The UK shopper strikes yet again!

This morning has brought an example of something which is both remarkable and familiar. You might argue that you cannot use those two words together but 2020 is a year that continues to defy convention. What I am referring too is more good news for the UK economy from this sector.

In October 2020, retail sales volumes increased by 1.2% when compared with September; the sixth consecutive month of growth in the industry.

This means that the annual picture looks really rather rosy too.

In October, the year-on-year growth rate in the volume of retail sales saw a strong increase of 5.8%, with feedback from a range of businesses suggesting that consumers had started Christmas shopping earlier this year, further helped by early discounting from a range of stores.

In recent times the pattern has changed with for example Black Friday being in a week’s time and there is also Cyber Monday. Some Black Friday offers seem to have already started, if the advertising I see is any guide. So the structure underlying seasonal adjustment has been changing and maybe there has been another shift this year. Thus there may be a hangover from these numbers but we simply do not know how much it will be?

If we try to compare we the period pre the pandemic we see another strong recovery and then boom.

Looking at October’s total retail sales values (excluding fuel), which is a comparable measure to our online series, sales increased by 7.9% when compared with February; driven by a strong increase in sales online at 52.8% in comparison to reduced store sales at negative 3.3%.

From all the deliveries I see happening the online numbers are hardly a surprise, but with Lockdown 2.0 now adding to the problems I fear for quite a bit of the high street.

So we do have a V-shaped recovery for one part of our economy and I guess the orders for the economics text books are already on their way to the printers.

What this has done is out the switch to the online world on speed with food sales seeing a particular boom. That will be fed by the stories that Covid-19 is being spread by supermarket visits.

In October, we can see that online sales for all sectors increased when compared with February. Online food sales nearly doubled, with an increase of 99.2% in comparison with food store sales, which saw a fall of 2.1%. Overall, total food sales increased by 3.4% when compared with February.

Clothing stores, with an overall decline of 14.0% in value sales, increased their online sales by 17.1% but saw the biggest fall in store sales at negative 22.1%.

The area which has most struggled does not really have an option for online sales.

In October, fuel sales still remained 8.8% below February’s pre-lockdown level, while car road traffic reduced by an average 14.2%.

Looking at the overall picture it is also a case of Shaun 1 Bank of England 0 because my case that lower prices lead to growth has got another piece of evidence in its favour.

This was the sixth consecutive month of growth resulting in value and volume sales 5.2% and 6.7% higher respectively than in February 2020, before coronavirus (COVID-19) lockdown restrictions were applied in the UK.

With value growth or if you prefer expenditure in Pounds lower than volume growth there has been disinflation or price falls combined with volume growth. For newer readers I first made the point formally on here on the 29th of January 2015.

Looking ahead that boost may now fade as October gave a hint of a change of trend.

All measures in the total retail sales industry saw an increase in October 2020. The monthly growth rate for value sales was 1.4% and for volume sales 1.2%.

It may take a while to note anything like that as Lockdown 2.0 will affect the December and particularly the November numbers.

Public Finances

These too were numbers that the forecasters got wrong by quite a bit. So today was yet another failure as Retail Sales were supposed to flat line and borrowing be much higher.

Public sector net borrowing (excluding public sector banks, PSNB ex) is estimated to have been £22.3 billion in October 2020, £10.8 billion more than in October 2019, which is both the highest October borrowing and the sixth-highest borrowing in any month since monthly records began in 1993.

Of course, we are borrowing extraordinary amounts so this is relatively good news rather than being outright good. As you can see below a more than half of the rise is extra central government spending.

Central government bodies are estimated to have spent £71.3 billion on day-to-day activities (current expenditure) in October 2020, £6.4 billion more than in October 2019; this growth includes £1.3 billion in Coronavirus Job Retention Scheme (CJRS) and £0.3 billion in Self Employment Income Support Scheme (SEISS) payments.

Also revenues have fallen and some of that is deliberate with the VAT and Stamp Duty cuts.

Central government tax receipts are estimated to have been £39.7 billion in October 2020 (on a national accounts basis), £2.7 billion less than in October 2019, with falls in Value Added Tax (VAT), Business Rates and Pay As You Earn (PAYE) income tax.

You might think that the balancing amount was local councils especially after the blow up in Croydon, which for those unaware is below.

Cash-strapped Labour-run Croydon Council has imposed emergency spending restrictions with “immediate effect”, the BBC has learned.

The Section 114 notice bans all new expenditure at Croydon Council, with the exception of statutory services for protecting vulnerable people.

A document seen by the BBC said “Croydon’s financial pressures are not all related to the pandemic”.

It is under a government review amid claims of “irresponsible spending”.

Section 114 notices are issued when a council cannot achieve a balanced budget. ( BBC News)

However the main other recorded component was the Bank of England at £2.8 billion. This is really rather awkward as it has not actually borrowed anything at all! But a Monty Python style method records it as such and it is the first time I can recall an issue I have regularly flagged about the national debt so explicitly affecting the deficit as well.

National Debt

So without further ado here is the misleading headline that much of the media has gone with today.

Public sector net debt (excluding public sector banks) rose by £276.3 billion in the first seven months of the financial year to reach £2,076.8 billion at the end of October 2020, £283.8 billion more than in October 2019.

This is misleading because it includes the activities of the Bank of England which are not debt. I am no great fan of the Term Funding Scheme but recording its £120 billion as all being debt is quite extraordinary and is a major factor leading to this.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of October 2020 would reduce by £232.9 billion (or 11.3 percentage points of GDP) to £1,843.9 billion (or 89.5% of GDP).

It makes quite a difference especially for fans of debt to GDP ratios as we go from 89.5% to “around 100.8% of gross domestic product” on this really rather odd road.

Comment

The continued growth of UK retail sales is good news as we see an area that has recovered strongly. This comes with two caveats. The first is that with out enthusiasm for imports it poses a danger for the trade figures. The second is that in a tear with so many changes I doubt any survey is completely reliable so we are more uncertain that usual.

Switching to the public finances and taking a deeper perspective we are posting some extraordinary numbers.

Public sector net borrowing (PSNB ex) in the first seven months of this financial year (April to October 2020) is estimated to have been £214.9 billion, £169.1 billion more than in the same period last year and the highest public sector borrowing in any April to October period since records began in 1993.

We seem set to keep spending more in some areas ( defence) but want to cut back in others ( public-sector pay) so all we can do at the moment is be grateful we can borrow so cheaply. Even the fifty-year Gilt yield is a mere 0.77% and as I have written before at these levels I would issue some one hundred year ones as the burdens are not going away anytime soon.

My theme that low inflation helps economies also gets support from the public finances.

Interest payments on the government’s outstanding debt were £2.0 billion in October 2020, £4.4 billion less than in October 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

The Bank of England never gets challenged as to why it keeps trying to raise our debt costs in this area. Also you see another reason why the establishment wants to neuter the Retail Prices Index ( RPI)

 

 

 

 

 

UK Retail Sales are seeing quite a surge

These times are ones where the news is often a combination of bad or grim.Indeed the mainstream media seems to be revelling in it. From time to time we do get some better news which I welcome.In the UK version of the pandemic that has regularly come from the retail sales data and this morning is no exception.

In September, we saw growth across all measures. The value of retail sales increased by 1.4% and volume sales by 1.5% when compared with the previous month.

The first point is that we have seen another month of growth which means that the pattern has been of a very strong recovery.

A strong rate of growth is seen in the three-month on three-month growth rate at 17.7% and 17.4% for value and volume sales respectively. This is the biggest quarterly growth seen on record as sales recovered from the low levels experienced earlier in the year.

If course a lot of care is needed because there was quite a previous fall.

In Quarter 2 (Apr to June), the volume of retail sales fell by 9.7%.

The effect of this is that we are now quite a bit above the pre pandemic level of retail sales.

When compared with February 2020’s pre-pandemic level, total retail sales were 3.9% and 5.5% higher in value and volume terms respectively.

Also one of my themes has been in play. Regular readers will recall that I argued back on the 29th of January 2015 that low inflation and indeed falling prices boost retail sales by making them cheaper in real terms, especially relative to wages. If you now look at the numbers again there has been a registered price fall of the order of 1.6% ( the difference between the value and volume figures above) and it has been associated with strong growth. This is bad news for those who argue that we need more inflation such as those setting policy at the Bank of England as they are replying on a “Wages Fairy” that has been absent for more than a decade now.

Breaking it down

The pandemic era seems to have made as hungry.

When compared with February, volume sales within food stores were 3.7% higher in September. Food retailers had suggested that the peak in March 2020 was because of panic buying at the start of the pandemic, and despite seeing a notable fall in sales following this peak, spending remained high. This may be a result of the government tightening restrictions for other services such as bars and restaurants at the end of September, which may have encouraged spending in food stores.

More seriously as the release above suggests there has been a shift here with people eating out less and therefore eating more at home. Unfortunately it is pretty much impossible to quantify. Perhaps some people still have cupboards full of tinned food and freezers full up as well.

There has also been a shift towards online retailing, or more accurately what was already happening got turbocharged.

In September, volume sales within non-store retailing were 36.6% higher than in February. Despite some contraction from the sharp rate of increase in this sector, consumers were still carrying out much of their shopping online when compared with February.

It is a case of what the Black-Eyed Peas would call “Boom! Boom! Boom!”

Despite monthly declines across all sectors except department stores, the proportion of online sales was at 27.5%, compared with the 20.1% reported in February. The proportion of online sales increased across all sectors with food stores nearly doubling their online proportions from 5.4% in February to 10.4% in September.

Putting it another way online sales are up 53% on a year ago.

I guess we should not be surprised that times like these have led to higher sales reflecting people passing the time by gardening and doing some home improvements.

Many retailers selling gardening products commented on increased demand during lockdown as consumers socially distanced in their gardens where possible.Flowers, plants and seeds stores provided strong positive contributions at 0.5 percentage points………Volume sales in household goods stores and “other” non-food stores increased to 11.0% and 10.7% above February, respectively. Feedback from household goods stores had informed us that home improvement sales from DIY and electrical goods stores did well in recent months and helped with the recovery of sales

There should be no great surprise with so many working from home that fuel sales are down.

In September, fuel sales volumes were still 8.6% below February with reduced travel as many continued to work from home, and clothing sales volumes were still 12.7% below February.

But as you can see clothing sales have suffered too. Perhaps a lack of work clothes.O have dome my bit for the October figures by buying a new sweatshirt and some running shorts.

In terms of the overall index we are now at 107.6 with 2018 as the benchmark of 100.

On the other side of the coin this was reported as well.

The GfK Consumer Confidence Index tumbled to -31 in October, its lowest level since late May and down sharply from a nine-month high of -25 in September, as well as being below all forecasts in a Reuters poll of economists. ( Reuters)

It is hard not to laugh at the forecasts.We have had a litany of simply dreadful ones in the pandemic era yet some still seem to have faith in them.As to the numbers October has its issues but I find a survey that is at -25 at a time of record retail sales in September somewhat puzzling.

Business Surveys

Today’s Purchasing Managers Index or PMI was also positive. Whilst the reading fell unlike in the Euro area we retained at least some growth.

The pace of UK economic growth slowed in October to
the weakest since the recovery from the national COVID-19
lockdown began. Not surprisingly the weakening is most
pronounced in the hospitality and transport sectors, as firms reported falling demand due to renewed lockdown measures and customers being deterred by worries over rising case numbers.

The growth that we are seeing is to be found here.

Where a rise in output was reported, survey
respondents pointed to factors such as pent up demand in the manufacturing sector, rising residential property transactions and the restart of work on projects that had been delayed at the start of the pandemic.

 

Comment

If we continue with today’s optimistic theme we see that we do have an example of a V-Shaped recovery in the UK economy. This is because retail sales are now a fair bit above pre pandemic levels. So a clear V shape. However this area has been the one which has benefited the most from income being supported by the furlough scheme which ends soon. The replacements are stronger than they were but we may see an impact from the November data. Also there are some extraordinary goings on in Wales which will be affecting retail sales there from tomorrow.

Supermarkets will be unable to sell items like clothes during the 17-day Covid firebreak lockdown in Wales.

First Minister Mark Drakeford said it would be “made clear” to them they are only able to open parts of their business that sell “essential goods”.

Many retailers will be forced to shut but food shops, off-licences and pharmacies can stay open when lockdown begins on Friday at 18:00 BST.

Retailers said they had not been given a definition of what was essential. ( BBC)

Frankly that looks quite a shambles in the making.

So in an echo of the weather as the sun has come out in Battersea we have received some good news today but sadly I suspect the Moody Blues were right about future prospects.

The summer sun is fading as the year grows old
And darker days are drawing near
The winter winds will be much colder

Good UK Retail Sales trip up the Bank of England

The morning has bought some better news for the UK economy which is welcome in these pandemic driven hard times. However it has been something of a problem for the Bank of England which tripped up yesterday. It decided to send a signal to markets via this section from its Monetary Policy Committee meeting Minutes.

The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular,
in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of
years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative
Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point
during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will
begin structured engagement on the operational considerations in 2020 Q4.

We learn something from the language as the group of people who have cut interest-rates describe it as “the decline in global equilibrium interest rates over a number of
years.” So we immediately learn that they do not think it has gone well as otherwise they would be taking the credit themselves. After all if it is really like that then they are redundant and we could use a formula to set interest-rates.

Next comes something which is perhaps even more embarrassing which is that only now  around 6 months after the pandemic peak ( which in economics terms was March 19th) have they been briefed on implementing negative interest-rates. What have they been doing? I would have expected it in the first week if not on day one. For the reasons I have explained over time on here I would vote no given such a chance, but at least I know that and I also know why I think that.

Finally they will wait until the next quarter to discuss it with the Prudential Regulation Authority?

The Economic Outlook

There was a conceptual problem with all of this because the view as expressed in the Minutes was that the economy was doing better than they have previously thought.

For 2020 Q3 as a whole, Bank staff expected GDP to be around 7% below its 2019 Q4 level, less weak
than had been expected in the August Report.

This brings us back to the issues I have raised above. Why did they not prepare for negative interest-rates where the outlook was worse than now?

UK Retail Sales

Things got better for us but worse for the Bank of England this morning as the retail sales numbers were released.

In August 2020, retail sales volumes increased by 0.8% when compared with July; this is the fourth consecutive month of growth, resulting in an increase of 4.0% when compared with February’s pre-pandemic level.

The UK shopper has returned to his/her pattern of growth and ironically we are now doing better than the previous period because if you recall annual growth was dropping then whereas now we have solid growth.

Indeed there was even more woe for the inflationistas at the Bank of England in the detail.

In August, retail sales values increased by 0.7% when compared with July and 2.5% when compared with February.

The amount spent is lower than the volume increase meaning that prices have fallen. This is another piece of evidence for the argument I first made on here on the 29th of January 2015 that lower prices led to higher sales volumes. Meanwhile the Bank of England is trying to raise prices.

The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the
UK monetary policy framework.

Actually they are also not telling the truth as raising prices by 2% per annum would not only reduce any retail sales growth it is not price stability. It is very sad that the present policy is to pick policymakers who all toe the party line rather than some who think for themselves. The whole point of having external members has been wasted as the Bank of England has in effected reverted to being an operating arm of HM Treasury.

Retail Sales Detail

The obvious question is to ask why is the retail sector exemplified by the high street in such trouble?The report does give insight into that.

In August, there was a mixed picture within the different store types as non-store retailing volumes were 38.9% above February, while clothing stores were still 15.9% below February’s pre-pandemic levels.

As you can see there has been quite a shift there and it is not the only one. Fuel volumes are still only at 91.3% of the February level. That is somewhat surprising from the perspective of Battersea but there is context from the issue with Hammersmith Bridge and now Vauxhall Bridge.

Also one area and I am sure you have guessed it has seen quite a boom.

Looking at the year-on-year growth in Table 2, total retail sales increased by 51.6%, with strong increases across all sectors. This shows that while we see declines on the month, online sales were at significantly higher levels than the previous year.

We have fallen back from the peak but the trend was up anyway as pre pandemic volumes were around 50% higher than in 2016. In August they were 125.9% higher than in 2016.

Eat Out To Help Out

In case you were wondering this was not part of the growth today and may well have subtracted from it according to The Guardian.

Britons spent £155m less in supermarkets in August than in the previous month as many returned to workplaces and the government’s eat out to help out scheme encouraged visiting restaurants and cafes.

Alcohol sales in supermarkets dipped month on month, with wine down 5% and beer down 10%, as the scheme encouraged people to swap Zoom catch-ups for trips to bars and restaurants, according to market research firm Kantar.

Comment

It has been a curious 24 hours when our central banking overlords have displayed their leaden footedness. The issue of negative interest-rates is something we have been prepared for and with both the UK 2 and 5 year bond yields already negative markets have adjusted to. For a while the UK Pound £ fell and the bond market rallied but the Pound has rallied again. So what was the point?

Also as Joumanna Bercetche of CNBC reminded me Governor Andrew Bailey told her this on the 16th of March.

On negative interest rates – Evaluated the impact on banks/ bldg societies carefully “there is a reason we cut 15bps”. Bailey: “I am not a fan of negative interest rates and they are not a tool I would want to use readily”. Banks are in position to support the economy.

Never believe anything until it is officially denied……

 

Some welcome good economic news for the UK

Today is proving to be something of a rarity in the current Covid-19 pandemic as it has brought some better and indeed good economic news. It is for the UK but let us hope that such trends will be repeated elsewhere. It is also in an area that can operate as a leading indicator.

In July 2020, retail sales volumes increased by 3.6% when compared with June, and are 3.0% above pre-pandemic levels in February 2020.

As you can see not only did July improve on June but it took the UK above its pre pandemic levels. If we look at the breakdown we see that quite a lot was going on in the detail.

In July, the volume of food store sales and non-store retailing remained at high sales levels, despite monthly contractions in these sectors at negative 3.1% and 2.1% respectively.

In July, fuel sales continued to recover from low sales levels but were still 11.7% lower than February; recent analysis shows that car road traffic in July was around 17 percentage points lower compared with the first week in February, according to data from the Department for Transport.

As you can see food sales dipped ( probably good for our waistlines) as did non store retailing but the recovery in fuel sales from the nadir when so few were driving was a stronger influence. I suspect the fuel sales issue is likely to continue this month based on the new establishment passion for people diving their cars to work. That of course clashes with their past enthusiasm for the now rather empty looking public transport ( the famous double-decker red buses of London are now limited to a mere 30 passengers and the ones passing me these days rarely seem anywhere near that). Actually it also collides with the recent public works for creating cycle lanes out of is not nowhere restricted space in London which has had me scratching my head and I am a regular Boris Bike user.

As we look further I thought that I was clearly not typical as what I bought was clothing but then I noted the stores bit.

Clothing store sales were the worst hit during the pandemic and volume sales in July remained 25.7% lower than February, even with a July 2020 monthly increase of 11.9% in this sector.

Online retail sales fell by 7.0% in July when compared with June, but the strong growth experienced over the pandemic has meant that sales are still 50.4% higher than February’s pre-pandemic levels.

In fact the only downbeat part of today;s report was the implication that the decline of the high street has been given another shove by the current pandemic. On the upside we are seeing innovation and change. Also if we look for some perspective we see quite a switch on terms of trend.

When compared with the previous three months, a stronger rate of growth is seen in the three months to July, at 5.1% and 6.1% for value and volume sales respectively. This was following eight consecutive months of decline in the three-month on three-month growth rate.

It is easy to forget in the melee of news but UK Retail Sales growth had been slip-sliding away and now we find ourselves recording what is a V-Shaped recovery in its purest form.

There is another undercut to this which feeds into a theme I first established on the 29th of January 2015 which is like Kryptonite for central bankers and their lust for inflation. If we look at the value and volume figures we see that prices have fallen and they have led to a higher volume of sales.I doubt that will feature in any Bank of England Working Paper.

Purchasing Manager’s Indices

These do not have the street credibility they once did. However the UK numbers covering August also provided some good news today.

August’s data illustrates that the recovery has gained speed
across both the manufacturing and service sectors since July. The combined expansion of UK private sector output was the fastest for almost seven years, following sharp improvements in business and consumer spending from the lows seen in April.

Public-Sector Finances

This is an example of a number which is both good and bad at the same time.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in July 2020 is estimated to have been £26.7 billion, £28.3 billion more than in July 2019 and the fourth highest borrowing in any month on record (records began in 1993).

That is because we did need support for the economy ( how much is of course debateable) and even so the monthly numbers are falling especially if we note this as well.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in June 2020 was revised down by £6.0 billion to £29.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions.

We can now switch to describing the position as the good the bad and the ugly.

Borrowing in the first four months of this financial year (April to July 2020) is estimated to have been £150.5 billion, £128.4 billion more than in the same period last year and the highest borrowing in any April to July period on record (records began in 1993), with each of the months from April to July being records.

The size of the debt is a combination of ugly and bad but we see that the numbers look like they are falling quite quickly now. Indeed if we allow for the effect of the economy picking up that impact should be reinforced especially if we allow for this.

Self-assessed Income Tax receipts were £4.8 billion in July 2020, £4.5 billion less than in July 2019, because of the government’s deferral policy;

National Debt

There has been some shocking reporting of this today which basically involves copy and pasting this.

Debt (public sector net debt excluding public sector banks, PSND ex) has exceeded £2 trillion for the first time; at the end of July 2020, debt was £2,004.0 billion, £227.6 billion more than at the same point last year.

It is a nice click bait headline but if you read the full document you will spot this.

The Bank of England’s (BoE’s) contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund (APF), Term Funding Schemes (TFS) and Covid Corporate Financing Facility Fund (CCFF).

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of BoE, PSND ex at the end of July 2020 would reduce by £194.8 billion (or 9.8 percentage points of GDP) to £1,809.3 billion (or 90.7% of GDP).

Regular readers may be having a wry smile at me finally being nice to the Term Funding Scheme! But its total should not be added to the national debt and nor should profits from the Bank of England QE holdings. Apparently profit is now debt or something like that.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £115.8 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase.

Comment

It is nice to report some better news for the economy and let us hope it will continue until we arrive at the next information point which is how the economy responds to the end of the furlough scheme in October. As to the Public Finances I have avoided any references to the Office for Budget Responsibility until now as they have managed to limbo under their own usual low standards. Accordingly even my first rule of OBR Club that the OBR is always wrong may need an upwards revision.

Let me now take you away from the fantasy that the Bank of England has taken UK debt above £2 trillion and return to an Earth where it is implicitly financing the debt. Here is the Resolution Foundation.

These high fiscal costs of lockdown look to be manageable, though. 1) The @UK_DMO   has raised over £243bn since mid-March. 2) While debt is going up, the costs are still going down. Interest payments were £2.4bn in July 2020, a £2bn fall compared with July 2019.

That shows how much debt we have issued but how can it be cheaper? This is because the Bank of England has turned up as a buyer of first resort. At the peak it was buying some £13,5 billion of UK bonds a week and whilst the weekly pace has now dropped to £4.4 billion you can see that it has been like a powered up Pac-Man. Or if you prefer buying some £657 billion of something does tend to move the price and yield especially if we compare it to the total market.

Gilts make up the largest component of debt. At the end of July 2020 there were £1,681.2 billion of central government gilts in circulation.

Finally the UK Retail Prices Index consultation closes tonight and please feel free to contact HM Treasury to ask why they are trying to neuter out best inflation measure?

 

 

Sweden sees its GDP plunge but also outperforms its peers

Sweden has been a regular topic on here due to the way its central bank conducted a type of economic test tube experiment, of which more later. That theme is also in play as we look to see the economic consequences of it avoiding the lockdowns which were prevalent in much of the rest of Europe. So if you like another form of test tube experiment which was potentially much more deadly. This morning Sweden Statistics began to bring us up to date.

Sweden’s GDP declined by 8.6 percent in the second quarter of 2020, seasonally adjusted and compared with the first quarter. This according to the preliminary compilation of the quarterly national accounts. Calendar adjusted and compared with the second quarter of 2019, GDP decreased by 8.2 percent.

The initial implication is that Sweden has indeed done better than the nearby Euro area but not by as much as some claimed along the way. However it is still very significant as we note an annual decline of 15% there. None the less we are still told this.

 The decrease in GDP is the largest single quarter drop in the directly comparable time series starting 1980.

We do not get a lot of detail but within it there is a glimmer of optimism.

Seasonally adjusted and compared to the preceding quarter the decrease is in large parts driven by falling exports and household consumption expenditure.

GDP numbers struggle with trade via their use of net trade and if imports held up that is a subtraction from the numbers when in this sort of situation it is a sign that the economy is doing better than elsewhere. So as (hopefully) exports recover as other economies do Sweden may also out perform in that phase.

Some caution with the accuracy of the numbers is provided by this and for those unfamiliar with the issue, there are in fact three different ways of calculating GDP.

Before balancing actual GDP growth from the expenditure approach was -9.0, with the corresponding figure for the production approach at -6.6 percent. Both these are growth rates compared to the corresponding quarter the previous year. Averaging the two give the final actual GDP growth of -7.8 percent.

Si we have a 2.4% difference which highlights an issue I raise from time to time. Not quite as bad as the one I observed in Portugal at one point in the Euro area crisis which approached 4%. At this time we could use them as a sort of confidence interval as in the GDP fall was between 6.6% and 9%. Of course that is far too sensible to become widely accepted.

In general it is the output version which is used and in my home country the UK for example the other two measures are adjusted to it. That has its flaws as it means trade flows which you pick up from expenditure numbers can be “adjusted”. But using the expenditure method has its issue as for example Japan has found itself producing unusually erratic numbers. For completeness there is also the income version. It is not a surprise for it to be missing initially as for example tax figures which take time are useful to give a full picture, and it is a shame Sweden looks like it ignores them.

Looking Ahead

In the circumstances any improvement is welcome.

In seasonally adjusted figures, private sector production increased by 0.7 percent compared with May 2020.

One might have hoped for more than that although a post lockdown bounce would have to reply on exports. Thus the annual picture is similar to the GDP one above.

Production in the industry sector decreased by 9.1 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures

As to the detail this is no great surprise.

The largest downward contribution to total private sector development came from the motor vehicle industry, which decreased by 16.7 percent in fixed prices and contributed -0.6 percentage points.

Nor I guess is this.

The largest upward contribution to total private sector development came from the chemical and pharmaceutical industry, which increased by 33.9 percent in fixed prices and contributed 0.8 percentage points.

Id we switch to the service sector we see a similar pattern.

Production in the services sector decreased by 8.4 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures.

However there was some news which will have the Riksbank popping a few champagne corks.

The largest upward contribution to total private sector development came from real estate services, which increased by 2.2 percent in fixed prices and contributed 0.3 percentage points.

Indeed with construction falling less than the other sectors the Riksbank will be able to stand proud at any central banker get togethers.

Production in the construction sector decreased by 4.3 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures.

Monetary Policy

Regular readers will understand why this is so.

At the same time, the repo rate is held unchanged at zero per cent.

But there are other areas which can be pumped up.

The framework for the asset purchases made by the Riksbank since the crisis began is being extended from SEK 300 billion to SEK 500 billion up to the end of June 2021. In September, the Riksbank will also begin purchasing corporate bonds.

You may enjoy this bit on the planned corporate bond purchases.

They shall be designed in a way that ensures a
broad and market-neutral impact on the Swedish corporate bond market and thereby on companies’ credit supply.

Market-neutral is the exact opposite of what will happen. Still I am sure the Riksbank has its reasons for supporting this area.

The real estate sector has been a driving force in the growth, representing around 45 percent of the primary volume.

Oh and as ever there are some tit bits for The Precious!

The Executive Board has further decided to cut interest rates and extend maturities on lending to banks.

The only surprise concerning money supply growth is that they have got broad money growing at pretty much the same rate as narrow money.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 16.5 percent in June, a decrease of 0.3 percentage points compared with May. M1 amounted to SEK 3 564 billion in June.

The growth rate of the broad monetary aggregate, M3, amounted to 15.4 percent in June, an increase of 0.8 percentage points compared with May. M3 amounted to SEK 4 170 billion in total in June.

Comment

There are two major contexts here. The first is the way that Sweden arrived at the pandemic in terms of monetary policy. The Riksbank panicked after being called “sado monetarists” bu Paul Krugman of the New York Times. Accordingly they cut interest-rates to -0.5% in a boom and then raised them to 0% as the economy slowed. Things got more awkward as we discovered that Sweden Statistics was not entirely sure about its unemployment measure. It found a flaw and reduced the unemployment rate from 7% to 6% and then the new measure rose to 7.3%.

In that sense both bodies were grateful for the pandemic but then Sweden which is often considered a leader took its own road on lockdown. We see that this meant the economy shrank by less but then did not recover much in production or services terms in June. However of course it was still relatively better off and this will be helped by the retail sales numbers released on Monday.

The retail trade sales volume increased by 3.9 percent in June 2020 compared with the same month a year ago. Retail sales in durables increased by 5.0 percent, while retail sales in consumables (excluding Systembolaget, the state-owned chain of liquor stores) increased by 0.2 percent. These figures are working-day adjusted and in fixed prices.

Although they now seem to have some problems with the retail sales numbers too.

Meanwhile I guess the Riksbank is scanning the report of every house sale.

She says, “hello, you fool, I love you
C’mon join the joyride”
Join the joyride ( Roxette )

 

 

UK Retail Sales surge in June

The Covid-19 pandemic has brought about all sorts of economic events. Yesterday evening I went for a stroll in Battersea Park and it was quite noticeable how the number of people going for a picnic there has increased. We do not know how permanent that will be but I suspect at least some of it will be as people discover that the same bottle of wine is so much cheaper than at a wine bar or pub. Oh yes and some seem to forget the food part of the picnic! I can see that BBC Breakfast have put their own spin on it.

9-year-old Sky had this message on #BBCBreakfast for people dropping litter in parks and open spaces

Yes more people have created more litter. Kudos to @PolemicPaine who pointed out ahead of a flurry of such media reports that it would happen. Some people’s behaviour is bad but in recent years the cleanliness of Battersea Park has improved a lot and thank you to the workers there.

Retail Sales

These are the numbers which were likely to be harbingers of change in the trajectory of the UK economy. So this morning’s news was rather welcome.

In June 2020, the volume of retail sales increased by 13.9% when compared with May 2020 as non-food and fuel stores continue their recovery from the sharp falls experienced since the start of the coronavirus (COVID-19) pandemic.

That was quite a surge and means this.

The two monthly increases in the volume of retail sales in May and June 2020 have brought total sales to a similar level as before the coronavirus pandemic; however, there is a mixed picture in different store types.

There is another way of looking at this.

In June, total retail sales continued to increase to reach similar levels as before the pandemic, with a fall of just 0.6% when compared with February.

So is it in modern language, like well over? Not quite as the text is a little reticent in pointing this out but volumes were some 1.6% lower than last June. Whilst growth had been slowing we usually have some so perhaps 3% lower than we might usually expect. However these are strong numbers in the circumstances and will have come as an especial shock to readers of the Financial Times with the economics editor reporting this. I have highlighted the bit which applies to June.

The latest numbers on card payments and bank account transactions from Fable Data show that in the week to July 19, total spending in the UK was 25 per cent down on the same week in 2019, a deterioration from a 13 per cent decline four weeks earlier.

As you can see whilst consumption is a larger category than Retail Sales there is quite a difference in the numbers here. According to the report by the economics editor of the FT a bad June was followed by a woeful July.

The latest indications from unofficial data on spending patterns in the UK suggests the economic recovery that began in late April has stalled — and possibly even moved backwards in July. Separate figures from the Bank of England’s payment system and from card payments collected by Fable Data show a worse picture for spending in mid-July than at the start of the month.

More on this later.

The Breakdown

Whilst the overall picture is pretty much back to February there have been some ch-ch-changes in the pattern.

In June, while non-food stores and fuel sales show strong monthly growths in the volume of sales at 45.5% and 21.5% respectively, levels have still not recovered from the sharp falls experienced in March and April.

My personal fuel sales shot up as I bought some diesel and went to visit an aunt and my mother;s house at the end of June but on a more serious level traffic in Battersea picked up noticeably. This is in spite of the official effort to discourage driving just after telling people to drive! Anyway switching sectors this is interesting.

Following this peak, sales returned to a level higher than before the pandemic. In June 2020, despite a small monthly decline of 0.1% in volume sales, food stores remained 5.3% higher than in February 2020.

I say that because of this.

Feedback from food retailers had suggested that consumers were panic buying in preparation for the impending lockdown.

If they were we would expect a dip going ahead. On a personal level I did put some extra stuff in my freezer in case I had to quarantine ( it was 7 days then) and bought some more tinned food. But collectively the other side of that has not been seen so far. Maybe it is because the June numbers do not see the opening of restaurants and the like which began on July 4th.

I doubt anyone is going to be surprised by this.

Non-store retailing has reached a new high level in June 2020, with continued growth during the pandemic and a 53.6% increase in volume sales when compared with February 2020.

Let me now give you the two polar opposites starting with the bad.

Textile, clothing and footwear stores show the sharpest decline in total sales at negative 34.9%. This was because of a combination of a large fall within stores at negative 50.8% along with a slower uptake in online sales, with a 26.8% increase from February.

Now the up,up and away.

Household goods stores, as the only store type to show an increase since the start of the pandemic, has a large uptake in online sales, increasing by 103.2%. In addition, household goods stores saw the smallest decline in store sales when compared with other non-food stores, at negative 15.2%.

I am glad to see my friend who has been painting his garage door and some windows pop up in the figures.

In June, electrical household appliances, hardware, paints and glass, and furniture stores all returned to similar levels as before the pandemic.

Comment

This is welcome news for the UK economy and it provides another piece of evidence for one of my themes. For newer readers I argued back in January 2015 that lower prices boost the economy ( the opposite of the Bank of England view) and we see that lower prices in retail have led us to getting right back to where we started from. I am sure that some PhD’s at the Bank of England are being instructed to sufficiently torture the numbers to disprove this already.

Actually the Bank of England is in disarray as in response to the FT data above one of its members seems to have switched to analysing health.

Jonathan Haskel, an external member of the BoE’s Monetary Policy Committee, said the evidence was beginning to show that household concerns about health were more likely to drive spending than government lockdown rules.

Oh well. Also this made me laugh, after all who provided all the liquidity?

“The need for more equity finance creates a case for authorities to be ambitious in reforming the financial system to remove any biases against the patience that’s needed for many equity investments,” he said.

“Even investors who should have the longest horizons seem to have a fetish for liquidity and an aversion to really illiquid growth capital assets.” he said. ( Reuters)

I do hope somebody pointed out to Alex Brazier, the BoE’s Executive Director for Financial Stability Strategy and Risk that the speech should be given to his own colleagues who have been singing along to Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

Let me finish by pointing out that these retail numbers are imprecise in normal times and will be worse now. So we have seen quite an upwards shift of say around 10%. Moving onto numbers which are even more unreliable there was more good news but regular readers will know to splash some salt around these.

At 57.1 in July, up from 47.7 in June, the headline seasonally
adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered above the 50.0 no-change value for the first time since February.

If Lagarde expects disinflation then we should fear inflation….

Today brings the economy of the Euro area in to focus. Over the weekend we heard from the President of the European Central Bank or ECB.

(Bloomberg) — European Central Bank President Christine Lagarde said the euro zone faces about two years of downward pressure on prices, but could see a turnaround after that because the coronavirus crisis will accelerate the transformation of the economy.

There is an obvious issue in forecasting 2 years ahead when we struggle to know what will happen in two weeks. Even worse is Christine Lagarde’s record as according to her both Greece and Argentina were going to grow in such a timescale when in fact their economies collapsed. Her policies are also doing the best they can to slow the transformation of the economy via the support of zombie banks and companies.

The reality is that the forecast is to justify decisions that have already been taken.

In the meantime, the central bank will need to keep its monetary policy exceptionally loose, and financial instruments will need to be developed that allow the economic transformation to be funded, she said.

Also there is an opportunity to find a scapegoat for an effect of her policies.

Still, she warned that pandemics typically increase inequality, with economic and social consequences that the central bank will have to take into account.

You also might think that she would be too busy with the day job to take on other things but apparently not.

“I am determined to have the same debate with governors at the ECB to ensure that in all areas, climate risk and biodiversity is taken into account,” she said. “We won’t do it in one day, but we must question in every domain, stress test by stress test.”

Also on Friday the ECB released this.

They’re here! We’ve just received the first banknotes featuring President Lagarde’s signature. The €5 and €10 notes will be the first with the new signature to enter into circulation, starting next week. Those with the signature of former presidents will remain legal tender.

Sadly they have ignored my suggestion that some of the notes should have been orange to mark the occasion.

German Manufacturing

This is something of a bellweather for the Euro area economy and trade. So let’s start with the positive bit.

WIESBADEN – According to provisional results of the Federal Statistical Office (Destatis), real (price adjusted) new orders increased by a seasonally and calendar adjusted 10.4% in May 2020 compared with April 2020.

As I am sure you were expecting the annual comparison whilst better than April’s -36.9% remains grim.

 Compared with May 2019, the decrease in calendar adjusted new orders amounted to 29.3%

If we go to the underlying index then total orders are at 71.1% of the 2015 average. There is a clear geographic pattern to this.

Domestic orders increased by 12.3% and foreign orders rose by 8.8% in May 2020 on the previous month. New orders from the euro area went up 20.9%, and new orders from other countries increased by 2.0% compared with April 2020.

Also I did start with a mention of a bellweather.

New orders in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, new orders were still more than 47% lower than in February 2020.

We can also look at turnover.

According to provisional results, price-adjusted turnover in manufacturing in May 2020 went up a seasonally and calendar adjusted 10.6% on the previous month…….

Compared with February 2020, the month before restrictions were imposed due to the corona pandemic in Germany, turnover in May 2020 was 23.5% lower in seasonally and calendar adjusted terms.

Again the car industry has been heavily affected and of course 2019 was considered a ropey year at the time.

Turnover in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, it was still nearly 47% lower than in February 2020.

Construction

We have learned that the Purchasing Managers Indices have their issues but here is this morning’s update.

The IHS Markit Eurozone Construction Total Activity Index rose sharply from 39.5 in May to 48.3 in June, indicating the weakest decline in construction activity across the eurozone since February amid a relaxation of measures designed to control the coronavirus disease 2019 (COVID-19) pandemic. Survey data showed France and Italy recorded construction output growth, while Germany posted a further marked decline.

Let us move on noting that Germany seems to be struggling across a few areas.

Retail Sales

Having seen the sad news about Ennio Morricone let is look at first the good.

In May 2020, when Member States began easing the COVID-19 containment measures, the seasonally adjusted
volume of retail trade increased by 17.8% in the euro area and by 16.4% in the EU, compared with April 2020,
according to estimates from Eurostat.

The bad is that volume is only 102% of the average for 2015 so the Euro  boom has gone for now and also this.

In May 2020 compared with May 2019, the calendar adjusted retail sales index decreased by 5.1% in the euro
area and by 4.2% in the EU.

The ugly is Greece which saw retail sales collapse as to return to my opening theme Christine Lagarde predicted “Shock and Awe”. Just to show how big the move was if we stay with 2015 as our benchmark then April 2007 was 167% of it as opposed to the 74.7% of this April. That is how you define an ongoing depression which sadly has been pushed even deeper by the economic impact of the Covid-19 virus pandemic. Also after all the reform rhetoric of the IMF and Euro area authorities I note that Greece has not yet produced numbers for May in this area.

Zombie! Zombie! Zombie!

This morning has seen the release of a ECB working paper which has made me mull those famous song lyrics, why? Well we get an official denial.

As regards the distribution of the funds, in contrast to the common perception about take-up in
central bank operations in crisis times, we do not find strong evidence that TLTRO funds end up
importantly with financially weak banks. If anything, banks with a larger capital buffer take up more.

You may note the use of “strong evidence” “importantly” and “if anything”. To which we can add “dominant” below.

The TLTRO funds do not end up dominantly with financially weak banks.

Indeed is weak banks are no big deal it makes you wonder why they bothered with this?

In addition, applying different lending benchmark requirements to banks depending on their deleveraging pressure appears to have been important to have take-up also by deleveraging banks.

or this.

namely by reducing the TLTRO interest rate and expanding the amount and types of eligible collateral.

This has become even for these times a big deal.

This paper asks what characterises and incentivises individual banks to take this “funding for
lending” which peaked at EUR 762 billion and what role the parameters of the scheme play.

Comment

Today’s article has been topped and tailed by the ECB and its activities. In the middle we have noted the effect of the lockdowns and pandemic. But if we look ahead the issue switches to what type of future it wants? For all the rhetoric the Euro area was already struggling highlighted by the way that the end of QE lasted for about 9 months. Curious as according to Christine Lagarde things are well placed.

Europe is in an excellent position to join this transition, according to Lagarde. The continent has the world’s largest circular economy and ecological innovation sector while the euro is the first currency used for the issuing of green bonds, she noted. ( Brussels Times)

Perhaps going round in circles is not the best analogy. Still there is time to be a control freak because it has gone so well?

However, this would not be enough and an economic policy framework that allows the required financing to be mobilized will need to be put in place, according to Lagarde.

Podcast

 

UK Retail Sales and Public-Sector Borrowing Surge

We were supposed to be receiving some grand news from the Bank of England this morning. But in fact we find ourselves simply noting a rather botched public relations spinning effort.

You spin me right round, baby
Right round like a record, baby
Right round round round ( Dead or Alive)

The main movement was in the value of the UK Pound £ which fell by around 1% so we saw using the old rule of thumb monetary easing equivalent to a 0.25% Bank Rate cut. How much of that was due to the PR shambles?

Anyway there was some good news in an implied better trajectory for the UK economy and that has been backed by the data this morning.

The monthly growth rate in May 2020 is strong because of a combination of recent increasingly rapid growth in non-store retailing and a pick-up for non-food stores from the lowest levels ever experienced.

Also let me give the Office for National Statistics credit for this.

Weights to total retail are calculated from the amount of money typically spent in each retail sector and used as a proportion to calculate growth contributions. For example, around 38.1 pence of every pound is typically spent in food stores, providing us with a weight of 38.1 to total retail. In May 2020, these proportions were recalculated to reflect the changes in spending during the pandemic. The amount of money spent in food stores increased to 51.4%,

In what are volatile and uncertain times one needs to keep on our toes and this example should be spread to the inflation numbers. The data should reflect as best we can what is happening not a world “far,far,away”. As you can see,doing so makes quite a difference. The number below gives a hint of how the inflation data would be affected and in my opinion it is a great shame that the Bank of England Minutes ignored this factor yesterday.

Fuel sales usually has a weight of just over 10.4% to total retail, but was at around 5.5% in May 2020, resulting in a positive contribution of 2.3 and 2.7 percentage points for value and volume sales respectively.

Actually the release even hints at this.

Fuel prices also continued to fall in May 2020………When compared with the same month a year earlier, fuel prices fell by 14.9%

However whilst the monthly improvement was very welcome and you might like to note was another example of the “expert” forecasters missing the dartboard as they were expecting more like 6% growth as opposed to 12% or so, we need a deeper perspective.

While we see some partial bounce back on the monthly growth rate in May 2020 at 12.0%, levels of sales do not recover from the strong falls seen in March and April 2020 and are still down by 13.1% on February 2020 before the impact of the corona virus pandemic.

Putting this another way the volume index was 93.7 in May if we set 2016 as the base level of 100. Previously the numbers were bouncing around 108.

I doubt any of you will be surprised by the shift to online retailing.

Online sales as a proportion of all retailing reached a record high of 33.4% in May 2020, exceeding the original record reported last month of 30.7%.

There was a larger uptake of online spending for food, which reached record proportions, from 9.3% in April to 11.3% in May.

Should consumers continue with this trend this is more bad news for the high street. Although as a counterpoint the mobs that descended on the shops which opened recently suggests there is some hope, although the health message sent from that was rather different.

Public Finances

Let me start with an apology as I was asked about this and thought it would probably take place in June.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of May 2020 was 100.9% of gross domestic product (GDP), the first time that debt as a percentage of GDP has exceeded 100% since the financial year ending March 1963.

There are a couple of factors in my defence however and one of them we have just been noting. That is a further hint that the economy is doing better than the consensus expectations. Oh and my first rule of OBR Club is likely to help me out.

 the current estimate of GDP used to calculate this ratio uses forecasts based on expectations published in the Office for Budget Responsibility’s (OBR’s) Coronavirus Reference Scenario.

They look well on their way to being wrong again. Also there is the large £13.9 billion revision to borrowing for April and we learn quite a bit from it. Take a look at this for example.

Central government tax receipts and National Insurance contributions for April 2020 have been increased by £5.4 billion and £2.4 billion respectively compared with those published in our previous bulletin (published 22 May 2020). Within tax receipts, Pay As You Earn income tax has been increased by £3.0 billion and Value Added Tax has been increased by £2.8 billion, both because of updated data.

As you can see there is another hint from the numbers that the economy was doing better than so far reported in April as we see upwards revisions to both income and expenditure taxes.Indeed the numbers have quite a conceptual problem as we mull whether imputation is like a pandemic?

In other words, we attempt to record receipts at the point where the liability arose, rather than when the tax is actually paid.

Oh and you can’t say I have not regularly warned you about the OBR!

On 4 June 2020, the OBR published an update to its Corona Virus analysis in which it reduced previous estimates of CJRS expenditure.

Perspective

We can start with May.

Over this period, the public sector borrowed £55.2 billion, £49.6 billion more than it borrowed in May 2019.

But via the revisions noted above we have already seen how unreliable a single month is so we do a little better looking at this.

In the current financial year-to-date (April to May 2020), the public sector borrowed £103.7 billion, £87.0 billion more than in the same period last year.

Although we need to note that we will be lucky if it is accurate to the nearest £10 billion. Within the receipts numbers there are some points of note. The Retail Sales numbers with monthly rises of 30%,61% and now 3,6% for the category with includes alcohol sales meets alcohol duty receipts which have fallen from £2.1 billion to £1.6 billion. Perhaps a health kick has been going on as tobacco receipts fall by £400 million to £1 billion. Also a slowing in the housing market is kicking in as Stamp Duty receipts fall from £2 billion to £1.1 billion.

Switching to the national debt there is this.

Debt (PSND ex) at the end of May 2020 was £1,950.1 billion, an increase of £173.2 billion (or 20.5 percentage points) compared with May 2019, the largest year-on-year increase in debt as a percentage of GDP on record (monthly records began in March 1993).

Comment

We have some welcome news today on the economy but context is needed as we have still experienced quite a drop, simply one which is smaller than reported so far. There is an irony in the two numbers released as we see this being reported which gives a worse impression.

Just in: UK government debt exceeded the size of the country’s economy in May for the first time in more than 50 years, official data published on Friday showed, as borrowing surged to pay for coronavirus response measures ( Financial Times)

Having awarded myself a slice of humble pie let me move onto an issue that the more clickbaity reports have ignored.

If we were to remove the temporary debt impact of APF and TFS, public sector net debt (excluding public sector banks) at the end of May 2020 would reduce by £195.5 billion (or 10.1% percentage points of GDP) to £1,754.6 billion (or 90.8% of GDP).

That is the role of the Bank of England in raising the reported level of the national debt and frankly this bit below is one of the silliest inclusions.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £95.7 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase. Note that the final debt impact of the APF depends on the disposal of the gilts at the end of the scheme.

Oh well. Let me end by bringing yesterday’s extra QE bond purchases and the borrowing together with these two numbers.

At the end of May 2020, the gilt holdings of the APF have increased by £46.7 billion (at nominal value) compared with the end of April 2020, to £475.1 billion in total. This increase is of a similar order of magnitude to the new issuance by the DMO in May 2020, which means that gilt holdings by units other than the APF have changed very little since April 2020.

As I have pointed out before if we take a broad brush the Bank of England is implicitly financing the government spending. That is why we can borrow so cheaply with some gilt yields negative and the fifty-year a mere 0.55%.

 

 

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