What is it about GDP in the first quarter these days?

The behaviour of the UK economy so far in 2017 has been something of a hot potato in debate as the numbers swing one way and then the other. Let me give you an example of a ying and yang situation . The downbeat ying was provided last week by the official data on UK retail sales.

The 3 months to March shows a decrease of 1.4%; the third consecutive decrease for the underlying 3 month on 3 month pattern……Looking at the quarterly movement, the 3 months to March 2017 (Quarter 1) is the first quarterly decline since 2013 (Quarter 4).

That was ominous for today’s GDP release as the consumer sector had been part of the growth in the UK economy. Our official statisticians crunched the numbers as to the likely effect.

The 3-month period ending March 2017 coincides with Quarter 1 (Jan to Mar) 2017 of the quarterly gross domestic product (GDP) output estimate. It marks the first negative contribution of retail sales to quarterly GDP growth since Quarter 4 (Oct to Dec) 2013, contributing negative 0.08 percentage points (to 2 decimal places).

However only yesterday there was a yang to the ying from the Confederation of British Industry or CBI.

Retail sales growth accelerated in the year to April, with volumes rising faster than expected, according to the latest monthly CBI Distributive Trades Survey.

Here is some more detail.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)…….Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%). Meanwhile sales volumes decreased in specialist food & drink (-43%) and furniture & carpets (-30%).

If we stay with the specifics of the CBI report its is fascinating to see clothing leading the charge again. Regular readers will recall that this was the state of play last autumn and at that time it was female clothing in particular. So ladies if you have rescued us yet again we owe you another round of thanks. In such a situation you would be the consumer of last resort as well as often the first!

But the issue here is how does this fit with the official data? There is one way it might work and it comes down to the timing of Easter which was later this year than last. Whilst the official data does make seasonal adjustments I have seen this miss fire before. Perhaps the clearest generic example of this is first quarter GDP in the United States which year after year has been lower than the trend for the other quarters hinting at a systematic issue.

House prices

If these have been leading the charge for UK economic growth then this morning’s news will disappoint.

House prices recorded their second consecutive monthly fall in April, while the annual rate of growth slowed to 2.6%, the weakest since June 2013.

The date is significant as it was the summer of 2013 when the Bank of England lit the blue touch-paper for UK house prices with a new bank subsidy programme. The latest version of this called the Term Funding Scheme has risen in size to £57.5 billion.since its inception last August. Looking forwards if we allow for the obvious moral hazard this is hardly especially optimistic.

As a result, we continue to believe that a small increase in house prices of around 2% is likely over the course of 2017 as a whole.

The GDP data

UK gross domestic product (GDP) was estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2017, the slowest rate of growth since Quarter 1 2016.

This was driven by the retail sales slow down and this.

Slower growth in Quarter 1 2017 was mainly due to services, which grew by 0.3% compared with growth of 0.8% in Quarter 4 (Oct to Dec) 2016……The services aggregate was the main driver to the slower growth in GDP, contributing 0.23 percentage points…….The main contributor to the slowdown in services was the distribution, hotels and restaurants sector, which decreased by 0.5%, contributing negative 0.07 percentage points to quarter-on-quarter GDP growth.

The services slow down will have had a big effect because it must be pretty much 80% of our economy by now. Officially it is 78.8%.

Actually much of the economy grew at this sort of rate.

Production, construction and agriculture grew by 0.3%, 0.2% and 0.3% respectively in Quarter 1 2017.

So a slowing on the end of 2016 but here is something to think about. UK GDP growth was 0.2% in the first quarter of 2016 so ironically it is better this year but also was 0.3% in 2015. Are we developing a similar problem to the US where it seems to be something of a hardy perennial situation and if so why?

Looking Forwards

As well as the more optimistic CBI retail sales report there was this from Monday.

The survey of 397 manufacturers found that domestic orders had improved at the fastest pace since July 2014 in the three months to April. Meanwhile export orders recorded the strongest growth in six years, supported by strong rises in competitiveness, particularly in non-EU markets which improved at a record pace.

It is not the only body which is looking forwards with some optimism.

The UK economy slowed sharply in Q1, as signalled by PMI. March rise in PMI suggests Q1 GDP could be revised up from 0.3% to 0.4%………Note that Q1 GDP was based on a forecast of no service sector growth in March. PMI showed strengthening ( Chris Williamson of Markit ).

What about the individual experience?

We have settled on GDP per capita as a better guide and this was frankly poor this time around.

GDP per head was estimated to have increased by 0.1% during Quarter 1 2017.

This adds to an issue which the chart below highlights, guess which of the lines is our more recent experience?

For the people who think that their individual experience has not backed up the claims of improvement there is food for thought in that chart.

Is GDP underecorded?

Tim Worstall wrote a piece for CapX this week telling us this.

For it’s obvious to our own eyes, and when properly adjusted GDP shows it once again, that we’ve all got much richer these recent decades.

Okay why?

The CPI overstates inflation – and thus understates how quickly real incomes are rising……Of course the ONS and others do the best they can but the current estimate is that inflation is overstated by 1 per cent a year. Or real income rises understated by it of course.

There are some interesting points on goods which are free ( WhatsApp for example) and ignored by GDP.  However it completely misses out the cost of housing which in recent times has been a major inflationary force in my mind. Would you rather have housing or the latest I-Pad?

Care is needed as of course there were substantial gains in the past but on this logic we are all much better off than we realise. Really?

Comment

The issue with first quarter growth was also true across the channel as the expectation and then the reality show below.

with 0.6% growth signalled for both Germany and France ( Markit )…….In Q1 2017, GDP in volume terms* slowed down: +0.3%, after +0.5% in Q4 2016 ( France Insee ).

So as we note the Bank of France was correct we await the US figures wondering what it is about first quarter GDP? For France this is not yet a sequence as last year was better but the UK and US seem trapped in a mire that appears to have a seasonal reappearance.

Looking ahead we were expecting higher inflation to bite on real incomes as 2017 progressed. As we stand a little of the edge of that has been taken off that impact. What I mean by that is the rise of the UK Pound £ to above US $1.29 helps with inflation prospects as does the fall in the price of a barrel of Brent Crude Oil to below US $52 per barrel. Of course they would need to remain there for this to play out.

Some posted some Blood Sweat & Tears lyrics a while back and they seem appropriate again.

What goes up, must come down
Spinning wheel got to go round
Talkin’ ’bout your troubles, it’s a cryin’ sin
Ride a painted pony, let the spinning wheel spin

Can the economy of Italy throw off its past shackles?

It is time to take another look at how the economy of Italy is performing and first let me point out that the backdrop is good. What I mean by that is that the outlook for the Euro area is currently rather good with this being reported by Markit at the end of last week.

Eurozone economic growth gathered further momentum in March, according to PMI® survey data, reaching a near six-year high…….The March flash PMI rounds off the best quarter for six years and signals GDP growth of 0.6% in the first quarter

That has been followed this morning by better news on the inflation front for March as lower petrol and diesel prices have pulled back both Spanish and some German regional inflation from the February highs this morning. Actually Spanish inflation seems very volatile and therefore difficult to read but this month’s picture seems lower than last even allowing for that. But overall there seem to be some economic silver linings around albeit that there was a cloud or two as the credit data lost some momentum.

What about Italy?

The sentiment numbers here released yesterday were positive as well.

With regard to the consumer survey, the confidence climate index grew in March 2017 from 106.6 to 107.6……With reference to the business surveys, the composite business confidence climate index (IESI, Istat Economic Sentiment Indicator) increased from 104.3 to 105.1.

However there was something rather Italian in all of this good news as I note this.

while the personal and current components worsened from 102.1 to 101.0 and from 104.7 to 104.5

Whilst the outlook is favourable it does not seem to have impacted so far on Italians themselves.

What about industry?

On Tuesday the Italian statistics office served up a swerving serve that Roger Federer would be proud of as its headline showed both industrial turnover (1.9%) and new orders (8.6%) rising. But if we look deeper as there were 21 days this year as opposed to 19 last we see this.

In January 2017 the seasonally adjusted turnover index decreased by -3.5% compared to the previous month (-2.3% in domestic market and -5.4% in non-domestic market)……..In January 2017 the seasonally adjusted industrial new orders index decreased by -2.9% compared with December 2016 (-6.6% in domestic market and +2.6% in non-domestic market).

So it was a bad January meaning that quarterly growth fell to 1.7% for turnover and 0.8% for new orders.

If we look for context of the Italian problem we see some of it in the underlying index which was set at 100 in 2010 and has now risen to 100.3. If we look further we see another sign as the growth has been export-led (121.7) whereas the domestic market has fallen to 91.5. Thus the domestic numbers are more depressionary than recessionary.

If we move to production we see that it fell by 0.5% in January leaving it at 93.8% of the level seen in 2010.

Retail Sales

If we look at the latest data we see that the better sentiment has yet to impact here.

In January 2017 the seasonally adjusted retail trade index increased by 1.4% with respect to December 2016 (+2.3% for food goods and +0.8% for non-food goods). The average of the last three months compared to the previous three months was unvaried. The unadjusted index decreased by 0.1% with respect to January 2016.

The underlying index returns us to thoughts of an economic depression as this time an index set at 100 in 2010 compares to 95.7 in January.

Employment and Unemployment

This continues a rather troubled pattern so let us start with the good bit.

The labour input used in the economic system (expressed by the hours worked in the national accounts) increased by 0.4% quarter-on-quarter and by 1.6% year-over-year.

So there is more work around but because of the past pattern it is hard to look past this.

The unemployment rate confirmed at 11.9%, up by 0.2 percentage points after the substantial stability over the four previous quarters.

Some of that is technical as the particpation rate rose reversing for example some of the arguments over the US labour market but it is also true that the previous year saw unemployment rise by 108,000. So we see that this problem is persisting when if we look at other metrics it should not be.

Also we get a clue perhaps as to the current issues with retail sales as we note that real wages are under pressure.

as a result of a 0.2% increase in wages ( in 2016).

 

Population

The numbers for 2016 are out and they tell us this.

The population at 1st January 2017 was estimated to be 60,579,000; the decrease on the previous year was 86,000 units (-1.4 per thousand).

This happened in spite of the growth from migration.

The net international migration in 2016 amounted to +135 thousand, a similar level to that seen in 2015. Compared to the latter it was determined by a higher number of inflows, 293 thousand, and a new record of outflows, for the recent time, equal to 157 thousand.

As we see people are leaving but are being replaced and some presumably mostly by those crossing the Mediterranean.

Also the demographics clock continued to tick. However let me also welcome this as people are living longer.

The mean age of the population at 1st January 2017 was 44.9 years, two tenths more than in 2016.

The banks

This has become a little like the never-ending story. After all what news is there some 3 months down the road after the announcement of a bailout for Monte Paschi. Well according to Bloomberg there are ongoing arguments.

In the view of some ECB Supervisory Board members, while Monte Paschi cleared the hurdles for aid, its viability was bolstered by unrealistic valuations of its bad loan portfolio, the people said. The board gave the all-clear even though the possibility that Monte Paschi sold junior bonds inappropriately to retail investors wasn’t fully reflected in the solvency assessment, they said.

There is also the issue of what will happen to Banca Popolare di Vicenza and Veneto Banca. The official view is that this will be solved “soon” which is a line they also use for Greece.

Also remember the Atlante bailout fund which was supposed to rescue things which rather embarrassingly was followed by Atlante 11 as it needed more funds, how is it going? From Teleborsa.

Intesa Sanpaolo is not prepared to add other loans in the Fund Atlas. It does not leave space for imagination Carlo Messina, CEO of the banking group……..”There is no doubt that today the one to which we must aim is to safeguard the investment made in Atlas “

Perhaps he is worried by this in 24 ORE.

Altogether, as reconstructed by Radiocor Plus, the adjustments made by the top 12 Italian banks that have joined Atlas amounted to 1.01 billion, compared with 1.98 billion actually paid into the fund on December 31 last year (about l ‘ 80% of the 2.45 billion total commitment declared by the main institutions). Less than a year after the birth of the fund, the average write-down was then 51.2% of actual amounts paid.

Comment

As ever there is much to consider and if we look at the forecast of the Bank of Italy against what is for once a favourable backdrop I am reminded of the “Girlfriend in a Coma” theme of Bill Emmott.

We expect GDP to expand, on an annual basis, by 0.9 per cent this year and the next and by 1.1 per cent in 2018 and 2019.

This reinforces my theme that even in the good years Italy manages around 1% economic growth which means that by the time we allow for downturns it is on a road to nowhere. Actually that explains its experience in the Euro area and as the population has grown it has seen GDP per capita fall by around 6%.

If we move to the banking sector we see something very sclerotic which is plainly holding the economy back as we not even the official data shows Non-Performing Loans at 16.24% of the total. If it is true that the Monte Paschi numbers have been “massaged” (again…) then I fear for what the real number is. Yet real reform never seems to actually turn up as we mull another apparently never-ending story.

 

 

Does anybody believe the Bank of England hints of an interest-rate rise?

Firstly let me open with my best wishes to those caught up in the terrible event at Westminster yesterday which is somewhere I pass through regularly. Let us then review some better economic news in a period where the UK statisticians overload particular days. If we go back to Tuesday where there was a panoply of inflation data there was also this about the public finances.

Public sector net borrowing (excluding public sector banks) decreased by £2.8 billion to £1.8 billion in February 2017, compared with February 2016; this is the lowest February borrowing since 2007.

I recall that the January numbers were also more positive and this led to this.

In January and February 2017, the government received £13.4 billion and £4.7 billion respectively in self-assessed Income Tax, giving a combined total of £18.1 billion. These represent the highest combined self-assessed Income Tax receipts on record (records begin in 1998).

So good news and other forms of revenue were good too.

Similarly, in January and February 2017, the government received £6.2 billion and £2.2 billion respectively in Capital Gains Tax, giving a combined total of £8.4 billion. These represent the highest combined Capital Gains Tax receipts on record (records begin in 1998).

It would seem that Capital Gains Tax is more significant than might be assumed. I guess the higher house prices ( it is paid on second homes and therefore buy to lets) and maybe profits from the equity market are driving this. I am surprised that the Bank of England has not been trumpeting this as part of its wealth effects, have they missed it?

Also the overall tax situation for the financial year so far has been strong.

In the current financial year-to-date, central government received £616.1 billion in income; including £465.6 billion in taxes. This was around 6% more than in the previous financial year-to-date.

There was a change to National Insurance rates but even allowing for that we are seeing a pretty good performance and ironically after the talk of extra spending and fiscal expansionism the numbers may well be telling a different story.

Over the same period, central government spent £638.1 billion; around 2% more than in the previous financial year-to-date.

With inflation rising that is of course less in real terms than it first appears and meant that we did better here.

Public sector net borrowing (excluding public sector banks) decreased by £19.9 billion to £47.8 billion in the current financial year-to-date (April 2016 to February 2017), compared with the same period in the previous financial year;

Retail Sales

There was good news as well in the February data for Retail Sales.

Estimates of the quantity bought in retail sales increased by 3.7% compared with February 2016 and increased by 1.4% compared with January 2017; this monthly growth is seen across all store types.

However the monthly numbers are erratic and the seasonal adjustment is unconvincing. February was partly so good because January was revised even lower. But the year on year comparison was strong.

In February 2017 compared with February 2016, all main retail sectors, except petrol stations saw an increase in the quantity bought (volume) while all sectors saw an increase in the amount spent (value). The largest contribution in both the quantity bought and amount spent came from non-store retailing.

However because of the week December and January data the trend remains for a fading of the year on year growth.

The underlying pattern as suggested by the 3 month on 3 month movement decreased by 1.4% for the second month in a row; the largest decrease since March 2010 and only the second fall since December 2013.

Actually we get a confirmation of some of the themes of this blog. For a start in something which central bankers and inflationistas will overlook higher inflation leads to lower consumption. The higher oil price has led to less petrol consumption.

the largest contribution came from petrol stations, where year-on-year average prices rose by 18.7%……..The underlying trend suggests that rising petrol prices in particular have had a negative effect on the overall quantity of goods bought over the last three months.

Over time I expect this to feed into retail sales as you see that prices are rising overall as the higher oil price feeds through.

Average store prices (including fuel) increased by 2.8% on the year, the largest growth since March 2012;

So sadly I expect the retail sales growth to fade away as higher inflation erodes real wages.  Also whilst it is only one sector we have yet another inflation measure (2.8% here) running higher than the official one, how many do we need?

Royal Statistical Society

I am pleased that it has expressed its misgivings about the new UK inflation infrastructure in a letter to The Times today. Here are the main points.

For several years, the Royal Statistical Society (RSS) has been advocating the introduction of a proper household inflation index. We believe the answer lies in the proposed Household Costs Index (HCI) that is currently being developed by the Office for National Statistics, with expert input from some RSS members.
Paul Johnson is right that government should not be cynical in its use of different inflation measures. We would also argue, however, that the government should use the appropriate inflation index for the job at hand. CPIH makes sense as an index for economic policy matters (such as potentially interest rate setting by the Bank of England) but it is HCI that, once fully developed and proven, should be used for uprating purposes and for assessing real incomes in the UK.

Good for them! I have spent quite some time taking my arguments to the RSS and am pleased that the message is at least partly not only being received but also transmitted. My only quibble would be that CPIH results from national accounts methodology and not economic principles.

Ben Broadbent

Ben spoke at Imperial College earlier and as ever his Forward Guidance radar misfired.

We may already be seeing the impact of that squeeze on retail spending, which in real terms fell quite sharply around the turn of the year.

Some felt it was a hint for the 9:30 numbers but if it was Ben had misread them. He gives some more Forward Guidance by telling us the UK Pound £ may go up or down!

Either the currency market is too pessimistic, in which case sterling’s depreciation is likely to be reversed over time. Or it’s not, in which case the costs of exporting will eventually go up.

Actually after the last Forward Guidance debacle Ben has either completely lost the plot or has developed a sense of humour as whilst not in the speech this was being widely reported..

It’s quite possible we could see rates go up in the UK

Can see scenarios where BOE could raise rates ( h/t FXStreet )

Another issue is that Ben Broadbent seems to follow financial markets and assume they are correct. If you recall when I was on BBC Radio 4’s MoneyBox last September the ex-Bank of England economist Tony Yates repeated the same mantra. They seem to have forgotten that they should not be puppets they should have their own views.

Comment

This week has had a ying and yang to it on UK economic news. The public finance and retail sales numbers remain good but the Sword of Damocles already beginning to swing is higher inflation especially via its effect on real wages. This will affect retail sales as 2017 progresses and that will affect the public finances too albeit there are also gains for the latter. Yet the establishment continues with its objective of inflation measures that ignore as much inflation as possible. Does anybody actually believe this new Forward Guidance from the Bank of England? After all back in 2011 they ignored inflation which went above 5% with disastrous consequences for real wages.

Me on Official Tip-TV

http://tiptv.co.uk/uk-inflation-property-bubble-boe-response-not-yes-man-economics/

 

Of UK Retail Sales and a 5% cut in real interest-rates

A feature of my career and time working with and analysing finance and economics has been the fall in interest-rates and yields. This of course has ended up with us now facing a period where more than a few interest-rates and bond yields are in fact in negative territory. My subject of yesterday France has a central bank ( ECB) with a deposit and current account of -0.4% and its 2 year bond yield is -0.5%. But let me give you some perspective from the Bank Underground blog of the Bank of England.

Real interest rates have fallen by around 5 percentage points since the 1980s.

Eye-catching is it not? Just to break this down they were 0% in the 1970s, 4.7% in the 1980s, then 1.9% up to the credit crunch and since 2009 have been -1.3%, Oh and that is 6% and not 5% by the way. For clarity this is for the United States one year yield minus how inflation turned out to be in that year.

So in the period since the 1980s we have seen, as I have pointed out quite a few times before quite a stimulus applied to the world economy and of course a fair bit of this has come in the credit crunch era. We then face a rather awkward conundrum because the supposed cure of lower interest-rates and yields is in response at least in part to the problems created by lower interest-rates and yields! A sort of doubling the dose response to an addiction. How does that usually work out?

Of course some want ever more as I note individuals like Kenneth Rogoff who want to ban as much cash as they can as they fear that they will not be able to repeat the “cure” next time around. This plainly means interest-rates going even more negative and more places seeing them. For example the UK now has a Bank Rate of 0.25% after over 3 years of pretty solid economic growth so what happens when the next recession turns up? Such thoughts have the problem of why a cure needs to be repeated so often at ever higher dosages and with ever more side-effects?

As to the causes of this the Bank Underground tries to dismiss fears over secular stagnation by pointing out this.

In the late 1930s, Alvin Hansen developed the term “secular stagnation” to describe his concerns that structural factors such as stagnant technological development and weaker population growth prospects would weigh on growth permanently.  We know now that these concerns over secular trends proved misplaced, and played little role in weaker growth.

Rather ominously that was really only changed by the second world war which is hardly a hopeful precedent! The author hopes that things will get better so lets join him in that but the truth is we are much less sure and there is a sort of unmentioned sword of Damocles hanging all over this which is Japan where the lost decade has become the lost decades.

Although the author would not put it like this there is quite a critique of current Bank of England policy tucked away in the blog.

When agents assign a low probability to the central bank remaining hawkish towards inflation, real rates must rise by a significantly larger amount in response to a given shock to stabilise inflation.  The required response decreases as credibility improves.

So as the credibility of Forward Guidance is only for the credulous now and the Bank of England plans to “look through” rising inflation then the logic applied there suggests real rates will have to rise substantially. Awkward.

Retail Sales

Speaking of rising inflation there was this in the data released this morning.

Average store prices (including fuel) increased by 1.9% on the year, the largest contribution to this increase came from petrol stations, where year-on-year average prices were estimated to have risen by 16.1%.

Regular readers will be aware that I was ahead of the pick-up in retail sales in the UK and quite a few other places by explaining that the lower inflation driven mostly be lower crude oil prices would raise consumption via a boost to real wages. So we are now beginning to see the mirror image of that relationship. It was only on Wednesday that I pointed out the real wage growth was fading and on some inflation measures had now gone negative. The price rise was just not from fuel as this from the food sector shows.

In January 2017, prices increased by 0.5% compared with December 2016, the largest month-on-month rise since April 2013, while the year-on-year increase of 0.2% is the highest since June 2014,

Thus the numbers today are not the surprise they have been presented as.

Month-on-month the quantity bought is estimated to have fallen by 0.3%.

If we look for more perspective we see this.

The underlying pattern as suggested by the 3 month on 3 month movement decreased by 0.4%; the first fall since December 2013.

In annual terms there is still growth but it has faded substantially for the heady days of late 2016.

In January 2017, the quantity bought in the retail industry is estimated to have increased by 1.5% compared with January 2016, the lowest growth since November 2013.

Actually so much of the change can be found in the sector where prices have risen the most.

The year-on-year increase in fuel stores is the largest rise since September 2011, contributing to the strong growth seen in the amount spent in fuel stores on the year. However, the quantity bought has decreased following the rise in fuel prices, suggesting that consumers are more cautious with spending in this sector.

Have readers noticed less traffic on the roads?

Tourism

There was some good news here albeit with an odd kicker.

Overseas residents made 9.2 million visits to the UK in the 3 months to December 2016. This was 6% higher than the same 3 months in 2015. The amount spent on these visits was unchanged at £5.3 billion.

It is no great surprise that the lower UK Pound £ has led to more visitors but I am curious that they spent no more. For a start how do we know? Does someone follow them into every shop? Also this goes against the argument made by some that past retail sales growth in the UK was added to by foreign purchasers using lower price for them.

Whatever the state of play there we do seem to be seeing more US tourists as we wonder if Trump fears are higher than Brexit ones?

Visits from North America increased by 15% in the 3 months to December 2016, when compared with the same 3 months in 2015.

Comment

We see that we have been living our lives in an extraordinarily favourable interest-rate environment. Many reading this will have lived their whole lives in it. The catch is that it has ended up being associated with trouble on two fronts. Firstly it did not avert a credit crunch and in fact ended up contributing to it and secondly if it was a cure we would not be where we are. Although care is needed as there were plenty of economic gains back in the day. As for now well some old fears have reappeared.

More Americans fell behind on their car loan payments in the fourth quarter, bringing auto delinquencies to their highest since the height of the financial crisis, Federal Reserve Bank of New York data released on Thursday showed…….

In the fourth quarter, $142 billion in car loans were generated, giving 2016 the most auto loan originations in the 18-year history of the data, the New York Fed said.

Auto debt hit $1.16 trillion, with a $93 billion rise over the year.

Sub-prime car loans anyone?

If we move to the UK then the consumer surge is fading. The numbers are erratic and influenced by the rise in the price of fuel but even taking that out annual growth fell to 2.6%. It remains a shame that the Bank of England last summer contributed to the inflation rise via the way that their rhetoric and Bank Rate cut and QE pushed the UK Pound £ lower. Before this is over I expect what was badged as a stimulus to turn out to be the reverse via its impact on real wages.

Greece is drowning under all the debt its “rescue” brought

After looking at the recent economic success of Spain on Friday, which was confirmed this morning by the official data showing 3.2% GDP growth in 2016 it is time to look at the other side of the Euro area coin. This is a situation that continues to be described by one of the songs of Elton John.

It’s sad, so sad
It’s a sad, sad situation
And it’s getting more and more absurd
It’s sad, so sad
Why can’t we talk it over
Oh it seems to me
That sorry seems to be the hardest word

This is the situation facing Greece which is on its way back into the news headlines after of course another sequence of headlines proclaiming a combination of triumph and improvement. What is triggering this is some new analysis from the IMF or International Monetary fund and it is all about the debt burden. It is hard not to have a wry smile at this as the IMF has been telling us the burden is sustainable for quite some time in spite of it obviously not being so as I have regularly pointed out in here.

The IMF analysis

The Financial Times has summarised it like this.

Greece faces what is likely to be an “explosive” surge in its public debt levels that within decades will mean it will owe almost three times the country’s annual economic output unless given significant debt relief, the International Monetary Fund has warned in a confidential report.

Not that confidential then! Or perhaps conforming to the definition of it in Yes Prime Minister. Worrying after some better news in relative terms from the World Economic Forum suggesting that Greece was a lot further down the list of national debt per person (capita) than you might think. Japan of course was at the head at US $85.7k per person and intriguingly Ireland second at US $67.1k per person but Greece was a fair way down the list at US $32.1k each. Of course it’s problem is relative to the size of its economic output or GDP (Gross Domestic Product).

If we look at the detail of the IMF report it speaks for itself.

The fund calculated that Greece’s debt load would reach 170 per cent of gross domestic product by 2020 and 164 per cent by 2022, “but become explosive thereafter” and grow to 275 per cent of GDP by 2060.

If we switch to Kathimerini we find out the driving force of the deterioration in the debt sustainability analysis.

Greece’s gross financing needs are estimated at less than 20 percent of GDP until 2031 but after that they skyrocket to 33 percent in 2040 and then to 62 percent by 2060.

If we step back for some perspective here we see confirmation of one of my main themes on Greece. This has been that the debt relief measures have made the interest burden lighter but have done nothing about the capital debt burden which has in fact increased in spite of the PSI private-sector debt reprofiling. We can bring in that poor battered can now because the Euro area and the IMF thought they had kicked it far enough into the future not to matter whereas the IMF is now having second thoughts. In short it has looked at the future and decided that it looks none too bright.

The crux of the matter is the amount of the austerity burden that Greece can bear going forwards. Back in May 2016 the IMF expressed its concerns of future economic growth.

Against this background, staff has lowered its long-term growth assumption to 1¼ percent, even as over the medium-term growth is expected to rebound more strongly as the output gap closes.

That will do nothing for the debt burden and will have been entwined with the extraordinary amount of austerity required under the current plans.

This suggests that it is unrealistic to assume that Greece can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a primary surplus of 3½ percent of GDP.

As an alternative the IMF suggested something of a relaxation presumably in the hope that Greece could then sustain a higher economic growth rate.

The Euro area view

This was represented last week by Klaus Regling of the European Stability Mechanism or ESM.

I think it’s really important for Greece because it will reduce interest rate risk and improve Greek debt sustainability.

What was that Klaus?

we are dealing here with a bond exchange, where floating rate notes disbursed by the ESM and EFSF to Greece for bank recapitalisation will be exchanged for fixed coupon notes. There are measures related to swap arrangements that will reduce the risk that Greece will have to pay a higher interest rate on its loans when market rates go up………In addition, the EFSF waived the step-up interest rate margin for the year 2017 on a particular loan tranche. A margin of 2% had originally been foreseen, to be paid from 2017 on.

As you can see each time Greece is supposed to pay more they discover it cannot and we need more “short-term” measures which according to Klaus will achieve this.

All this will go a long way in easing the debt burden for Greece over time, according to our debt sustainability analysis. It could lead to a cumulative reduction of the Greek debt to GDP ratio of around 20 percentage points over the time horizon until 2060.

It does not seem a lot when you look at the IMF numbers does it. Also Euro area ministers repeated something which they have said pretty much every year of the crisis, from the FT.

Mr Dijsselbloem, who is also the Dutch finance minister, said that Greece was recovering faster than anyone expected.

Really? What was that about fake news again?

Retail Sales

We can learn a lot from these numbers and let us start with some badly needed good news.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in November 2016, recorded an increase of 3.6%.

Although sadly some of the gloss fades when we note this.

The seasonally adjusted overall volume index in November 2016 compared with the corresponding index  of October 2016 recorded a decrease of 0.2%.

So overall a welcome year on year rise and the strongest category was books and stationery. However perspective is provided if we look at the index which is at 69.7 where 2010 was 100. As that sinks in you get a true idea of the economic depression that has raged in Greece over the period of the “rescue” and the “bailout”. Most chilling of all is that the food beverages and tobacco index is at 55.6 on the same basis leaving us with the thin hope that the Greeks have given up smoking and fizzy drinks.

Also it is far from reassuring to see the European Commission release consumer confidence data for Greece indicating a fall of 3.4 to 67.8.

Comment

There is much to consider here but we find ourselves looking back to the Private-Sector Initiative or debt relief of 2012. I stated back then that the official bodies such as the ECB and IMF needed to be involved as well because they owned so much of the debt. It did not happen because the ECB said “over my dead body” and as shown below what were then called the Troika but are now called the Institutions pursued a course of fake news.

Thanks to Michael Kosmides of CNN Greece who sent me that chart. As we note the fake news let me give you another warning which is that Greece these days depends on its official creditors so news like this from Bloomberg last week is much less relevant than it once was.

The yield on Greece’s two-year bonds surged 58 basis points to 7.47 percent, while those on benchmark 10-year bonds rose 22 basis points to 7.13 percent as of 2:41 p.m in London.

The real issue is that Greece desperately needs economic growth and lots of it. As I pointed out on December 16th.

Compared to when she ( Christine Lagarde of the IMF) and her colleagues were already boasting about future success, the Greek economy has shrunk by 19%, which means that the total credit crunch contraction became 26%

 

 

 

The Greek economic depression continues to the sound of silence

Today it is time again to look at what has been in my time as a blogger a regular and indeed consistent contender for the saddest story of all. This is of course the issue proclaimed as “shock and awe” by Euro area ministers such as Christine Lagarde back in May 2010 as they sent Greece spiralling into an economic depression from which it shows little sign of returning. This was accompanied by a media operation where those who argued for a different course of action were smeared with claims that they would damage the Greek economy. How shameful that was!

Instead we got austerity and claims of an internal devaluation instead of the old IMF strategy where the austerity was ameliorated by a currency devaluation. Oh and promises of reform which remain in the main just that promises. Eventually there was a default but by then it was not enough partly because the official creditors refused to take part. Drip by drip we have had confessions of failure as the IMF first decided its sums were wrong and more recently has become a fan of fiscal stimulus rather than austerity. Just as a reminder Greece was supposed to return to growth in 2012 (1.1%) and then 2.1% for two years before growing at 2.7% until the end of time.

An economic depression

How do we measure this? Well the first signal is that Greek GDP was 19.5% lower in the second quarter of this year than it was in the second quarter of 2010 when “shock and awe” was proclaimed. So that is a severe depression or Great Depression. There is no other way of putting that.

If we move to the present position then we see this.

Available seasonally adjusted data indicate that in the 2nd quarter of 2016 the Gross Domestic Product (GDP) in volume terms increased by 0.2% compared with the 1st quarter of 2016 against the increase of 0.3% that was announced for the flash estimate.

Sadly even this brief flicker of candle light gets sucked up by the gloom when we look at the annual comparison.

In comparison with the 2nd quarter of 2015, it decreased by 0.9% against the decrease of 0.7% that was announced for the flash estimate of the 2nd quarter on August 12, 2016.

We have other signs of a depression here. Firstly the fact that so far there is no rebound. Ordinarily however bad things are economies eventually rebound in what is called a V-shaped response but here we have a much grimmer L shape as in a collapse and then no recovery. Also numbers in such a situation are mostly revised upwards but as you can see it has in fact been downwards.

Wages

An important signal of these times has been the behaviour of wages and especially real wages well we have seen nothing like this. There is an index for Greek wages for different sectors so let us start with manufacturing which at the start of 2010 was at 95.9 and at the start of 2016 was at 45.5 and had fallen by over 9% in the preceding year. It is not the worst example as the wages of the professional and scientific sector fell from 100.8 to 45.9 over the same time period.

Just so you see both sides of the coin the best number was for the information sector which only and by only I mean comparatively fell from 89.8 to 80.9.

Retail Trade

This sadly is one of the worst examples of the economic depression. You may wish to make sure you are sitting comfortably before you read that on a scale where 2010=100 then Greek retail trade was 69.8 in June. Grimmest of all is that food is at 78.1.

Is it getting any better or Grecovery as some were proclaiming in 2013? Take a look for yourself.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in June 2016, recorded a decrease of 3.6% compared with the corresponding index of June 2015, while compared with the corresponding index of May 2016, recorded an increase of 3.7%.

May must have been dreadful mustn’t it?

The Monetary System

We see regular proclamations of recovery but regular readers will recall the situation last year when Greece saw capital flight on a large-scale. Capital Greece sums it up like this.

Greece΄s banking sector saw a 42 billion euro deposit outflow from December to July last year.

They try to put a positive spin on the data but it tells a rather different story.

Greek bank deposits dropped slightly in July after a rise in the previous two months………Business and household deposits fell by 160 million euros, or 0.13 percent month-on-month to 122.58 billion euros ($138.3 billion), their lowest level since November 2003.

That means the credit crunch is ongoing.

Export Led Growth

One of the ways that the “internal devaluation” was supposed to benefit Greece was via foreign trade. This should impact in two ways. Firstly exports would be more price competitive and rise and secondly imports would fall in sectors where Greek producers can replace them. How is that going? From Kathimerini.

exports of Greek products dropped to their lowest point in the last four years in the first half of 2016, posting an annual decline of 8.1 percent to 11.8 billion euros, against 12.8 billion in January-June 2015. Excluding exports of oil products, the annual decline came to 1.4 percent.

So the oil price fall has had an impact except care is needed here if it was counted when we were being told this was getting better. Especially troubling considering the efforts of the ECB to reduce the value of the Euro came from this.

There was a notable decrease in exports, including oil products, to non-EU countries, where they fell by 14.6 percent compared to June last year.

An area which had shown signs of hope was tourism where I recall better numbers and hope for the future but sadly the Bank of Greece has another tale.

In January-June 2016, the balance of travel services showed a surplus of €2,991 million, down 6.7% from a surplus of €3,205 million in the same period of 2015…….The decrease in travel receipts resulted from a 1.6% decline in arrivals and a 4.9% fall in average expenditure per trip.

Just in case someone wants to deploy the scapegoat of 2016 which is of course Brexit that has so kindly given the poor much abused weather a rest. well see for yourself…

Receipts from the United Kingdom increased by 24.8% to €388 million.

Actually it is people from outside the European Union who have stopped going to Greece for a holiday it would appear.

while receipts from outside the EU28 dropped by 21.9% (June 2016: €469 million, June 2015: €601 million).

Any thoughts as to why?

Comment

As we review the scene there is a familiar austerity drumbeat.From Kathimerini.

Tens of thousands of pensioners will see their auxiliary pensions slashed by between 10 and 12 percent on Friday morning, while in some cases the cuts will even exceed 40 percent…..This second wave of cuts will affect 144,000 pensioners, after a first one hit just under 67,000 retirees in August.

Odd that because we have been told so many times that reform has been completed. Oh and we have been told so many times that the banks are fixed as well.

Greece’s four systemic banks increased their provisions for nonperforming loans by a total of 1 billion euros during the second quarter of the year

By systemic they mean toxic under the Britney definition.

I’m addicted to you
Don’t you know that you’re toxic
And I love what you do
Don’t you know that you’re toxic

Meanwhile the Greek depression continues to the Sound of Silence.

Hello darkness, my old friend
I’ve come to talk with you again
Because a vision softly creeping
Left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains within the sound of silence

 

The new Bank of England QE program explained

Today brings us quite a bit of new information on the state of play of the UK economy post the Brexit leave vote and the Bank of England response to it. It is a rather moot point that the Bank of England should have waited for such data before pressing the trigger on its monetary sledgehammer. After all it may yet crack the wrong nut! Let me start with what we have discovered about the new Bank of England QE (Quantitative Easing) machine which fired up its new engines yesterday. Just as a reminder I pointed out on August 5th that the salvo of £70 billion ( including £10 billion of Corporate Bonds) may well have been fired straight into the nearest foot.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

Ah so a one for one ratio with the planned QE increase! At this point Mark Carney and the Bank of England are wearing a collective Dunces cap. Let us move onto the technical details of the new QE era. Back in 2012 the Bank of England reported on another issue

that would give an estimate of the total increase in household wealth stemming from the Bank’s £325 billion of asset purchases up to May 2012 of just over £600 billion, equivalent to around £10,000 per person if assets were evenly distributed across the population.

Apart from an implicit confession that it is aiming at equity and house prices the obvious catch is that the assets are not “evenly distributed” as they are concentrated in much fewer hands as the echoes of the 1% and 0.1% appear. Or to be put another way.

And the survey suggested that the median household held only around £1,500 of gross assets,

The Purchases

This will be made on a Monday, Tuesday and Wednesday at which point the Bank of England’s presumably exhausted bond buyers will retire for the next four days. Each day they will do this.

Between 8 August 2016 and 31 October 2016, the size of auctions will initially be £1,170mn for each maturity sector.

They buy a particular part of the maturity spectrum on a particular day so today Tuesday is for long-dated Gilts.

The Bank will continue, normally, to conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; of over 15 years on Tuesdays; and of 7-15 years on Wednesdays.

Tuesday’s are particularly significant as they are the day that not only our children are committed to the consequences of QE but our grandchildren as well. The category “over 15 years” includes our longest-dated UK Gilt which matures in 2068 and as part of previous operations the Bank of England owns some £989 million of it.

As the size of the operation increases then this factor will become more significant.

The Bank does not currently intend to purchase gilts where the Bank holds more than 70% of the “free float”, i.e. the total amount in issue minus government holdings. The Bank will, however, continue to keep the gilts eligible for purchase by the APF under review.

The consequences

These are to be seen in UK Gilt prices which are surging and consequently in yields which are falling. The benchmark ten-year yield has fallen below 0.6% this morning for the first time ever and the thirty-year yield has fallen to yet another new low of 1.41%. Of course the latter will be seeing Bank of England purchases today as it buys the highest Gilt prices we have ever seen.

Those who have the ability to remortgage might well be noting that the UK five-year Gilt yield is a mere 0.17% as that particular rate is used for the various derivatives used to set the rates for fixed-rate mortgages. So there could be a bonanza set of offers to come unless of course the banks suck the gains into their margins.

Differences with the ECB

Yesterday showed up a couple so let me explain. The ECB will not buy bonds yielding less than its deposit rate currently -0.4%. Whereas the Bank of England bought a 2019 Gilt yielding a mere 0.03% proving that it is quite content to buy UK Gilts at a yield much lower than its Bank Rate of 0.25%. As it finances its purchases at Bank Rate it may lead to some head-scratching however! Perhaps nobody has thought that through yet.

But the concept of a 0% or even negative yield does seem to put the Bank of England off as there were offers for Gilts around that area it rejected and I suspect that the cause was along those lines. We will have to wait and see as this will not recur until next Monday.

Index-Linkers

Just for clarity the Bank of England does not buy these as part of its QE operations so around 22% of the UK Gilt market is not available to it. It has of course purchased then in the past for its pension fund.

Today’s data

This opened with the most timely in the series from the British Retail Consortium. From Reuters.

Retail spending in July was 1.9 percent higher than a year earlier, the biggest rise in six months and up sharply from 0.2 percent growth in June, when bad weather added to uncertainty around June 23’s referendum, the British Retail Consortium said.

This news added to yesterday’s.

The data are in line with figures on Monday from credit card company Visa which showed consumer spending picked up in July, as Britons’ behaviour failed to match a post-Brexit slump in sentiment reported in earlier surveys.

So we should note that the BRC numbers do not always coincide with the official data and single month retail sales figures are unreliable but so far so good especially compared to the worst fears. It adds to the positive tourism figures reported yesterday.

Next up came some solid production data although it was for June so maybe only slightly affected by the Brexit result.

Total production output is estimated to have increased by 0.1% in June 2016 compared with May 2016……..Total production output is estimated to have increased by 2.1% between Quarter 1 (Jan to Mar) 2016 and Quarter 2 (Apr to Jun) 2016.

So month on month positive albeit by the smallest margin but the quarterly data was reviewed like this by Andy Verity of the BBC.

Industrial output grew in the second quarter of the year faster than it had since 1999 (ONS).

A little care is needed as the boost was earlier in the quarter and may have been affected by the Easter seasonal adjustment misfiring but still good.

Manufacturing was down on the month by 0.3% but overall had a good quarter.

The largest contribution to the quarterly increase in total production came from manufacturing, which increased by 1.8%. The largest contribution to the increase in manufacturing came from the manufacture of transport equipment, which increased by 5.6%.

I have highlighted the transport sector because it was it after a good quarter which was the main player in June manufacturing dipping.

Trade problems

These are ongoing for the UK economy and I have been writing about them for years and years. As the monthly figures are pretty hopeless as for example the important services data is only collected quarterly here is the state of play.

Between Quarter 1 (January to March) 2016 and Quarter 2 (April to June) 2016, the total trade deficit for goods and services widened by £0.4 billion to £12.5 billion.

Persistent deficits are the name of the game here. How much of a difference the lower UK Pound will make is open to speculation although some sections of the Financial Times appear to believe it should have been affecting the trade figures before it had happened?! Perhaps they have been watching too many time travel episodes of Dr.Who.

Comment

There is something of an irony in that as I look through and analyse the new QE operations of the Bank of England program that today’s evidence suggests it is not necessary. There are always dangers in any data series but retail sales and production (albeit modestly) being higher do not a case for QE make. If QE helped a trade position then we should have started it some 20 years or more ago!

Yet the siren voices at the Bank of England cry out again. From Reuters.

“Bank rate can be cut further, closer to zero, and quantitative easing can be stepped up”, McCafferty wrote in an op-ed for the Times.

Has Ian McCafferty forgotten already that he voted against the extra QE? No doubt he hopes people will forget how his votes for an interest-rate rise turned into the reality of an interest-rate cut. He must be dizzy from all the U-Turns and spinning around.