons behind this,” Mr Weidmann said.

As you can see its President has a good go at blaming Johnny Foreigner and in particular the UK. Actually the latter is somewhat contradicted by the report itself as it points out Germany has also benefited from the UK in 2019.

In particular, exports to the United Kingdom were weak in the second quarter. A contributing factor to this, according to the Bundesbank’s economists, was the original Brexit date scheduled for the end of March. This resulted in substantial stockpiling in the United Kingdom over the winter months. This led to a countermovement in the second quarter.

Actually the report itself does not seem entirely keen on the idea that it is all Johnny Foreigner’s fault either.

“Sales in construction and in the hotel and restaurant sector declined. Wholesale trade slid into the downturn afflicting industry”, the Bank’s economists write. Only retail trade as well as some other services sectors are likely to have provided positive momentum.

So it is more widespread than just trade.In fact if we look at the details below we see that it was the 0.4% growth in the first quarter which looks like the exception to the present trend.

Construction output declined steeply after posting a sharp increase during the first quarter due to favourable weather conditions. Meanwhile, the demand for cars, pent up by delivery bottlenecks last year, had largely been met at the start of 2019 and did not increase further in the second quarter.

Ominous in a way as we wonder if it might get the same treatment as the first quarter of 2018. But if we take the figures as we presently have them then GDP growth in the first half of this year has been a mere 0.3%. But they are not expecting much better and maybe worse.

Economic activity could decline slightly again in the current quarter, the economists suggest. There are, they write, no signs yet of an end to the downturn in industry, adding: “This could also gradually start to weigh on a number of services sectors.”

They also touch on an area which concerns others.

Leading labour market indicators painted a mixed picture. Industry further scaled back its hiring plans. By contrast, in the services sectors, except the wholesale and retail trade, and in construction, positive employment plans dominated.

Is the labour market turning? This morning’s numbers only really tell us what we already knew.

The year-on-year growth rate was slightly lower in the second quarter than in the first quarter of 2019 (+1.1%) and in the fourth quarter of 2018 (+1.3%).

Maybe we learn a little more here.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment increased by 50,000, or 0.1%, in the second quarter of 2019 compared with the previous quarter.

That number looks a fair bit weaker.

Markit PMI

This has not had a good run and let me illustrate this with the latest update from the 5th of this month.

The combination of a deepening downturn in manufacturing output and slower service sector business activity growth saw the Composite Output Index register 50.9 in July, down from 52.6 in June and its lowest reading in just over six years.

Yes it shows a fall but it has continued to suggest growth for Germany and sometimes strong growth when in fact there was not much and then actual declines.

Comment

The situation here is revealing on quite a few levels. Let me start with one perspective which is ironically provided by ECB President Mario Draghi when he suggested his policies  ( negative interest-rates and QE) added 1.5% to GDP. That was for the Euro area overall but if we apply it to Germany we see that the boom fades a bit and more crucially the German economy started “slip-sliding away” as soon as the stimulus began to fade. That is rather a different story to the consensus that it is the southern European countries that have depended most on stimulus policies.

Next is the German economic model which relies on exports or if you prefer demand from abroad. We have seen a phase where this has been reduced at least partly due to the “trade war” but also I think that the issues with diesel engines which damaged the reputation of its car manufacturers hit too. Whatever the reason there is not a lot behind it in terms of domestic consumption.

The issue with domestic consumption gets deeper as we note that economic policy is sucking demand out of the economy. At the beginning of the year the finance ministry thought that the surplus would be 1.75% of GDP. That seems much less likely now as economic growth has faded but it is one of the reasons why we keep getting reports that Germany will provide a fiscal stimulus which reached 50 billion Euros yesterday. With all of its bond maturities showing negative yields it could easily do so and in fact would be paid to do it, but it still looks unlikely as I note the mention of a “deep recession” being required.

As to my question in some ways the answer is yes. But we need to take care as the domestic consumption problem was always there and once export growth comes back we return to something of a status quo. I also expect the ECB to act in September but on the other side who would expect Germany to be the economic version of a junkie desperate for a hit?

 

 

 

 

Is the UK in recession or not?

Today sees or if you read this later has seen the announcement of a new UK Prime Minister. Most likely Boris Johnson but possibly Jeremy Hunt faced some unwelcome news from the National Institute for Economic and Social Research or NIESR yesterday.

Economic growth has stalled and there is around a one-in-four chance that the economy is already in a technical recession.

The opening part of the statement is true as the 0.5% GDP growth in the first quarter will not be repeated and the Bank of England has reduced its forecast from 0.2% to 0%. What they did not say is that as we look at our peers this is a pretty common phenomenon. For example both Germany and Italy fear a contraction in the quarter just gone as this from the latest Bank of Italy economic review points out.

In the second quarter, economic activity in Italy may have remained unchanged or decreased slightly; it was affected by the weak industrial cycle, common to Germany too, caused by persisting trade tensions.

Actually more disturbingly the Bank of Italy thinks things may then get even worse.

The Bank of Italy’s surveys show that firms expect a slowdown in demand over the next few months and indicate a very modest growth in planned investment for the current year.

France seems to have a little growth but not much so the general picture is weak.

Then we get to the phrase “technical recession” . Sadly they do not define this as some describe this as the formal version which is two quarters of economic contraction. If they mean a monthly fall because of course we have monthly GDP data then they are in a bit of a mess because we got this in December.

 However, monthly growth contracted by 0.4% in December 2018 ( UK ONS )

Then it grew by 0.5% in January so quite what that tells us I am not sure about from the monthly date being very volatile.

What is the current position?

Here the monthly GDP review from the NIESR.

The UK economy is on course to contract by 0.1% in the second quarter of 2019. Two quarters of contraction would mean that the economy is in a technical recession, but the initial outlook for the third quarter of 2019 is for growth of 0.2% . If correct, that would still imply that the economy has lost significant moment since the first quarter.

Okay so we learn that recession would have done. I guess they thought it would attract the media more if they used technical recession. Anyway they do not think we will have a formal recession and as it happened the Office for National Statistics suggested we seem to have moved away from a quarterly contraction. Here are its new faster indicators of economic activity. These are not national statistics but then one of its best measures ( RPI) is not either.

The all-industry quarter-on-quarter turnover diffusion index was 0.02 in Quarter 2 2019, slightly above its 2008 to 2018 average; the level of 0.02 means there were very slightly more firms reporting an increase in turnover between Quarter 1 (Jan to Mar) 2019 and Quarter 2 2019 than the number of firms reporting a decrease in turnover between the two periods……..The quarter-on-quarter turnover diffusion index for the services industry was 0.03 in Quarter 2 2019, substantially above its historical average.

Care is needed as for example to get a real number from turnover you need an inflation measure or deflator. But the services number seem hopeful as it is by far the main player in the UK economy.

The Value Added Tax (VAT) indicators show a mostly positive picture for Quarter 2 (Apr to June) 2019.

Moving on the road traffic data for lorries was slightly weaker in May which may well be welcomed in a general sense but less so for the economy. Shipping traffic however went the other way.

The number of ships visiting important UK ports increased in May 2019 to its highest level since comparable data became available in October 2018. The number of ships was 9% higher in May 2019 than April 2019, although these data are non-seasonally adjusted.

Of course in July we have become rather obsessed with the number of UK ships in Iranian ports! Actually the link between that ship and the UK seems a bit tenuous but there you have it. Also I wonder what an unimportant port is?

Brexit

I agree with the “very murky” bit.

The outlook beyond October, when the United Kingdom is due to leave the European Union, is very murky indeed with the possibility of a severe downturn in the event of a disorderly no-deal Brexit.

For a start we may not leave in the same manner that we did not leave at the end of March. Also the NIESR has reined back its rhetoric in this area.

On the assumption that a no-deal Brexit is avoided, the economy is forecast to grow at around 1 per cent in 2019 and 2020 as uncertainty continues to hold back investment and productivity growth remains weak.

This continues here.

In our main-case forecast scenario, economic conditions are set to continue roughly as they are, with high levels of employment and capacity utilisation but slow growth as businesses refrain from investment in view of continuing high uncertainty about future trading relations. CPI inflation would continue to be close to target.

That is a change from back in the day when we were told this.

In the longer run, our analysis suggests that it would lower GDP by between 1.5 per cent and 7.8 per cent in 2030, also compared with a world in which the UK voted to remain.

Of course we might be lower than otherwise in 2030 but in most scenarios we would have very little idea how true it was. They think a no-deal scenario would hammer 2020.

 In an alternative orderly no-deal scenario, we would expect GDP growth to fall to zero in 2020 and CPI inflation to rise above 4 per cent in response to a lower exchange rate and accommodative monetary policy.

This next bit I found interesting because we keep being told we need more fiscal policy, whereas in this report it does not have much impact.

Fiscal policy measures may be required to help smooth the adjustment to a no-deal Brexit though, as shown in Box C, they would be unlikely to have a large macroeconomic effect.

Comment

So we see that for all the column inches devoted to it there was in fact much less to the NIESR report than you might think. One of the signals I report on regularly has been flashing a warning for some time. This is the issue of UK Gilt (bond) yields. Both the two-year and five-year yields are below 0.5% suggesting yet another interest-rate cut is on the cards. So the general consensus is for weak growth at best. Also that view seems to be spreading as this from a Markit survey suggested yesterday.

There were some noteworthy developments in
interest rate expectations in July, as the proportion
of UK households predicting the next move by the
Bank of England to be a cut rose to its highest in
over two-and-a-half years.

Tucked away in the report was a hopeful signal which correlates with the recent strong retail sales growth.

UK households continued to signal decent growth
of incomes from employment, which corroborates
what recent ONS data have shown and is a positive
indication for consumer spending this summer.

If we remind ourselves of my view that the UK economy has been growing at around 0.3% per quarter for a while then after 0.5% in the first quarter we would literally expect ~0.1% in the second. With the inaccuracies in the data and the problems around the world signalled by the trade data in the Pacific we looked at yesterday we could see a negative quarterly number for growth. However we would be very unlikely to be alone….