Italy may be in a recession but more importantly its depression never ended

The last 24 hours have brought the economic problems and travails of Italy into a little sharper focus. More news has arrived this morning but before we get there I would like to take you back to early last October when the Italian government produced this.

Politics economy, reform action, good management of the PA and dialogue with businesses and citizens will therefore be directed towards achieving GDP growth of
at least 1.5 percent in 2019 and 1.6 percent in 2020, as indicated in new programmatic framework. On a longer horizon, Italy will have to grow faster than the rest of Europe, in order to recover the ground lost in the last
twenty years.

This was part of the presentation over the planned fiscal deficit increase and on the 26th of October I pointed out this.

If we look back we see that GDP growth has been on a quarterly basis 0.3% and then 0.2% so far this year and the Monthly Economic Report tells us this.

The leading indicator is going down slightly suggesting a moderate pace for the next months.

They mean moderate for Italy.So we could easily see 0% growth or even a contraction looking ahead as opposed some of the latest rhetoric suggesting 3%  per year is possible. Perhaps they meant in the next decade as you see that would be an improvement.

Political rhetoric suggesting 3% economic growth is a regular feature of fiscal debates because growth at that rate fixes most fiscal ills. The catch is that in line with the “Girlfriend in a Coma” theme Italy has struggled to maintain a growth rate above 1% for decades now. Also as we look back I recall pointing out that we have seen quarterly economic growth of 0.5% twice, 0.4% twice, then 0.3% twice in a clear trend. So we on here were doubtful to say the least about the fiscal forecasts and were already fearing a contraction.


All Italy’s troubles were not so far away as the statistics office produced this.

In the fourth quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 0.2 per cent with respect to the previous quarter and increased by
0.1 per cent over the same quarter of previous year.

Whilst much of the news concentrates on Italy now being in a recession the real truth is the way that growth of a mere 0.1% over the past year reminds us that it has never broken out of an ongoing depression. If we look at the chart provided we see that in 2008 GDP was a bit over 102 at 2010 prices but now it has fallen below 97. So a decade has passed in fact more like eleven years and the economy has shrunk. Also I see the Financial Times has caught onto a point I have been making for a while.

Brunello Rosa, chief executive of the consultancy Rosa and Roubini, has pointed out that, on a per capita basis, Italy’s real gross domestic product is lower than when the country adopted the euro in 1999. Over the same period Germany’s per capita real GDP has increased by more than 25 per cent, while even recession-ravaged Greece has performed better than Italy on the same basis.

On that basis Italy has been in a depression this century if not before. Indeed if you look at the detail it comes with something that challenges modern economic orthodoxy, so let me explain. In 1999 the Italian population was 56,909,000 whereas now it is just under 60.5 million. Much of the difference has been from net migration which we are so often told brings with it a list of benefits such as a more dynamic economic structure and higher economic growth. Except of course, sadly nothing like that has happened in Italy. As output has struggled it has been divided amongst a larger population and thus per head things have got worse.

Meanwhile this seems unlikely to help much.

Italy’s statistical institute will soon have a new president, the demographer Gian Carlo Blangiardo. He has recommended calculating life expectancy from conception – rather than birth – so as to include unborn babies. ()

Also population statistics in general have taken something of a knock this week.

Pretty interesting – New Zealand just found it has 45,000 fewer people than it thought. In a population of 4.9 million (maybe), that means economists might have to start revising things like productivity and GDP growth per capita. ( Tracy Alloway of Bloomberg).

Can I just say chapeau to whoever described it as Not So Crowded House.

The banks

I regularly point out the struggles of the Italian banks and say that this is a factor as they cannot be supporting the economy via business lending so thank you to the author of the Tweet below who has illustrated this.

As you can see whilst various Italian government’s have stuck their heads in the sand over the problems with so many of the Italian banks there has been a real cost in terms of supporting business and industry. This has become a vicious circle where businesses have also struggled creating more non-performing loans which weakens the banks as we see a doom loop in action.

What about now?

The GDP numbers gave us an idea of the areas involved on the contraction.

The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and fishing
as well as in industry and a substantial stability in services. From the demand side, there is a negative
contribution by the domestic component (gross of change in inventories) and a positive one by the net
export component.

The latter part is a bit awkward for Prime Minister Conte who has taken the politically easy way out and blamed foreigners this morning. As to the industrial picture this morning;s PMI business survey suggests things got worse rather than better last month.

“January’s PMI data signalled another deterioration in Italian manufacturing conditions, with firms struggling in the face of a sixth consecutive monthly fall in new business. Decreases in output, purchasing activity and employment (the first in over four years) were recorded, marking a weak start to 2019.”

The spot number of 47.8 was another decline and is firmly in contraction territory.


This is as Elton John put it.

It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd

Italy has been in an economic depression for quite some time now but nothing ever seems to get done about it. Going back in time its political leadership were keen to lock it into monetary union with France and Germany but the hoped for convergence has merely led to yet more divergence.

One of the hopes is that the unofficial or what used to be called the black economy is helping out. I hope so in many ways but sadly even that is linked to the corruption problem which never seems to get sorted out either. Oh and whilst many blame the current government some of that is a cheap shot whilst it has had its faults so has pretty much every Italian government.




Argentina is counting the cost of its 60% interest-rates

In these times of ultra low interest-rates in the western world anywhere with any sort of interest-rate sticks out. In the case of Argentina an official interest-rate of 60% sticks out like a sore thumb in these times and in economic terms there is a second factor in that it has been like that for a while now. So the impact of this punishing relative level of interest-rates will be building on the domestic economy. Also the International Monetary Fund is on hand as this statement from Christine Lagarde yesterday indicates.

“I commended Minister Dujovne and Governor Sandleris on decisive policy steps and progress thus far, which have helped stabilize the economy. Strong implementation of the authorities’ stabilization plan and policy continuity have served Argentina well, and will continue to be essential to enhance the economy’s resilience to external shocks, preserve macroeconomic stability and to bolster medium-term growth.

“I would like to reiterate the IMF’s strong support for Argentina and the authorities’ economic reform plan.”

The opening issue is that sounds awfully like the sort of thing the IMF was saying about Greece when it was predicting a quick return to economic growth and we then discovered that it had created an economic depression there. Of course Christine Lagarde was involved in that debacle too although back then as Finance Minster of France rather than head of the IMF. Also the last IMF press conference repeated a phrase which ended up having dreadful connotations in the Greek economic depression.

It’s on track as of our last mission which was, you know, in December.

As the track was from AC/DC.

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell
No stop signs, speed limit
Nobody’s gonna slow me down

So let us investigate further.

Monetary policy

The plan is to contract money supply growth so you could look at this as like one of those television programmes that take us back to the 1970s.

In particular, the BCRA undertakes not to raise the monetary base until June 2019. This target brings about a significant monetary contraction; while the monetary base increased by over 2% monthly in the past few months, it will stop rising from now onwards. Then, the monetary base will dramatically shrink in real terms in the following months.

So you can see that the central bank of Argentina is applying quite a squeeze and is doing it to the monetary base because it is a narrow measure, Actually it explains it well in a single sentence.

The BCRA has chosen the monetary base as it is the aggregate it holds a grip on.

It is doing it because it can. Although I am a little dubious about this bit.

The monetary base targeting will be seasonally adjusted in December and June, when demand for money is higher.

It is usually attempts to control broad money that end up targeting money demand rather than supply. It is being achieved with this.

the BCRA undertakes to keep the minimum rate on LELIQs at 60% until inflation deceleration becomes evident.

Also there will be foreign exchange intervention if necessary, or more realistically there has been a requirement for it.

The monetary target is supplemented with foreign exchange intervention and non-intervention measures. Initially, the BCRA would not intervene in the foreign exchange market if the exchange rate was between ARS34 and ARS44. This range is adjusted daily at a 3% monthly rate until the end of the year, and will be readjusted at the beginning of next year. The BCRA will allow free currency floating within this range, considering it to be adequate.

Finally for monetary policy then monetary financing of the government by the central bank is over.

As it has already been reported, the BCRA will no longer make transfers to the Treasury.

Fiscal Policy

Another squeeze is on here as the BCRA points out.

Finally, the new monetary policy is consistent with the targets of primary fiscal balance for 2019 and of surplus for 2020.

Yes in terms of IMF logic but the Greek experience told a different story. There a weaker economy made the fiscal targets further away and tightening them weakened the economy in a downwards spiral.

So where are we?

The squeeze is definitely as my calculations based on the daily monetary report show that the monetary base has shrunk by just under 4% in the last 30 days. If we move onto the consequences of this for the real economy then any central bankers reading this might need to take a seat as the typical mortgage rate in December was 48%. To give you an idea of other interest-rates then an overdraft cost 71% and credit card borrowing cost 61%.

If we look for the impact of such eye-watering levels we see that mortgage growth was on a tear because annually it is 54% up of which only 0.1% came in the last month. Moving to unsecured borrowing overdraft growth has been -1.2% over the past 30 days but credit card growth has been 3.5% so perhaps there has been some switching.

Economic growth

This has gone into reverse as you can see from this from the statistics office.

The provisional estimate of the gross domestic product (GDP), in the third quarter of 2018, had a fall of 3.5% in relation to the same period of the previous year.
The seasonally adjusted GDP of the third quarter of 2018, with respect to the second quarter of 2018, showed a variation of -0.7%.

So a weaker quarter following on from a 4.1% dip in the second quarter of 2018 which was mostly driven by the impact of a drought on the agricultural sector. Looking back the Argentine economy did recover from the credit crunch pretty well but the recorded dip so far takes us back to 2011 or eight years backwards.

The IMF points out this year should get the agricultural production back which is welcome.

in the second quarter, a rebound in agricultural
production (expected to fully recover the 30 percent
production lost in 2018 because of the drought)
should lead to a gradual pickup in economic activity.

But if we put that to one side there has to be an impact from the credit crunch. Also whilst this is good.

The recession and peso depreciation are quickly lowering the trade deficit.

It does come with something which has a very ominous sign for domestic consumption.

The adjustment mainly reflects
lower imports, reflecting a contraction in
consumption and investment.

Moving to inflation then here it is.

The general level of the consumer price index (CPI) representative of the total number of households in the country registered in December a variation of 2.6% in relation to the previous month.


There is a fair bit to consider here as we see a monetary squeeze imposed on an economy suffering from a drought driven economic contraction. Also I have form in that I warned about the dangers of raising interest-rates to protect a currency on May 3rd.

However some of the moves can make things worse as for example knee-jerk interest-rate rises. Imagine you had a variable-rate mortgage in Buenos Aires! You crunch your domestic economy when the target is the overseas one.

Interest-rates were half then what they are now and I have already pointed out what mortgage rates now are. As to what sort of a economic crunch is coming the latest from the statistics office looks rather ominous.

The statistics office’s monthly economic activity index fell 7.5% y/y in November after dropping 4.2% in the previous month.

As to the business experience this from Reuters gives us a taste of reality.

Like many small businessmen, Meloni has found himself caught in a vice. Sales from his plant in the town of Quilmes, 30 km (19 miles) outside the capital Buenos Aires, shrank by just over one third last year as Argentina’s economy sank deep into recession…..


Meloni said the plant, which makes fabrics, used to operate 24 hours a day from Monday to Saturday but now just operates 16 hours a day, five days a week. Like many other businesses, Meloni advanced the holidays to his roughly 100 employees with the hope that once summer ends in March, demand will pick up.

It is very expensive to make people in Argentina which keeps people in a job (good) but with lower pay from less work (bad) and if it keeps going will collapse the company (ugly).

Back in the financial world I also wonder how this is going?

About a year after emerging from default, Argentina has surprised investors by offering a 100-year bond.

The US-dollar-denominated bond is offered with a potential 8.25 per cent yield.


Here are my answers to questions asked about the Euro area economy

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?