UK construction has been growing rather than being in recession. Ouch!

This morning brings us more on what has become the troubled construction sector in the UK. Or to be more specific what we have been told by our official statisticians is troubled. Regular readers will be aware that I found some of this bemusing partly due to geographical location as there is an enormous amount of building work going on at Nine Elms around the new US Embassy. The last time I counted there were 32 cranes in the stretch between Battersea Dogs and Cats Home and Vauxhall. Also there have been problems with the official construction data series of which more later going back some years which have led to me cautioning that the numbers may need to be taken with the whole salt-cellar rather than just a pinch of salt.

What happened last week?

I pointed out on Friday that there had been ch-ch-changes.

This has been driven by revised construction estimates, with its output growth revised up by 1.9 percentage points to negative 0.8%

This was the road on which total UK GDP growth was revised up from 0.1% to 0.2%. It takes quite a lot for something which is only 6.1% of total output to do that but as it was originally reported at -3.3% then -2.7% and now -0.8% you can see that the original number was way off. This is a familiar pattern albeit not usually on this scale and does pose a systemic question. After all if you are struggling to measure something which is mostly very tangible such as a building and the associated economic output how can you measure the more intangible outputs of the services sector?

Actually there was more as the reformist wave spread across the data for 2017 as well.

While the 0.8% fall in Quarter 1 marks the largest quarterly decline since Quarter 3 (July to Sept) 2012, it is now estimated that this is the first fall since Quarter 3 2015 – earlier estimates had recorded falling output through much of 2017.

This does alter the narrative as we had been given numbers indicating a recession and at the worst hinting at a possible start of a depression, so it is hard to overstate this. Let us drill down into the detail.

Today’s new construction estimates show a much stronger growth profile throughout 2017, with upward revisions recorded in each quarter except Quarter 3

The major shift numerically is in the first half of 2017  as the first quarter goes from growth of 2.4% to 3.2% and the second from -0.4% to 0.4% . However in terms of impression and mood the last quarter may have hit the hardest as after previous doom it had the gloom of -0.1% whereas in fact it grew by 0.3%, Adding it all up gives us this.

Construction output is now estimated to have increased by 7.1% in 2017, up from 5.7%

What has changed?

Reality is of course unchanged by the way that it has been officially measured has seen these changes.

As part of the wider improvement programme for construction statistics, ONS has introduced significant improvements to the method for imputing data for businesses that have not yet returned their ONS survey responses.

Oh! That rather sends a chill down the spine as in essence we are back to fantasy numbers yet again and yet again they are in the housing sector. I am willing to give them a chance but can we really not get a grip on the actual numbers? Also I note that things in terms of actual measurement seem to be getting worse rather than better and the emphasis is mine.

Quarter 1 2018 is affected to a greater extent than Quarter 1 2017 due to the higher number of imputations in more recent periods due to lower response rates, as well as the inclusion of the bias adjustment.

In addition there has been a change to the seasonal adjustment which I take as an admittal of the problem I have highlighted before with the first quarter of the year which has been a serial underperformer. The combination of the changes has seen the beginning of the last two years revised up by 0.8% in construction terms so maybe this is some help with this issue.

Where are we now?

Let us take Kylie’s advice and Step Back in Time to 2016 about which we were told this.

The value of construction new work in Great Britain continued to rise in 2016, reaching its highest level on record at £99,266 million; driven by continued growth in the private sector.

Just for clarity this is far from all being new work as shown below.

Aside from all new work, all repair and maintenance equated to £52,223 million in 2016. This is an increase of £1,679 million compared with 2015.

There was a common factor in both new and maintenance work in 2016 in that the growth was essentially in the private-sector.

That number represented quite a boom. The nadir for the construction sector had been unsurprisingly in 2009 at the height of the credit crunch impact when output was £65.9 billion. Things got better but then there was something of a double-dip in 2012 when it fell back to £69.7 billion. As you can see from the 2016 number it was then a case off pretty much up,up and away from then.

The numbers above are in current prices rather than the usual deflated version which reminds us again that the deflator has been singing along to Lyndsey Buckingham.

I think I’m in trouble
I think I’m in trouble


Today’s update and if you like revisionism represents quite a change. Previously 2017 had seen the UK construction industry behave like one of those cartoon characters who are going so fast they do not spot the edge of a cliff but even when they go over it carry on briefly before they drop like a stone. On the road we were in a recession with flashes of a depression. Now we see that it was a year which opened very strongly but then slowed which is very different. Annual growth of 7.1% does not to say the least fit well with a depression scenario.

Now we see that we are being told the same for 2018.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

Sound familiar? Well Kelis would offer this view.

Mght trick me once
I won’t let you trick me twice
No I won’t let you trick me twice

This really is quite a mess and regular readers will be aware it has been going on for some years. There was an attempt at an ongoing fix by “improving” the inflation measure called the deflator. Then there was an attempted “quick-fix” by switching a services company into construction. Plainly they did not work and frankly the idea of having these construction numbers as part of the monthly GDP numbers we get next week is embarassing. They are simply not up to it.

As to where we are now the Agents of the Bank of England offer a view.

Construction output remained little changed on a year ago, and contacts were cautious about the short-term outlook .

So now some 3% lower then? Also the Markit survey has its doubts.

June data revealed a solid expansion of overall
construction activity, underpinned by greater
residential work and a faster upturn in commercial

Indeed it was quite upbeat.

There were also positive signs regarding
the near-term outlook for growth, as signalled by the
strongest rise in new orders since May 2017 and the
largest upturn in input buying for two-and-a-half

So apologies for reporting official data which has turned out not to be worth the paper it was printed on. However strategically I think it is correct to follow the official data whilst also expressing doubts about systemic issues. Next week when we get the monthly GDP number we will return to a media bubble analysing each 0.1% which needs to be looked through the lens of a sector which has just been revised by 2,5%.








Brazil has hopes for an economic recovery but it has little to do with Rio2016

The biggest show on Earth otherwise known as the Olympics is now in full flow in Brazil. Indeed there is a golden tinge now from a UK perspective after Adam Peaty broke the world 100 metres breaststroke record twice so congratulations to him. However more of a metaphor for the economic situation came from the two Olympic road races which were admittedly exciting but also very dangerous on the descent part. Of the four leaders at that point in the two races only one remained on her bike and the fall of Annemiek van Vleuten was sickening. I am pleased to hear she is recovering but concussion is an odd business so we cannot yet be sure, but we do know that cycling seemed to have elements of the film Rollerball for a while.

The economic situation

The IMF produced its review of Latin America in April and told us this.

Economic activity contracted by 3.8 percent in 2015 and is projected to decline again in 2016 at the same rate

Not exactly auspicious to hold an Olympics during what is clearly a recession and looking backwards may yet be defined as depression. What is the outlook?

sequential growth is projected to turn positive during 2017; nevertheless, output on average will likely remain unchanged from the previous year.

As to the list of causes of this situation it appears to be rather long.

Economic activity has been contracting because of low business and consumer confidence, high domestic policy uncertainty, weakening export prices, tightening financial conditions, and low competitiveness.


There has been a succession of these as the ratings agencies try as ever to catch up with reality. The Financial Times pointed out this in June.

Many blame Ms Rousseff’s government, which through the granting of ad hoc tax breaks and intervention in the economy sharply increased gross public debt to 67.5 per cent of GDP from just over 52 per cent in mid-2014.

In terms of the Euro area crisis these are by no means large numbers although of course it does exceed the levels of the Stability and Growth Pact but everyone ignored those! However I note that the latest Fitch downgrade from May shows a continued rise in the expected level of government debt.

Fitch forecasts the general government deficit to average over 8% of GDP in 2016-17, down from over 10% in 2015. On current policy settings, Fitch forecasts that Brazil will continue to incur primary deficits during 2016-17. The general government debt burden is expected to reach nearly 80% of GDP by 2017 (making Brazil one of the most indebted sovereigns in the ‘BB’ category) and remain on a rising trend unless growth recovers more materially and fiscal consolidation gains pace.

One factor that is very different to what has become considered to be a modern normal is the price Brazil has to pay to borrow. The ten-year Brazilian government bond yield is at 11.75% so we do see at least one country which the much maligned bond vigilantes have been at play! More seriously we see that debt costs seem set to be an increasing problem for Brazil as it borrows more. The world-wide move to lower bond yields has not passed Brazil by just merely that it started at a very high level of over 16% at the turn of the year.

Foreign investors will have had a good 2016 as not only have bond prices risen but the Brazilian Real has too from above 4 to the US Dollar to 3.16 now.

Interest-Rates and Inflation

With an economy in a severe recession then modern central banking theory would presumably have the official interest-rate in negative territory. Not the Banco Central De Brasil.

Therefore, the Copom unanimously decided to maintain the Selic rate at 14.25% p.a., without bias.

The reason that it has such a high interest-rate is the problem Brazil is experiencing with inflation.

For regulated prices, the Committee forecasts an increase of 6.6% in 2016, 0.2 p.p. lower than the forecast in the June Copom meeting. For 2017, the current forecast of a 5.3% increase in regulated prices is 0.3 p.p. higher than the forecast in the last Copom meeting.

Thus we see a central bank which is pretty much a pure inflation targeter and unfashionably for these times is pretty much ignoring the ongoing recession. The inflation target is higher than we are used to at 4.5% which provokes a wry smile as do not places like the IMF and many economists tell us that higher inflation is a form of economic nirvana?

The central bank also gives us a clear guide to how severe the fiscal problem in Brazil is.

The nominal result, which includes the primary result and nominal interests appropriated on an accrual basis, posted a deficit of R$32.2 billion in June. In the year, the nominal deficit totaled R$197.1 billion, compared with a deficit of R$209.6 billion in the same period of the previous year. In the 12-month period up to June, the nominal result posted a deficit of R$600.5 billion (9.96% of GDP), falling by 0.12 p.p. of GDP when compared with the May’s result.


Sadly this is soaring in response to the recession.

The unemployed population (11.6 million persons) rose 4.5% in relation to the quarter between January and March (11.1 million persons), a rise of 497 thousand persons looking for a job. Compared with the same quarter last year, this estimate increased 38.7%, a rise of 3.2 million unemployed persons in the workforce.

The unemployment rate has risen to 11.3% which is up 0.4% on the previously quarter and a chilling 3% compared to a year before.

In terms of an economy we have learnt that it is also important to look at employment trends as well.

The employed population (90.8 million persons) remained stable when compared with the quarter of January to March 2016. In comparison to the same quarter 2015, when the total employed persons was 92.2 million people, there was decrease of 1.5%, a reduction of 1.4 million persons among the employed.

The employment numbers may be suggesting an end to the current economic decline but the picture for real wages is grim.

The average usual real earnings from all jobs (R$ 1,972) fell 1.5% over the same quarter from January to March of 2016 (R$ 2,002) and had a drop of 4.2% in relation to the same quarter of the previous year (R$ 2,058).

Misery Index

It used to be fashionable to calculate a Misery Index which involved adding the inflation rate to the unemployment rate. Perhaps it got redacted as we began to be told that inflation is good for us. Anyway in Brazil the index is of the order of a thoroughly miserable 17%.

Will the Olympics help much?

Apparently not according to Fitch via Forbes.

Total Olympics infrastructure investment between 2009-2015 reached around R$38.5 billion ($12 billion), a small sum compared to the country’s $2.2 trillion economy. Tourism is expected to generate R$1.3 billion ($400 million) and increase real growth by just 0.02 percentage points – less than half amount originally estimated.


There is much to consider here and if we look for some perspective we see a period where Brazil rode the commodity price boom by exporting in essence to China. This was the era described by the then Finance Minister as the “Currency Wars” as the Real rose in response. This meant that Brazil had a type of Dutch Disease as other production such as manufacturing slowed. Whilst it had successes it is always worrying to see economic systems described as a model as that of President Lula was. There only way is invariably not up after that.

So bust followed and inflation accompanied it as the Real fell. Now we see unemployment rising strongly too. The immediate outlook is not good according to the latest business surveys.

Consequently, the seasonally adjusted Markit Brazil Composite Output Index climbed from 42.3 in June to 46.4 in July, its highest mark since March 2015.

However the decline appears to be slowing and let us hope that such a situation continues. There are plenty of challenges for the new government which includes all the ongoing corruption scandals that have so plagued modern-day Brazil. There is an irony though in that the turn coincides with the Olympics rather than being caused by it. At least there is now some hope that the decline will slow and then stop.

Number Crunching

Brexit seems to have had very little impact on UK football transfers from Europe as opposed to the “devastating consequences” promised by Karen Brady to the BBC. However there is one clear consequence so far.

Pogba fee is €105 million. That’s £89 million. Would’ve been £74 million had he been bought before the pound crashed ( @andymitten)

At that exchange rate he was previously sold by Manchester United for just over 1 million Euros so storming business for Juventus. Oh and of course it assumes no exchange-rate hedging.

Mark Carney prepares the ground for a UK Bank Rate cut

Yesterday was rather a significant day for the Bank of England although the so-called “Super Thursday” was in terms of actual action yet another damp squib.

at its meeting on 11 May, the MPC voted unanimously to maintain Bank Rate at 0.5% and to maintain the stock of purchased assets, financed by the issuance of central bank reserves, at £375 billion.

Only in terms of the “masterly inaction” so beloved of Sir Humphrey Appleby was that a Super Thursday. However there was a reminder of why back in Canada there was a campaign as shown below.

Mark Carney for Liberal Leader.

He was criticised for interfering in politics and as the party he would have led surged from third place to win the next election he showed an early sign of his Forward Guidance by instead opting for the Bank of England.

This brings us to yesterday which became – especially in the press conference – a one subject day as the consequences of Brexit ( the UK leaving the European Union) were debated. Those on the remain side will have cheered his claims whilst the leave camp will be disappointed and point out that the claims he does the wishes of George Osborne have another tick in the box. Perhaps this section of the remit is currently applying.

Subject to that, the MPC is also required to support the Government’s economic policy,

As ever let me avoid the politicking but point out that the UK establishment is solidly in one camp and the rhetoric from Martin Sanbu in the Financial Times is bizarre.

But the BoE uniquely combines the authority of a venerable government institution with a well-deserved reputation for independence and competence.

Forward Guidance on interest-rates? The “rebalancing” of Mervyn King? What of course we are seeing is one section of the UK establishment doffing its cap towards another.

Scaremongering from Governor Carney

There was a fair bit of this on display yesterday.

the EU referendum has begun to weigh on activity…… Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. …… This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth

At one point he went even further. From BBC News.

“could possibly include a technical recession”.

Here has invented his own term as we wonder exactly how this differs from a recession?! Perhaps he thought he would look clever. However in ordinary circumstances the establishment would round on someone saying this accusing them of “negativity” and “talking the economy down”.

Forecasting failures

If we look back to the policy horizon or when the Bank of England was setting monetary policy for now we go back to May 2014. What was happening then? Well Mark Carney was under fire on the subject of Forward Guidance. He had more to say on the subject that day.

the economy has edged closer to the point at which Bank Rate will need gradually to rise.

I will let him off the way that oil price forecasts and hence domestic energy costs barked up the wrong tree but economic growth or GDP forecasts are material. We were told that annual economic growth would now be 3% and rising or pretty much flat out. One section of the forecast had it edging towards 6%! That does matter because you see where we are is in the equivalent bottom zone to that if we note the update from the NIESR ( National Institute for Economic and Social Research) from Tuesday.

Our monthly estimates of GDP suggest that output grew by 0.3 per cent in the three months ending in April 2016 after growth of 0.4 per cent in the three months ending in March 2016.

The latest business surveys have us dropping out of the fan chart altogether.

The PMI surveys are collectively indicating a near stalling of economic growth, down from 0.4% in the first quarter to just 0.1% in April.

These have been reinforced by this mornings official construction numbers.

In March 2016, output in the construction industry was estimated to have decreased by 3.6% compared with February 2016……….In Quarter 1 (Jan to Mar) 2016, output in the construction industry was estimated to have decreased by 1.1% compared with Quarter 4 (Oct to Dec) 2015.

I have regularly reported on the many troubles in the official UK construction data but they come on the back of poor production and manufacturing numbers. Indeed looked at alone they have fallen into a recession as output has fallen in two quarter for both.

So both Forward Guidance for an interest-rate rise and forecasting have been their usual failures. Thus Governor Carney was probably relieved to use a possible Brexit as a scapegoat as after all the weather has been pleasant recently and the winter was mild.

Monetary Policy

There will be more than a few minds on the Monetary Policy Committee mulling this statement.

In the United Kingdom, activity growth slowed in Q1 and a further deceleration is expected in Q2

After all the “output gap” they tell us so much about has just got wider. Let me just be clear that the output gap has failed as a predictive tool but the official reply to this is to sing along with Shania Twain.

That don’t impress me much

Oh and if the surveys and data shown above are any guide then this was guilty of understatement.

Growth over the forecast horizon is expected to be slightly weaker than in the February projection.

Reading those excerpts you may be surprised by this conclusion.

the MPC judges that it is more likely than not that Bank Rate will need to be higher by the end of the forecast period than at present to ensure inflation returns to the target in a sustainable manner.

Please do not misunderstand me that are valid grounds in terms of inflation targeting for such thoughts but this is a body which ignored consumer inflation rising about 5% per annum in the autumn of 2011 and it is now less than one tenth of that. Whereas government economic policy needs some “supporting” right now.


Governor Carney must be pleased that he has been able to open the door to an easing of UK monetary policy and a possible Bank Rate cut with so little response. After all it would be a catastrophic failure for his policy of Forward Guidance should Mark 19 be completely the opposite of its predecessors. Thus he must have been delighted to be able to travel in a smokescreen provided by the heat and light ( admittedly very little light) of the Brexit debate.

In an ordinary meeting he would have had to face even more questions about his own competence and abilities as well as his period of tenure as Governor. Oh and you know my view on official denials and forecasts…

IMF’s Lagarde: UK Interest Rates Could Rise Sharply If UK Leaves EU (@livesquawk)

You might have thought our valiant anti-corruption crusader might have been quiet as reminders circulate of her own corruption trial! But I guess she too is grateful for the distraction provided. As to her role as an economic seer well you merely need to look up both her and the IMF’s record on Greece. Her fellow travellers at the Financial Times may have to forget what they wrote in 2014 though.

 IMF getting it wrong again and again


Meanwhile I note this rather extraordinary statement from Andy Haldane the Bank of England’s Chief Economist in a speech in Edinburgh yesterday.

Each comprises internal and external members, individually accountable and drawn from diverse backgrounds.

That is the MPC,FPC and others. Really? Anyway they diversely voted 9-0 again.


What is really happening to world trade?

One of the features of economic life used to be that the world economy grew and that world trade grew even faster. This was a welcome development albeit one marred by the fact that there is an element of double-counting in world trade called the Rotterdam Effect. Back on the 12th of October I explained the OECD definition of it.

Traditional measures of trade record gross flows of goods and services each and every time they cross borders. This ‘multiple counting’ of trade can, to some extent, overstate the importance of exports to GDP.

I added to that the effect on some countries is very large and the Netherlands is once hence the name.

If we switch from Gross exports to value added then 36% of her exports in 2009 vanished into thin air,which has quite an impact on one’s view of her as an exporter.

Others are on the list as well.

Belgium may be grateful for the phrase Rotterdam effect as otherwise there might be an “Antwerp effect” as 35% of her gross exports vanish using a value added system……Luxembourg. Of its 2009 exports some 59% vanished if we move to measuring value added……….

Also trade figures have all sorts of problems as I pointed out back then and let me illustrate that with an example of a commodity which has been on the move in 2016 which is gold and my own country the UK.

The range of these revisions to the annual trade balance is between negative £5.0 billion and positive £3.0 billion. (announced in the 2014 Pink Book)

Makes you wonder does it not about the accuracy of it all as that money was shuffled from the financial account to the trade one? Time for The Stone Roses.

I’m standing alone
You’re weighing the gold
I’m watching you sinking
Fool’s gold

Indeed it is time for some revisionism about The Stone Roses as of course these days it would not only be their music which adds to GDP but the drugs too.


There has been some doom mongering in Shanghai already at the G-20 meeting with ABC News summarising it like this.

Global growth is at its lowest in two years and forecasters say the danger of recession is rising. The IMF cut this year’s global growth forecast by 0.2 percentage points last month to 3.4 percent. It said another downgrade is likely in April.

I do like the idea of the IMF being able to forecast economic growth to 0.2%! Regular readers here will of course be thinking it was wrong yet again. Oh and its Managing Director is bleating on about reforms, yes the same reforms that were promised at G-20 in 2014 as Groundhog Day returns. The 2% of extra economic growth will only come apparently if all that hot air reaches a wind farm.

The OECD has been on the case to as well according to Reuters.

Global growth prospects remain clouded in the near term, with emerging-market economies losing steam, world trade slowing down and the recovery in advanced economies being dragged down by persistently weak investment.

This was reinforced by hints of more easing from the People’s Bank of China which is convenient with the G-20 circus being in Shanghai. So let us move on with the mood music being downbeat.

The world trade figures

The Financial Times has been doing some click bait scaremongering overnight.

The value of goods that crossed international borders last year fell 13.8 per cent in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor.

Have you spotted what they have done? They have used the strong US Dollar as a measure of value whereas if you move to volume and the bottom of the article we see this.

Measured in volume terms the picture was not as grim, with global trade growing 2.5 per cent. But that fell below global economic growth of 3.1 per cent, extending a depressing trend in the global economy.

So we do have a concern albeit one of a lesser order that if world trade growth is slowing so presumably is world growth unless something is taking up the slack. Although this is a little awkward as much of it is  lower oil and commodity prices which may do just that! what we can say is that trade did fall in November and December as we wonder what happens next.


Even JP Morgan seems to have caught onto the mood music in this area.

Private equity is turning its back on shipping after a glut of funding over the last five years contributed to overcapacity in the industry, according to Andrian Dacy, the head of JPMorgan Asset Management’s Global Maritime business.

This overcapacity has been a contributor to the fall in the Baltic Dry Index as we wonder why JP Morgan is telling people to get out at something of a nadir for it. Furthermore at a time of ever shortening horizons it is very revealing when someone talks of a 25 year time period don’t you think? If we look at its values we see that the BDI has bounced a little recently to 325 but that it a fair bit lower than the 500s of last February and a world away from the 1200s of last August.

If we move on from the BDI wondering how the relative impacts of overcapacity and demand interrelate we can find some help in the calmer waters of the Harpex Index. It covers seven classes of ships and gives us some insight into trade of consumer goods. What it is telling us is that there has been a slowing in this area. The recent peak of of 546 in the early summer of 2015 has been replaced by a drop to 364 where the weekly reading has remained for the last few weeks (okay one 363 ..).

Thus shipping is in a bear market and at least some aspects are in a depression but for the wider economy the picture is muddied and mixed by lower oil and commodity prices.


It is sadly ironic with apologies to Alanis Morrisette that the central bankers who proclaim Forward Guidance are pumping out an atmosphere of fear right now.

The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium.  For the past seven years, growth has serially disappointed—sometimes spectacularly,

That was Bank of England Governor Mark Carney who at least has not flown out to Shanghai to lecture us again on the risks of global warming. But the man who told us that monetary policy was not “maxxed out” seems to have undertaken yet another U-Turn.

It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change and productivity growth.

After a few paragraphs of waffle claiming reforms have happened Mark then provides ammunition for critics like me who have long argued that one of the moral hazards of what central bankers have done is as shown below.

In most advanced economies, difficult structural reforms have been deferred.

Well you and your colleagues financed that Mark with your monetary policies. Also we got a confirmation that he plans to push the UK Pound £ lower as he morphs into Mervyn King.

Currencies’ values fell, boosting competitiveness – the exchange rate channel.

Except as Mark gets lost in his own land of confusion this apparently does not work because it is a zero sum game.

But for the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero sum game.

We also got a confession that my critiques may have hit home, “several commentators are peddling the myth that monetary policy is “out of ammunition.”  Is “the only game in town” over?”. Feel free to join the comments section Mark with stuff as shown below so people can reply.

Low interest real rates have bought time by bringing forward demand to today from tomorrow…..However, the effect of QE on the wealth channel cannot last forever.

Also those who remortgaged on the back of his Forward Guidance may wonder about how they lost and the banks gained.

And determined central bank action and forward guidance put a floor under inflation expectations and bolstered sentiment – the confidence channel.

Ah is that the same confidence channel his scaremongering is now undermining or a different one? Oh and what about the banks.

To be clear, monetary policy is conducted to achieve price stability not for the benefit of bank shareholders.

Never believe anything until it is officially denied……..


Russia faces another round of its economic crisis

The last few days have given us an old-fashioned indication of an economy in distress which is that regimes often look to cast a smokescreen over economic problems at home and potential unrest by indulging in military action and wars. An example of this has been kindly provided this morning by Russia Today.

Russian airstrikes have torched more than 1,000 tankers taking stolen crude oil to Islamic State refineries. This blow against the jihadists comes as the Russian Air Force has hit 472 terrorist targets in two days in Syria, making 141 sorties.

The Russian bear has a sore head and is flexing its muscles in response. Along the way it is sending hints elsewhere as for example by the way that its Backfire bombers have skirted UK airspace on their way to Syria and made the RAF’s day by giving them the opportunity to scramble in response. Indeed if the rumours prove true that today’s defence review will give the RAF 2 extra fighter squadrons then its messes tonight may echo to Vladimir Putin’s name. Of course in terms of economic consequences such a situation is only likely to cause further issues for the UK’s troubled public finances which continue to underperform.

Oil and commodity Prices

Another way of looking at the economic crisis for Russia is provided by the oil price. This morning the price of a barrel of Brent Crude Oil has fallen by 2% to below US $44. Now lets us add in how much oil Russia produces which Bloomberg has provided.

Output from January to October averaged about 10.7 million barrels a day, a 1.3 percent increase over the same period in 2014, the data show. That’s in line with the Russian Energy Ministry’s full-year forecast for production of 533 million tons, or 10.7 million barrels a day.

If we look back to 2011,12,13 and the first half of 2014 the oil price acted as if a tractor beam was keeping it at around US $108 per barrel as we have discussed on here in the past. So if we take these numbers forwards we see a loss to the Russian economy of the order of US $680 million per day. Now I doubt it gets the full oil price and some prices will be different to Brent Crude but this is clearly in broad terms a quantum shift for a commodity producer.

From the domestic point of view this will be insulated for a while by the fall in the Ruble which provides a short-term period of “money illusion” but as the consequent inflation washes through the system the effects will then spread. Also as Otkritie Capital point out the public finances take a large hit.

Through the tax framework, the government took the brunt of the blow, just as it used to take most of the windfall profits.

If we move to the other commodities that Russia mines and produces we see a similar story. This morning’s news on Bloomberg is like a list of things produced by Russia.

Copper fell through $4,500 a metric ton for the first time since 2009, while nickel dropped to the lowest level since July 2003. Zinc lost 2.5 percent as of 8:13 a.m. in London,

Russia is also the world’s main producer of palladium and last week we were told this.

Palladium, also mostly used in pollution-control devices, has plunged 32 percent, and prices are near a five-year low set in August.

Completing the series comes a reminder that Russia is a substantial gold producer as well and the drum beat continues. From Emirates 24/7 today.

Gold extended losses on Monday, falling towards a near-six-year low reached last week…….Spot gold had dropped 0.7 per cent to $1,070.36 an ounce.

The Ruble

This has fallen this morning so that it again requires some 66 Rubles to buy one US Dollar. If we look back to the better times for the Russian economy we see that it was in the low 30s so in essence the shift from the commodity boom to commodity disinflation and for Russia deflation has halved its currency. Quite chilling when put like that isn’t it?

We have seen quite a lot of volatility in 2015 as there was a rally to around 50 in May and a couple of times it has rumbled around 70. So we learn two things. Firstly how can Russian industry and businesses possibly plan in such a volatile environment? Secondly that rather than being a short sharp shock followed by a recovery this is something which to quote the Stranglers is “Hanging Around”. This leads to quite a different set of economic influences especially as we wonder if it will persist for long enough to be described as “temporary”?

Inflation Inflation Inflation

The September Monetary Report of the Bank of Russia summed it up like this.

Therefore, given the ruble depreciation in July-August 2015 and the elevated inflation expectations, consumer price growth in 2015 will be higher than expected – 12.0-13.0%.

This compares to a developed world average inflation rate that is in essence zero per cent and if we look to see the components we are told this.

the contribution of exchange rate dynamics to annual inflation in August was roughly 7 pp and lower demand reduced inflation by about 1 pp.

So the former tells us of  an inflationary burst and the latter tells us of a consequence of deflation. A combination which Britney has helpfully described for us.

Don’t you know that you’re toxic?

Two consequences

The first is that something which low inflation is helping in many countries which is real wages is seeing a doppelgänger in Russia. From Danske Bank today.

real wages growth (-10.9% y/y) shrank the most in 16 years

They also give us a clear consequence of this.

pushing retail sales to their lowest level since 1998 (-11.7% y/y)

Also I note that it is not a good time to be poor in Russia as a basic staple so basic in fact that central bankers describe it as “non-core” has done this.

High food inflation is weighing heavily on private consumers, posting 18.4% y/y in October and 21.2% y/y in the ten months so far.

The second consequence is much closer to home from my point of view as we note this from Bloomberg on the state of play in London’s property market.

Russian buyers acquired 4.2 percent of homes sold in central London’s best districts in the third quarter, compared with 10 percent a year earlier, according to broker Knight Frank LLP.

In Ruble terms UK property has doubled in price over the last 15/18 months as again it nudges 100 Rubles to the UK Pound £.  Russians who invested heavily in the UK in central London such as Roman Abramovich have played a bit of a blinder although it is probably best to hide such matters from Vladimir Putin.


Central banks especially ones subject to the whims of Vladimir Putin tend to have an optimistic bias so let us touch base with the Bank of Russia.

The Bank of Russia estimates GDP to contract by 3.9-4.4% in 2015…….According to the Bank of Russia forecast, GDP will fall by 0.5-1.0% in 2016 and the economic growth rates are expected to be 0.0-1.0% in 2017 and 2.0-3.0% in 2018.

As you can see things are not so good when even those with a clear incentive to get out the rose tinting can only forecast a return to growth in a period which fans of Carole King would describe as “So Far Away”.

If we move to other issues we see that Russia has quite a lot of the inflation that central bankers are trying to create on a smaller scale elsewhere and via the route (currency depreciation) which some are trying to get it albeit on a smaller scale. I think you would find that Russian consumers and workers would offer quite a critique of the effect on them.

If we move wider there is the ongoing issue of paying US Dollar denominated debt with ever more Rubles and that being deflationary in itself. Of course with interest-rates as shown below there is hardly much incentive to borrow in Rubles either.

the Bank of Russia decided to limit its key rate reduction to 50 basis points in July and cut it to 11.00% p.a.,

Added to these economic factors are the political and military which are intertwined with it. I discussed the military interventionism earlier and we also see Europe extending its sanctions but in economic terms the disruption is highlighted by this from the Wall Street Journal.

State of emergency declared in Crimea after pylons supplying energy from Ukraine are blown up.

Are we seeing inflation in states of emergency too?



Does Japan change our view of recession and economic success?

After the horrible events of Friday night in France there has already been significant economic news from the land of the rising sun, Nihon or Japan today. This is the announcement that Japan has returned to recession and in fact has experienced a “quadruple dip” as this is the fourth time it has done so in the credit crunch era. This poses all sorts of questions for us to consider as we approach the third anniversary of the economic policy called Abenomics which was proclaimed as a solution to the economic travails of Japan and the concept of the “lost decade” which is now into its third incarnation.

Today’s data

Reuters puts it thus.

Official data on Monday showed the world’s third-largest economy shrank an annual 0.8 percent in July-September after a 0.7 percent contraction in the prior quarter, putting it firmly into recession – two consecutive quarters of declines.

If we look into the detail of this there is another factor which will trouble policymakers in Tokyo.

But capital expenditure fell 1.3 percent, more than a median market forecast of a 0.4 percent decrease, to mark a second declining quarter, and revealing the sluggish state of manufacturing investment.

This is significant because Japanese businesses are in general cash rich (354 Trillion Yen)  at this time but as you can see they seem to prefer building up these balances to investing. This is not the theme we get from either the Japanese establishment or those who support Abenomics.

Consumption is growing

This is a more hopeful development for Japan as we see the Japanese consumer willing to spend a little more. There was growth of 0.5% on the previous quarter which helped to buttress the overall numbers. If we move to see why this is happening we see something rather awkward for the whole Abenomics concept so let us take a look at Japanese wages.

These have grown and registered a growth rate of 0.4% in September. Now this is hardly stellar and nothing like the UK or US but take a look at the pattern described by Japanese Macro Advisers.

Since the advent of the Abenomics, the wage growth in Japan has seen a consistent but slow improvement. In 2013, regular wages in Japan fell by 0.9%. In 2014, it still fell, but by only 0.1%. In 2015, it will probably turn to a positive rise, although barely positive.

So we see a rationale for a nudge higher in consumption but even here there are things to consider. Let me start with unemployment and the idea that on this measure Japan is pretty much at what we used to argue was full employment.

The unemployment rate in Japan has reached the lowest rate in 20 years and leading indicators such as new job offers indicate that more tightening ahead in the labor market.

Thus we see that wage growth is in fact very low once we allow for what is a tightening labour market. Also in what we might argue is Turning British wage growth is being held down by this.

As the wages of part-time workers are lower than those of full-time workers, a larger share of part-time workers mean a lower average wage for all.

The Bank of England might have written that. However we see that however you spin it wage growth is low.

What about real wages?

As inflation is pretty much zero we see that Japan has finally crawled to a smidgen of real wage growth which has helped consumption. The catch is that it has done so via a doppelgänger to the claims of Abenomics. Lower consumer inflation has boosted real wages rather than a beneficial cycle from inflation of 2% per annum leading to higher nominal wage growth which in some unspecified fashion was supposed to provide real wage growth.

We of course do not know what wage growth would be if Abenomics had driven consumer inflation higher but we do get hints from the unwillingness of Japanese businesses to push wages higher when they not only can afford to but the labour market looks tight.

What about trade?

This should be the year that trade in Japan surges and pushes economic output higher. There have been two clear wins for it in 2015. The most obvious is highlighted below by the US Energy Information Agency.

It is the third largest oil consumer and net importer in the world behind the United States and China. Furthermore, it ranks as the world’s largest importer of liquefied natural gas (LNG) and second-largest importer of coal.

Accordingly there has been quite a boost in 2015 from falling prices for oil and coal as the whole energy price envelope changes and Japan can buy much cheaper energy. Although of course energy would be even cheaper if Abenomics had not driven the value of the Yen lower.

On the other side of the coin exports should be benefiting from much cheaper costs as not only energy prices but many commodity prices have fallen. This should be adding to the comparative advantage provided by a lower Yen on the foreign exchanges. Yet if we look at quarterly export growth in 2015 so far we see 1.9%, -4.3% and now 2.6% which is far from what would have been hoped for.

As a general point the issue of the responsiveness of exports to what is a competitive devaluation has changed in the credit crunch era. My country the UK had disappointments following its 2007/08 depreciation and Japan looks to be on the same road. Do businesses place a lower emphasis on current exchange-rates in their long-term plans? I believe so. As we wonder how long it takes for a move to be considered permanent?

Also there is the issue that when the Yen was strong Japanese businesses responded by sending production abroad to countries such as Thailand. So the situation changed unfavourably for Japan.

What is the outlook?

Yutaka Harada of the Bank of Japan spoke last week and I note this summary from him..

Thus far, I have shown that QQE has helped Japan’s economy recover, albeit at a moderate pace.

Not exactly a claim of triumph is it for a policy which is described as “bold action”?! For newer readers QE has been around the block a bit in Japan quite a few times and therefore QE became QQE in the way that in the UK  the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield. After all declaring QE14 to be a success begs the question of 1-13 especially if the claims are only for “moderate” success. Looking forwards the prospects for GDP growth look moderate too.

 1.2 percent for fiscal 2015, 1.4 percent for fiscal 2016, and 0.3 percent for fiscal 2017.

The business surveys or purchasing managers indices are positive too as this from Markit highlights.

At the sector level, both manufacturers and service providers forecast greater expansions in activity over the year.

The catch is that they were positive also over the period just gone when the economy shrank.


I want to bring in two big problems for Japan which are long-running themes on here. The first is the shrinking population which leads to arguments that we should look at GDP per capita. This has been better than the aggregate numbers  because the population stopped growing and then fell. Should this continue as seems likely in 2016 and the Japanese economy does grow then GDP per capita will outperform again as the population shrinks. Just to give you an idea of the scale of the move the population shrank by another 215,000 in the six months to October.

Another feature of this is an ageing population which shifts the balance against Japan even if the population was stable. Some think of this in chilling terms if we throw in the thoughts of Bank of England Chief Economist Andy Haldane.

For the UK, that would suggest up to 15 million jobs could be at risk of automation.  In the US, the corresponding figure would be 80 million jobs.

What about Japan Andy? Actually I am more upbeat than Andy as mankind is capable of leaps along the lines of “something wonderful” from the film 2001 A Space Odyssey and by definition we cannot project them. But until it happens Japan has in Taylor Swift terms “Trouble,Trouble,Trouble”.

Now in the second major issue we return to an aggregate measure which is the debt of the public-sector. There are varied different definitions but the IMF has it at 246% of GDP in gross terms and Japan continues to run a fiscal deficit which thIs year is estimated at around 6% of GDP. As Japan has assets the numbers look much better in net terms (126%) but with the ongoing deficit it is slip sliding away.

So let me sum up with the words of Lewis Carroll to describe the state of play for Japan.

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

Looked at like that is Abenomics simply the effort of an establishment determined to preserve a fantasy that overall economic growth is still available? Let us hope that “something wonderful” comes along soon as I do not see how having the monetary taps fully open does the job.

The outlook for the economy of Japan continues to disappoint Abenomics fans

There is much to consider in the land of the rising sun, Nihon. Firstly there is the stirring performance of its team in the Rugby World Cup which has been in marked contrast to that of England for example. By contrast the economic experiment called Abenomics after the Prime Minister Shinzo Abe continue to have more troubles than successes. Its original three arrows have started to look like duds as we peruse the economic environment as summarised by the Japan Times over the weekend.

The central bank will unveil the revisions in its biannual outlook report on economic activity and prices due Oct. 30, the Nikkei said. BOJ policymakers will cut the growth forecast to around 1 percent from 1.7 percent for the year ending March 2016, it reported. It also said the estimate for the following year would be cut from 1.5 percent.

This is a catching up with reality after the poor performance in the second quarter of this year that I reported back on the 17th of August.

This morning Japan’s Cabinet Office informed us that GDP had fallen by 0.4% in the second quarter of 2015 which is often reported as an annualised fall of 1.6%. (Later it was revised to 0.3% and 1.2% respectively)

Even worse was the fact that the exports fell as opposed to the hopes of a rise under the policy of driving the Yen lower. Although we need some perspective here as the Yen fell to over 125 versus the US Dollar as opposed to more like 120 now. These days even the amounts quoted below apparently do not drive your currency lower. From the Bank of Japan.

The monetary base had increased significantly as asset purchases by the Bank had progressed, and the year-on-year rate of growth had been at around 35 percent.

The Background

Regular readers will be aware that I had pointed out that there were several reasons for this to be a good year for Japan and for its economy to push forwards like its rugby scrum. The main one has been the fall in the oil price for an economy described like this.

A fall in the oil price is likely to be extremely welcome for an economy which imports more than 90% of the energy it uses. The US Energy Information Agency describes it thus.
Japan is the world’s largest liquefied natural gas importer, second largest coal importer, and third largest net oil importer.

I did a back of the envelope calculation which suggested that the gain to Japan was of the order of US $225 million per day.

To this we can add the expansionary monetary policy of the Bank of Japan with the sort of numbers shown above. I hesitate to say full steam ahead as we may be on the verge of what Agent Smith from the The Matrix series of films would described as “More! More!”. An awkward element has been the way that a lower oil price gives a boost to the Japanese economy because of course it provides exactly the opposite effect to the higher inflation of Abenomics.If you believe both then may I suggest you sing along to the recently departed Errol Graham.

Everyone’s a winner, baby, that’s the truth (yes, the truth)

What about wages?

This to my mind is pretty much the crux of the matter. The supporters of Abenomics thought so too as we have been subject to a barrage of rhetoric on the subject along the lines of that they were just about to turn higher. Let us see how the Nikkei Asian Review reports today’s numbers.

Real wages, adjusted for inflation, rose just 0.2 percent year-on-year, slowing from a revised 0.5 percent gain in July, as nominal wages are slow to keep up with price increases of food and daily necessities, undermining the purchasing power of households.

So it is not convinced by the pattern and it does not appear to be convinced by the inflation numbers either! However we have a problem as we note the barrage of rhetoric we have received in the past. The last 2 months of real wage growth in Japan are indeed welcome but rather than any improvement in trend they in fact reflect the fall in inflation that has been seen.

If we look at wage growth as defined by Total Cash earnings it rose by 1.9% in July 2014 and 0.9% in July 2015 and if we move to August last year was 0.6% and this year was 0.5%. Ouch! Wage growth has in fact slowed on this basis. In essence the improvement has been falling inflation as the impact of the Consumption Tax rise fell out of the numbers and a lower oil price impacted. Ooops! So exactly the opposite of Abenomics which was supposed to provide gains from higher prices and inflation.

One can debate the mixture of real and nominal wage growth but let me put it another way. One area of relative success for Japan is its low unemployment rate of 3.4% so a thriving economy would push wages higher. Now let is consider real wage growth in the UK and US for example.

UK Office for National Statistics: Comparing the three months to July 2015 with the same period in 2014, real AWE (total pay) grew by 2.8 per cent.

US Department of Labo(u)r Statistics: Hourly earnings have risen by 2.2 percent over the year. (So real wages rose 2%).

There is an order of magnitude difference between the Anglo-Saxons and the Japanese here. Odd that as the Japanese numbers have apparently been about to surge for 2 years now. The Governor of the Bank of Japan seems to think that they already have.

the positive feedback loop between the increases in employment and wages and the rise in inflation.

Indeed he actually offered a critique of current wage rises although of course he did not put it like that.

Now firms are enjoying record profits and the labor market is in a full-employment condition.

Shouldn’t wages be surging?

At the same time, it is also true that the pace of increase in fixed investment and wages is lackluster in light of record profits.

What is the current outlook?

The Markit business survey series for September was concluded today so what do we learn from it?

The weaker increases in both the manufacturing and service sector was reflected in the Nikkei Composite Output Index which posted the lowest reading since April (51.2), down from 52.9 in August.

So Japan had a relatively good August but this faded in September. Still welcome in comparison to suggestions via weak official industrial output figures that Japan has returned to recession again.

Three New Arrows

If things we going so well we would not have seen this from Prime Minister Shinzo Abe back on the 24th of September. From The Japan Times.

Prime Minister Shinzo Abe said Thursday he has set out three new goals for “Abenomics” and will target a 20 percent increase in (nominal) gross domestic product to ¥600 trillion.

He also added three new arrows to his quiver.

The three new economic policy goals include: promotion of economic growth, child-rearing assistance to push up the low birth rate and social security measures to increase nursing facilities for the elderly.


Prime Minister Abe has kindly reminded us of the demographic issues that Japan faces and let me add in a national debt which is 246% of annual economic output or GDP (Gross Domestic Product). In here we see that difference between the collective experience which can be described as Japan Inc (Incorporated) and the individual. His promise is one which helps Japan collectively with its debts if we ignore the lack of timescale provided but as it is for nominal GDP the individual Japanese will fear higher inflation and perhaps lower real wages.

Moving with the Japan Inc theme it is not that Japanese companies cannot afford higher wages. From Governor Kuroda.

Japanese firms have been making record profits, exceeding the peak registered before the global financial crisis.

That coincides with some of the data from the latest Tankan survey.But if you take the view that Abenomics is an example of Japan Inc moving things to suit itself then the current situation is just fine and real wage growth will continue to disappoint. Thus the individual experience will continue to disappoint. Of course Japan is far from alone being on such a course.

Meanwhile along the lines of its performance in the rugby there is much to admire about Japan. Its long life expectancy and the way which its treats its older population for example. In many ways it truly is different to us and certainly thinks so itself! So there will be plenty more opportunities to sing along with Graham Parker and the Rumour.

Discovering Japan
Discovering Japan
Discovering Japan