The economy of China is not seeing a V-Shaped recovery

This morning has seen a does of economic news from the epicentre of the current pandemic and hence crisis which is China. This is keenly awaited as we see how the economy responds to the pandemic. Sadly we seem already to be charging into what might be described as Fake News so let us take a look.

BEIJING, March 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector firmed up to 52 in March from 35.7 in February, the National Bureau of Statistics (NBS) said Tuesday.
A reading above 50 indicates expansion, while a reading below reflects contraction.
The rebound came as the country’s arduous efforts in coordinating epidemic control and economic and social development have generally filtered through, NBS senior statistician Zhao Qinghe said.

Okay now first we need to remind ourselves that this is a sentiment indicator not an actual output number although tucked away we do get some clearer  guidance.

With positive changes taking place in domestic epidemic control and prevention, 96.6 percent of China’s large and medium-sized enterprises have resumed production, up 17.7 percentage points from one month ago, NBS survey showed.
A sub-index for production, rallied 26.3 points from one month earlier to 54.1, hinting at reviving production activities.

Below we seem some sectors which we would expect to pick-up and in fact are probably flat-out. Let’s face it demand for some protective equipment may never have been as high as this.

Meanwhile, the PMI for high-tech manufacturing, equipment manufacturing and consumer goods all stood in expansion zone, signaling quickened restoration in the sectors, according to Zhao.

The twitter feed of Xinhua News also continues with the line that things are in some cases back to normal.

As the outbreak of the novel #coronavirus has been basically contained in China, the construction of Xiongan, often billed as China’s “city of the future,” has resumed in an orderly manner.

I am sure some of you have already spotted the difference between “basically contained” and contained already. But the theme is of an economic recovery.

China’s March composite PMI rose significantly to 53, up 24.1 points from February.

This has been reported as being quite a rebound as the two tweet below highlight.

Wow! Impressive V-shape recovery in #China’s Manufacturing #PMI. Up to 52 from 35.7. ( @jsblokland) 

 

So far, data seems to support China’s prospects of a V-shaped economic recovery…. Strong PMI rebound.

The second tweet is from the editor of The Spectator Fraser Nelson.

A V-shaped recovery means that you are very quickly back to where you started. This was what was promised for Greece back in the day which is of course a troubling harbinger. After all the Greek economy promptly collapsed.

The National Bureau of Statistics

It published an explainer which tells a rather different story.

The purchasing manager index is a chain index, which reflects the economic changes in this month compared with the previous month. The magnitude of the change has a great relationship with the base of the previous month.

There was more.

the manufacturing PMI, non-manufacturing business activity index, and the comprehensive PMI output index fell sharply in February, and the base rose from the previous month. These data indicate that the production and operation status of enterprises in March has significantly changed from February.

This gets reinforced here.

Taking the production index as an example, according to the answer of the enterprise purchasing manager to the question “The production volume of the main products of this month has changed from last month”,

So as you can see the situation is likely to be as follows the reading of 52 is an improvement on the 35.7 of February. so for example might be 38 or 39 if we try to impose some sort of absolute moniker in this. Accordingly there has been an improvement but V-shaped?

The mire sanguine view I have expressed is much more in line with this from the South China Morning Post today.

China’s economic situation could get worse before it gets better, amid a second wave of demand shock that is set to hit both domestic and foreign trade, a Chinese government official has warned.Addressing a press conference in Beijing on Monday, the day after President Xi Jinping toured businesses in Zhejiang province, vice-minister of industry and information technology Xin Guobin delivered a candid and downbeat assessment of the economy, in a subtle break from recent optimistic rhetoric about economic recovery.

What is behind his thinking?

“With the further spread of the international epidemic, China’s foreign trade situation may further deteriorate,” Xin said. “Overseas and domestic demand are both slumping, having a significant impact on some export-oriented companies. These companies might face a struggle to survive.”

We also get a clue as to what “barely contained” in terms of the Corona Virus means.

After bringing the domestic epidemic under control, China gave the green light earlier this month for over 600 cinemas, thousands of tourism attractions and half the country’s restaurants to reopen.

But in sudden U-turn last Friday, the National Film Bureau ordered all cinemas to shut down again, without explaining why or when they might hope to reopen.

Shanghai municipal authorities also ordered a number of famous tourist attractions to close over the weekend, including the Oriental Pearl Tower and Shanghai Ocean Aquarium.

Is it back?

Hong Kong

We have looked at Hong Kong before because it had its economic troubles before this pandemic struck. However in terms of today’s subject it does give us something of a clue to what is happening in China and if so today’s Retail Sales numbers speak for themselves.

After netting out the effect of price changes over the same period, the provisional estimate of the volume of total retail sales in February 2020 decreased by 46.7% compared with a year earlier. The revised estimate of the volume of total retail sales in January 2020 decreased by 23.1% compared with a year earlier. For the first two months of 2020 taken together, the provisional estimate of the total retail sales decreased by 33.9% in volume compared with the same period in 2019.

It is not to say that some areas have not seen a boost.

 On the other hand, the value of sales of commodities in supermarkets increased by 11.1% in the first two months of 2020 over the same period a year earlier.  This was followed by sales of fuels (+6.5% in value).

The first part is no surprise but unless people were fleeing the place ( or perhaps preparing to) I am unsure about the second part.

For the other areas of retail sales it was basically the tale of woe you might expect.

Analysed by broad type of retail outlet in descending order of the provisional estimate of the value of sales and comparing the combined total sales for January and February 2020 with the same period a year earlier, the value of sales of food, alcoholic drinks and tobacco decreased by 9.3%. This was followed by sales of jewellery, watches and clocks, and valuable gifts (-58.6% in value); other consumer goods, not elsewhere classified (-21.9%); electrical goods and other consumer durable goods, not elsewhere classified (-25.1%); medicines and cosmetics (-42.7%); commodities in department stores (-41.4%); wearing apparel (-49.9%); motor vehicles and parts (-24.2%); footwear, allied products and other clothing accessories (-43.1%); furniture and fixtures (-19.6%); Chinese drugs and herbs (-23.7%); books, newspapers, stationery and gifts (-35.0%); and optical shops (-28.6%).

Comment

These are highly charged times both in terms of the pandemic and the subsequent economic outlook. As you can see the reports of China bouncing back are in fact beyond optimistic. Indeed even Xhinua News made the point.

However, Zhao said the single-month rise does not necessarily mean the production has been back to pre-outbreak levels, noting that more data should be observed. The upturn of economy, Zhao said, only comes when the PMI moves up for at least three consecutive months.

So today’s song lyrics come from Brian Ferry ( although originally written by Bob Dylan).

It’s a hard and it’s a hard and it’s a hard and it’s a hard
And it’s a hard rain’s a gonna fall

What has happened to the UK consumer?

One of the apparent certainties of economic life is that the British consumer will take the advice of the Pools winner from many years ago and “Spend! Spend! Spend!”. This has led to another feature of our economic life because it seems to have been forgotten by many economists but before the credit crunch there were calculations that out marginal propensity to import from this was of the order of 40%. So there was a clear link to the trade deficit as well. Oh and for millennials reading this the Pools was gambling before there was a lottery, mostly in my experience by older people as for example my grandfather did but my father did not.

However last month provided a counterpoint to such certainty as the slowing in growth that we saw in the latter part of 2019 turned into something more.

In the three months to December 2019, the quantity bought in retail sales decreased by 1.0% when compared with the previous three months……..The quantity bought in December 2019 fell by 0.6% when compared with the previous month; the fifth consecutive month of no growth.

There was still some annual growth just not much of it ( 0.9%). This led to some sill headlines across the media as they used the British Retail Consortium claim that we had seen the worst year since 1995 for retail sales as click bait. That ignored the fact that its numbers are invariably much weaker than the official ones suggesting it id wedded to the bricks and mortar style retail sales which we know is troubled and not enough of the online world. Indeed there was far less reporting of this month’s effort from the BRC as the equivalent of tourists saw fewer easy pickings.

On a Total basis, sales increased by 0.4% in January, against an increase of 2.2% in January 2019. This is above both the 3-month and 12-month average declines of 0.4% and 0.2% respectively.

So weaker than last year but up and should it continue would end the decline in the averages. Actually we now know that the BRC was confused in this area as the inflation numbers did not pick this up.

We have to remember, this semi-positive performance will also be the result of aggressive discounts and consumers’ preoccupation with bagging a bargain.

Labour Market

This brings a contrasting theme as it should be supporting retail sales just as growth has faded away.

Between October to December 2018 and October to December 2019, the level of employment increased by 336,000 (or 1.0%) to a record high of 32.93 million.

There was also some real wage growth over the year just not as much as reported.

In the year to December 2019, nominal total pay (not adjusted for change in prices) grew by 2.9% to £544. Nominal regular pay grew by 3.2% to £512 over the same period. The recorded growth rates show that wage growth is decelerating.

Sadly many places fell for the real regular wages are back to the pre crisis peak spinning of our official statisticians as they cherry-picked from the very top of the tree. But even using more realistic inflation measures than the official imputed rent driven CPIH we still had some real wage growth.

Payment Protection Insurance

I have long argued this has been like a form of QE for the consumer and retail sales so this caught my eye earlier.

The bill for PPI claims in 2019 would be about £2.5bn, but Lloyds said no further provisions were needed as it had already set aside enough money.

It brings the total paid out by Lloyds over the mis-selling saga to £21.9bn. ( BBC )

Today’s Data

As suggested above we had a better month in January.

Retail volumes increased by 0.9% in January 2020, recovering from the falls in the previous two months; the increase was mainly because of moderate growth in both food stores (1.7%) and non-food stores (1.3%).

Actually if we look into the detail the underlying position is stronger and I am pleased to report that my main theme in this area was clearly in play.

Fuel saw a large fall of 5.7% in the quantity bought in January 2020 when compared with December 2019, which coincides with a rise in fuel prices of 2.3 pence per litre between December and January.

For newer readers I first wrote on the 29th of January 2015 that lower inflation boosted retail sales growth which you may note is not only true but the opposite of what central bankers keep telling us. I was involved in a debate with Danske Bank yesterday on this subject and in the end they agreed with me although that last sentence!

Higher than expected inflation makes people worse off, as it means people’s real wage growth is not as high as expected. That is why stable and predictable inflation is so important. Whether the target is 0%, 1% or 2% is less important.

Anyway returning to the data we see a corollary of my theme which is that higher prices should led to lower consumption which seems to be in play. It is probably also true that we are seeing the impact of the switch towards electric vehicles.

Perspective

The better number for January although it may not initially look like it helped the three month average.

In the three months to January 2020, both the amount spent and the quantity bought in the retail industry fell by 0.5% and 0.8% respectively when compared with the previous three months.

This is because November and December were so weak that even a better January was unlikely to fix it. The Underlying index was 108.5 in October then went 107.7 and 107.1 before now rising to 108.1. The index was set at 100 in 2016 so we see this area has seen more growth than others.

On an annual basis we have some growth just not very much of it.

When compared with a year earlier, both measures reported growth at 2.1% for the amount spent and 0.8% for the quantity bought.

Comment

Today gives an opportunity to look at how economics applies in real world events. Having just lost all readers from the Ivory Towers let me apologise to anyone who was disturbed by any screaming from them! They may have just have been able to laugh off the idea that higher inflation is bad but the next bit is too much. You see we have a favourable employment situation especially with real wage growth being added to employment growth but we are losing two factors.

The first is the impact of the PPI claim repayment money which looks as though much of it went straight to the retail sales bottom line. Next there is this from the Bank of England.

The annual growth rate of consumer credit rose to 6.1% in December, having ticked down to 5.9% in November. The growth rate for consumer credit has been close to this level since May 2019. Prior to this it had fallen steadily from an average of 10.3% in 2017.

Whilst it is still the fastest growing area of the economy I can think of my point is that growth has slowed and that seems to be affecting retail sales. A particular area must be what is going on with car sales and a few months back the Bank of England said that but since then it has decided that silence is golden on this subject. For fans of official denials there was of course this from Governor Carney back in the day.

This is not a debt fuelled expansion

 

Even the UK consumer can not always spend “more more more”

The issue of retail sales is one that has become a signal of our times in various ways. It has long been considered a support for economic growth especially in my home country the UK. However there are places where economics would like more of it such as in the surplus countries Germany and Japan which would then help with rebalancing world trade via higher imports. In more recent times the green agenda clearly implies lower retail sales although something which is likely to be as unpopular is that tends not to get much publicity. Finally there is the issue of the decline of the high street and the rise of online shopping. It is hard for shops to compete with companies willing to deliver even at 9 o’clock on a Sunday evening as I have observed recently.

Measuring such things is complex and let me illustrate with a story which starts well. From the US Census Bureau.

Advance estimates of U.S. retail and food services sales for December 2019, adjusted for seasonal
variation and holiday and trading-day differences, but not for price changes, were $529.6 billion, an
increase of 0.3 percent (±0.4 percent)* from the previous month, and 5.8 percent (±0.7 percent) above
December 2018

I have highlighted the bit which shows that these are turnover or nominal rather than real figures. But there is more to it than meets the eye as whilst these look good there were downwards revisions I gather which mean that the Atlanta Fed GDP Nowcast thinks this.

 After this morning’s retail sales release from the U.S. Census Bureau, the nowcast of fourth-quarter real personal consumption expenditures growth declined from 2.3 percent to 1.6 percent.

As Avril Lavigne pointed out.

Why’d you have to go and make things so complicated?

The UK

The background has been provided by the British Retail Consortium.

Total sales for 2019 decreased by 0.1%, compared with 1.2% growth in 2018. This is the worst year on record…………Taking November and December together to iron out the Black Friday distortions, Total sales declined 0.9% compared with the same period in 2018…….Taking November and December together to iron out the Black Friday distortions, Like-for-Like sales declined 1.2% compared with the same period in 2018.

This is what produced the headlines which were copied across social media that this had been the worst year for UK retail since 1995. This was not the media’s finest hour as this was plainly rubbish to anyone who has any knowledge of the official data. Let us be generous and say that such a view is true for some of the department stores and so on struggling to compete with the virtual world.

Today’s data

We have been observing a slowing of the rate of growth as 2019 had developed and this continued in December.

Comparing the three months to December 2019 against the same three months a year ago, growth in the quantity bought increased by 1.6% in December 2019, despite a strong decline of 2.2% for department stores.

Along the way we get a reminder that department stores are essentially in a depression, which is backed up by this next bit,

Online sales as a proportion of all retailing was 19.0% in December 2019, compared with the 18.6% reported in November 2019.

Actually whilst we still have annual growth if we look more recently we have moved into a decline.

Looking at the three-month on three-month growth rate, the quantity bought in retail sales has not experienced growth for three consecutive months. The three months to October 2019 remained flat, while the three months to November and December fell by 0.5% and 1.0% respectively.

Indeed and it was a case of and the beat goes on if we look at December itself.

The quantity bought in December 2019 fell by 0.6% when compared with the previous month; the fifth consecutive month of no growth.

I am not quite sure why they say/write “no growth” when there is a perfectly useful word like decline available. Anyway we get very little detail for December but do from the three-monthly detail get more of a grip about what has happened in 2019.

Declines were seen across most sectors except for household goods stores and fuel. The strong decline of 3.2% in non-store retailing was largely because of a fallback from very strong growth in the previous three months for September at 4.0%, this included large monthly growth in July of 7.3%, which was attributed to large promotions in the sector. The quantity of goods bought in non-store retailing increased on the latest month by 1.0%.

This is a sort of a doppelganger of the situation in the US we observed earlier. There we saw December misleading as the trend whereas in the UK it was the surge in July and subsequent associated fall back which has muddied the water.

Also if we widen our perspective from pure economics perhaps the pressure on providers and sellers of cheap fashion clothing is having an impact.

Clothing experienced strong declines both on the month at negative 2.0% and in the three months to December at negative 2.3%. This is the sixth consecutive month of no growth for clothing stores for the three-month on three-month movement.

Comment

The situation regarding UK Retail Sales has been “slip-sliding away” as Paul Simon put it in the latter part of 2019. Care is needed as it had previously been very strong and it cannot keep surging. Even the UK consumer must tire eventually. But there are consequences from the apparent shift and clear food for thought is provided by the fact that an already weak last quarter of 2019 will have a downwards pull on its GDP of the order of 0.05%.

That then turns eyes to Threadneeedle Street and the Bank of England which told us this earlier this week. From Monday.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

The Retail Sales release is likely to have him at least singing along with Prince.

She’s never satisfied (She’s never satisfied)
Why do we scream at each other
This is what it sounds like
When doves cry

In a more sophisticated world where they are supposed to look forwards they should be noting that the sentiment reports have shown a post election rally. But back in the real world they have an itchy-finger for interest-rate cuts if the summer of 2016 is any guide. Although the Governor’s focus has changed.

Mark Carney said: “It’s an honour to be supporting the Prime Minister as the UK invites almost 200 countries to Glasgow in November to address the climate threat. This COP 26 Summit will be a critical moment for climate action.”

Will they fly in so that they can tell the rest of us not to fly?

If we return to the “worst year since 1995” release then even today’s weak numbers have scotched that. The lust for clickbait so often trumps reasoning and thought.

 

 

 

 

Yet another scandal unfolds at the Bank of England

Sometimes the news just leaps at you off the page and overnight this has happened concerning a warning I have made in the past about the Bank of England. So let us get straight to the Financial Times on the subject.

The Bank of England has referred to the UK’s financial watchdog the revelation that an audio feed of its market-sensitive press conferences was supplied to high-speed traders before the events were officially broadcast.

This is disgraceful on two counts. Firstly in an era of computer driven algorithm driven trading an edge like this is quite something for them as we mull exactly who was more equal than others? To coin a phrase. Next is the fact that this happened at the ECB several years ago and after such a warning someone should have been dispatched to make sure that it could not happen at the Old Lady. So we can add laziness to the incompetence.

As ever the PR machine is in full flow and has opened its batting with an attempt to put the blame elsewhere.

Following a rapid internal investigation, the central bank confirmed what it called a “wholly unacceptable” use of its back-up audio feed of press conferences by a third party supplier, which it has refused to name citing legal reasons.  The BoE was responding to an article in The Times, which reported that hedge funds had been eavesdropping on press conferences a few seconds before others heard the words of governor Mark Carney.

The spinning starts with the report of a “rapid investigation” which surely is in fact a really tardy one as the ECB scandal was several years ago now! Also did no-one wonder why this was set-up?

The audio feed was installed only to act as a back-up in case the video feed failed, but the BoE said it had recently discovered — “following concerns raised with the bank” — that the feed had been misused by the supplier since earlier this year.  “This wholly unacceptable use of the audio feed was without the bank’s knowledge or consent, and is being investigated further,” the BoE said in a statement. Those who received the audio feed had a five to eight-second advantage over people who watched the main video feed, the Times reported.

Have you noted how a “few seconds” seems to have suddenly morphed into a ” five to eight-second advantage”? Also the attempt to shift blame to the supplier is really rather weak. Did nobody wonder why funds were willing to pay the amounts suggested below?

Clients were charged between £2,500 and £5,000 per press conference for access to the audio feed, the newspaper reported, adding that high-speed audio services were also offered for similar events at the European Central Bank, the US Federal Reserve and the Bank of Canada.

Even the Financial Times which like more than a few parts of the media has lauded Governor Carney as a “rock star” central banker have to admit this.

However, this is embarrassing for the BoE. Comments made by Mr Carney and other senior BoE officials at the press conferences that follow meetings of the monetary policy committee and financial stability committee often move sterling and gilt prices: having a start of a few seconds would allow traders to pre-empt the rest of the market.

As to any resolution well in true Yes Prime Minister style the ball is licked into the long grass.

On Thursday, the BoE said it had referred the matter to the Financial Conduct Authority to investigate whether rules had been broken and trading had occurred on the basis of early information from the feed.

How about yes and yes as the answers to those questions?! Indeed in the replies IronKnee seems to understand the game.

You don’t understand the system, it’s the City

We have a long investigation, then take a few traders to Court (great if they are from the EU27 or have excess melanin) because the Executives couldn’t possible know what their staff were doing and can’t be held responsible.

Indeed the higher up you are the less responsible you are for anything. Yet in other areas…..

#ECJ : An airline is liable for the harm caused by a spilt cup of hot coffee #nikiluftfahrt

Let me now link this back to my theme and what I consider to be an even more serious issue so let us step back in time to August 2nd 2018 and I have added some emphasis.

 Actually one way or another the decision has already been made as the Monetary Policy Committee voted last night. This was a rather unwise change made by Governor Carney as it raises the risk of leaks or what is called the early wire as the official announcement is not made until midday. As you can see from the chart below the BBC seems to think that the decision is a done deal or knows it is ( h/t @Old_Grumpy_Dave ).

Retail Sales

We can continue the Bank of England theme as we note that last time around 2 members voted for an interest-rate cut and would likely be further confirmed by today’s Retail Sales release.

The quantity bought in November 2019 fell by 0.6% when compared with the previous month, with only household goods stores reporting growth…….In the three months to November 2019, the quantity bought in retail sales decreased by 0.4% when compared with the previous three months; this is the first decline since April 2018.

The state of play is summed up by this bit.

There has been a slowdown in the rate of growth in recent months, with October 2019 increasing at just 0.1%. November 2019 saw a decline of 0.4%; this is the first decline since April 2018, which reported a fall of 0.2%.

Indeed the annual comparison has weakened too.

Year-on-year growth in the quantity bought increased by 1.0% in November 2019; this is the lowest growth since October 2017, owing to a decline of 1.1% in non-food stores.

So there does seem to be something going on although there is a catch as whilst the official view is that this is covered by the seasonal adjustment I am much more doubtful.

In 2019, the official Black Friday was on 29 November and outside our November reporting period, which covers four weeks from 27 October to 23 November; our seasonally adjusted estimates account for this shift in timing.

Comment

As the term of Bank of England Governor Mark Carney comes to an end I am reminded of the Yes Prime Minister view that an intelligent and honest Governor would be an “innovation”. Added to that has been the accusations that he has played politics in the Brexit debate which was frankly hardly a surprise for a man accused of playing politics when he was Governor of the Bank of Canada. Sadly such issues got covered in a smokescreen provided by a fawning media who presumably are hoping today that people have short memories.

However there are 2 deeper issues which are as follows. The Bank of England has proved to be somewhat scandal ridden as we note the Li(e)bor and various other scandals. Next is the fact that this matters ever more because central bankers have intervened in so many new areas. Indeed that has been highlighted this morning by the Riksbank in Sweden which ran negative interest-rates in a boom and now responds to rising unemployment with this.

Therefore, in line with the assessment in October, the Executive Board has decided to raise the repo rate from –0.25 per cent to zero per cent. The forecast for the repo rate is unchanged, and the repo rate is expected to remain at zero per cent in the coming years.

Yet they mostly escape criticism for this shambles. Perhaps if Governor Carney could stick to the day job that might help.

 

 

Greece GDP growth is a tactical success but a strategic disaster

Yesterday the Eurogroup made a statement lauding the economic progress made by Greece.

We welcome the confirmation by the institutions that Greece is projected to comfortably meet the primary surplus target of 3,5% of GDP for 2019. We also welcome the adoption of a budget for 2020, which is projected to ensure the achievement of the primary surplus target and which includes a package of growth-friendly measures aimed at reducing the tax burden on capital and labour. Greece has also made significant progress with broader structural reforms, notably in the area of the labour market, digital governance, investment licensing and the business environment.

Actually of course this is another form of punishment beating as we note that the depression ravaged Greek economy will find 3.5% of GDP subtracted from it each year. It is hard not to then laugh at the mention of “growth-friendly” measures. Moving to reform well this all started in the spring of 2010 so why is reform still needed? Indeed the next bit seems to suggest not much has been done at all.

 It will be crucial for Greece to maintain, and where necessary accelerate, reform momentum going forward, including through determined implementation of reforms on all levels. Against this background, we welcome that the Greek authorities reiterated their general commitment to continue the implementation of all key reforms adopted under the ESM programme, especially as regards the reduction of arrears to zero, recruitments in the public sector and privatisations.

Anyway they are going to give Greece some of the interest and profits they have taken off it back.

Subject to the completion of national procedures, the EWG and the EFSF Board of Directors are expected to approve the transfer of SMP-ANFA income equivalent amounts and the reduction to zero of the step-up interest margin on certain EFSF loans worth EUR 767 million in total.

What about the economy?

We have reached the stage I have long feared where any improvement is presented as a triumph. This ignores two things which is how bad matters got and how long it has taken to get here. Or to put it another way Christine Lagarde was right to describe it as “shock and awe” when she was French finance minister but in the opposite way to what she intended.

Manufacturing

This week’s PMI survey from Markit was quite upbeat.

November PMI® survey data signalled a quicker improvement in operating conditions across the Greek manufacturing sector. Overall growth was supported by sharper expansions in output and new orders. Stronger domestic and foreign client demand led to a faster rise in workforce numbers and a greater degree of business confidence.

The reading of 54.1 is really rather good at a time when many other countries are reporting declines although of course the bit below compares to a simply dreadful period.

The rate of overall growth was solid and among the sharpest seen over the last decade.

However there was some good news in a welcome area too.

In response to greater new order volumes, Greek
manufacturers expanded their workforce numbers at a steep pace that was the quickest for seven months.

Also there was some optimism for next year.

Our current forecasts point towards a faster expansion in industrial production in 2020, with the rate of growth expected to pick-up to 1.1% year-on-year.

Sadly though if we look at the previous declines even at such a rate before Maxine Nightingale would be happy.

We gotta get right back to where we started from

Retail Trade

If we switch to the official data we see that the recent news looks good.

The Overall Volume Index in retail trade (i.e. turnover in retail trade at constant prices) in September 2019, increased by 5.1%, compared with the corresponding index of September 2018, while, compared with the corresponding index of August 2019, decreased by 3.9%

So in annual terms strong growth which should be welcomed. But having followed the situation in Greece for some time I know that the retail sector collapsed in the crisis. So we need to look back and if we stay with September we see that the index ( 2015=100) was 144.5 in 2009 and 129.3 in 2010 whereas this year it was 107.3. In fact looking back the peak in September was in 2006 at 167.1 so as you can see here is an extraordinary depression which brings the recent growth into perspective.

Indeed the retail sector was one of the worst affected areas.

Trade

This is one way of measuring the competitiveness of an economy and of course is the area the International Monetary Fund used to prioritise before various French leaders thought they knew better. After such a long depression you might think the situation would be fixed but no.

The deficit of the Trade Balance, for the 9-month period from January to September 2019 amounted to 16,500.5 million euros (18,313.6 million dollars) in comparison with 15,390.6 million euros (18,139.7 million dollars) for the corresponding period of the year 2018, recording an increase, in euros, of 7.2%.

However there is a bright spot which we find by switching to the Bank of Greece.

A rise in the surplus of the services balance is due to an improvement primarily in the travel balance and secondarily in the transport and other services balance. Travel receipts and non-residents’ arrivals increased by 14% and 3.8% year-on-year respectively. In addition, transport (mainly sea transport) receipts rose by 5.5%.

Shipping and tourism are traditional Greek businesses and the impact of the services sector improves the situation quite a bit.

In the January-September 2019 period, the current account was almost balanced, while a €1.4 billion deficit was recorded in the same period of 2018. This development reflects mainly a rise in the services surplus and also an improvement in the primary and the secondary income accounts, which more than offset an increase in the deficit of the balance of goods.

In fact tourism has played an absolute blinder for both the trade position and the economy.

In January-September 2019, the balance of travel services showed a surplus of €14,032 million, up from a surplus of €12,507 million in the same period of 2018. This development is attributed to an increase, by 14.0% or €1,976 million, in travel receipts, which were only partly offset by travel payments, up by 28.0% or €450 million.

GDP

Today has brought the latest GDP data from Greek statistics.

The available seasonally adjusted data indicate that in the 3rd quarter of 2019 the Gross Domestic
Product (GDP) in volume terms increased by 0.6% in comparison with the 2nd quarter of 2019, while
in comparison with the 3rd quarter of 2018, it increased by 2.3%.

The story here is of export driven growth which provides some hope. The domestic economy shrank with consumption 0.4% lower and investment 5% lower on a quarterly basis whereas there was this on the external side.

Exports of goods and services increased by 4.5% in comparison with the 2nd quarter of 2019……….Imports of goods and services increased by 0.6% in comparison with the 2nd quarter of 2019.

Comment

At first it looks extraordinary that the Greek domestic economy could shrink on a quarterly basis but then of course we need to remind ourselves that the fiscal policy described at the beginning of this article is extraordinarily contractionary. So in essence the recovery seems to be depending rather a lot on the tourism industry. I also note that if we look at the Euro area data there is an unwelcome mention in the employment section.

The largest decreases were observed in Lithuania (-1.2%), Romania (-1.1%), Finland (-0.5%) and Greece (-0.3%).

Not what you would hope for in a recovery period.

Switching to an idea of the scale of the depression we see that in the latest quarter GDP was 49 billion Euros, compared to the previous peak in the spring of 2007 of 63.3 billion Euros ( 2010 prices). So more than 12 years later still nearly 23% lower. That is what you call a great depression and at the current rate of growth it will be quite some time before we get right back where Greece started from.

 

Where will Christine Lagarde lead the ECB?

We find ourselves in a new era for monetary policy in the Euro area and it comes in two forms. The first is the way that the pause in adding to expansionary monetary policy which lasted for all of ten months is now over. It has been replaced by an extra 20 billion Euros a month of QE bond purchases and tiering of interest-rates for the banking sector. The next is the way that technocrats have been replaced by politicians as we note that not only is the President Christine Lagarde the former Finance Minister of France the Vice-President Luis de Guindos is the former Economy Minister of Spain. So much for the much vaunted independence!

Monetary Policy

In addition to the new deposit rate of -0.5% Mario Draghi’s last policy move was this.

The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP), i.e. the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP), at a monthly pace of €20 billion as from 1 November 2019.

It is the online equivalent of a bit of a mouthful and has had a by now familiar effect in financial markets. Regular readers will recall mt pointing out that the main impact comes before it happens and we have seen that again. If we use the German ten-year yield as our measure we saw it fall below -0.7% in August and September as hopes/expectations of QE rose but the reality of it now sees the yield at -0.3%. So bond markets have retreated after the pre-announcement hype.

As to reducing the deposit rate from -0.4% to -0.5% was hardly going to have much impact so let us move into the tiering which is a way of helping the banks as described by @fwred of Bank Pictet.

reduces the cost of negative rates from €8.7bn to €5.0bn (though it will increase in 2020) – creates €35bn in arbitrage opportunities for Italian banks – no signs of major disruption in repo, so far.

Oh and there will be another liquidity effort or TLTRO-III but that will be in December.

There is of course ebb and flow in financial markets but as we stand things have gone backwards except for the banks.

The Euro

If we switch to that we need to note first that the economics 101 theory that QE leads to currency depreciation has had at best a patchy credit crunch era. But over this phase we see that the Euro has weakened as its trade weighted index was 98.7 in mid-August compared to the 96.9 of yesterday. As ever the issue is complex because for example my home country the UK has seen a better phase for the UK Pound £ moving from 0.93 in early August to 0.86 now if we quote it the financial market way.

The Economy

The economic growth situation has been this.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area in the third quarter of 2019 ( Eurostat)

As you can see annual economic growth has weakened and if we update to this morning we were told this by the Markit PMI business survey.

The IHS Markit Eurozone PMI® Composite
Output Index improved during October, but
remained close to the crucial 50.0 no-change mark.
The index recorded 50.6, up from 50.1 in
September and slightly better than the earlier flash
reading of 50.2, but still signalling a rate of growth
that was amongst the weakest seen in the past six and-a-half years.

As you can see there was a small improvement but that relies on you believing that the measure is accurate to 0.5 in reality. The Markit conclusion was this.

The euro area remained close to stagnation in
October, with falling order books suggesting that
risks are currently tilted towards contraction in the
fourth quarter. While the October PMI is consistent
with quarterly GDP rising by 0.1%, the forward looking data points to a possible decline in economic output in the fourth quarter.

As you can see this is not entirely hopeful because the possible 0.1% GDP growth looks set to disappear raising the risk of a contraction.

I doubt anyone will be surprised to see the sectoral breakdown.

There remained a divergence between the
manufacturing and service sectors during October.
Whereas manufacturing firms recorded a ninth
successive month of declining production, service
sector companies indicated further growth, albeit at
the second-weakest rate since January.

Retail Sales

According to Eurostat there was some good news here.

In September 2019 compared with August 2019, the seasonally adjusted volume of retail trade increased by 0.1% in the euro area (EA19). In September 2019 compared with September 2018, the calendar adjusted retail sales index increased by 3.1% in the euro area .

The geographical position is rather widespread from the 5.2% annual growth of Ireland to the -2.7% of Slovakia. This is an area which has been influenced by the better money supply growth figures of 2019. This has been an awkward area as they have often been a really good indicator but have been swamped this year by the trade and motor industry problems which are outside their orbit. Also the better picture may now be fading.

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

In theory it should rally due to the monthly QE but in reality it is far from that simple as M1 growth picked up after the last phase of QE stopped.

Comment

As you can see there are a lot of challenges on the horizon for the ECB just at the time its leadership is most ill-equipped to deal with them. A sign of that was this from President Lagarde back in September.

“The ECB is supporting the development of such a taxonomy,” Lagarde said. “Once it is agreed, in my view it will facilitate the incorporation of environmental considerations in central bank portfolios.” ( Politico EU)

Fans of climate change policies should be upset if they look at the success record of central banks and indeed Madame Lagarde. More prosaically the ECB would be like a bull in a China shop assuming it can define them in the first place.

More recently President Lagarde made what even for her was an extraordinary speech.

There are few who have done so much for Europe, over so long a period, as you, Wolfgang.

This was for the former German Finance Minister Wolfgang Schauble. Was it the ongoing German current account surplus she was cheering or the heading towards a fiscal one as well? Perhaps the punishment regime for Greece?

As to the banks there were some odd rumours circulating yesterday about Deutsche Bank. We know it has a long list of problems but as far as I can tell it was no more bankrupt yesterday than a month ago. Yet there was this.

Mind you perhaps this is why Germany seems to be warming towards a European banking union…..

UK Retail Sales are strong again posing questions for the CBI and BRC

We find ourselves advancing today on what is the strengths of the UK economy which is retail sales. These have consistently supported economic output and GDP ( Gross Domestic Product). However there is an undercut to this as our propensity to consume is a major factor in our persistent balance of trade deficits. It is also one of the factors that gets forgotten when this tune starts up and people get the vapors because it is an area where we are different.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so
I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

British Retail Consortium

This has played a rather different tune to the official data as these excerpts from its prices report show.

Shop prices fell by 0.6% on the previous year as low consumer demand and stiff competition continued to push down prices…….While consumers may welcome lower prices, falling consumer demand is squeezing retailers’ already tight margins.

Their volume data has been weak for some time.

Unsurprisingly September proved to be another difficult month for retailers, with like-for-like sales declining by 1.7 per cent compared to last year. Worryingly, even online sales moved closer to stalling, with growth of non-food online sales only 0.7 per cent.

“Ongoing Brexit uncertainty is clearly having a material impact on the consumer psyche, with all but one non-food category being in decline in September. Consumers are choosing to focus on the essentials, with food one of the few categories delivering growth.

The trouble is that they have ended up looking like they have experienced a set of bum notes as the official data has turned out to be pretty good. Indeed frankly there has been no relation between the two at all.

The CBI

The Confederation of British Industry has been sending out an SOS for some time now.

Retail sales volumes in the year to September fell for the fifth consecutive month, albeit at a slower pace than the previous month, according to the latest CBI Distributive Trades Survey. Retailers expect the contraction in sales volumes to ease further in October.

There is a particular subject they seem obsessed with.

Five successive months of falling volumes tells its own story about the tough conditions retailers are having to operate in. Add to this the pressures of Sterling depreciation and the need to plan for potential tariffs and supply issues in the event of a no-deal Brexit and you get a gloomy picture for the sector.

The media have often joined in with this gloomy view but have regularly found themselves crossing their fingers that their readers,listeners and viewers have forgotten this when the official data is released. I fear that the British Retail Consortium and the CBI are imposing their own views on a particular issue onto the data rather than just letting the numbers speak for themselves.

Today’s Data

At first it might appear odd that this was a good number.

The quantity bought was flat (0.0%) in September 2019 when compared with the previous month, following a fall of 0.3% in August 2019.

There is the improvement from last month’s fall but there is also the fact that September last year was a particularly weak number where the index fell from 106.2 to 105.4 so if we switch to an annual comparison we see a strengthening of the position.

The year-on-year growth rate shows that the quantity bought in September 2019 increased by 3.1%, with growth across all sectors except department stores and household goods.

If we look at the picture we see that pretty much everywhere is strong but particularly non-retail and food.

In September 2019, all four main sectors contributed positively to the amount spent and quantity bought, resulting in a year-on-year growth of 3.4 and 3.1 percentage points respectively.

Non-store retailing provided the largest contribution to the growth in the quantity bought at 1.4 percentage points. Food stores reported the largest contribution to the amount spent at 1.5 percentage points in September 2019.

The Recent Trend

There have always been issues with monthly retail sales data being erratic and the modern era with the development of Black Friday and Amazon sales days have made that worse. Thus we get the best idea from the three month average.

In the three months to September 2019, moderate growth in the quantity bought continued at 0.6% when compared with the previous three months, with all sectors within non-food stores reporting declines except “other stores”.

That may be moderate growth for retail sales but we would be happy indeed if all the other areas of the economy managed it! As to the detail we are told this.

Non-store retailing showed strong growth at 4.3%; this includes a strong monthly growth in July 2019 of 6.9% with summer promotions boosting sales more than usual in this month. Food stores also reported a growth in the three-month on three-month movement; this follows three previous months of decline in the three-month on three-month growth rate.

I am afraid that one sector seems locked into decline though.

Department stores continued the ongoing decline in the three-month on three-month movement resulting in 13 consecutive months of no growth in this sector.

Online Sales

These continue to strengthen overall.

Internet sales increased by 9.1% for the amount spent in September 2019 when compared with September 2018, with all sectors reporting growths except department stores.

However the monthly numbers like elsewhere are erratic.

In contrast, internet sales fell on the month by 2.0% when compared with August 2019.

It seems that department stores cannot buy a break as I note that their online sales over the past year have fallen by 3.6%

Comment

We are seeing yet more confirmation of the theme that I established on the 29th of January 2015.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

Actually we have shifted from absolute price falls to relative ones as inflation in this area which has been around 0.3% is far lower than wage growth, So we have real wage growth of over 3% which is boosting retail sales. Ironically the British Retail Consortium think this impact may be even stronger.

September Shop Prices fell by 0.6% compared to a 0.4% decrease in August. This is the highest rate of decline since May 2018…..Non-Food prices fell by 1.7% in September compared to August’s decrease of 1.5%. It is the highest rate of decline since May 2018.

So according to their numbers relative real wages are surging but as to the consequences well Kim Syms got it right I think.

Too blind to see it
Too blind to see what you were doing
Too blind to see it
Too blind to see what you were doing.

As to the wider issue these numbers move the UK further away from a recession as they suggest a small ( 0.03%) boost on a quarterly basis and a stronger annual one.

Meanwhile in other news Bank of England Governor Mark Carney has flown all the way to Boston in the United States to lecture us all on climate change.

Asked about his views on climate change and potential divestments from fossil fuel firms, Carney said a more effective approach would be to help companies, including automakers and energy producers, move to lower emissions.

“It’s not just about divestment,” he said. Better, he said, would be “to put capital into an energy company, that’s going from oil-and-coal heavy to a renewable mix, that they wouldn’t otherwise do if they didn’t get the capital.” ( Reuters)

He did however find time to remind us that his priority remains The Precious! The Precious!

Carney said the British central bank would probably cut the countercyclical capital buffer that it sets for banks to zero, from 1% now, if the economy – which faces the prospect of a no-deal Brexit shock – took a hit.

The Investing Channel