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

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

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

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

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

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

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

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

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

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

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

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

Retail Sales

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

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

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

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

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

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

If we look for more perspective we see this.

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

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

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

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

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

Have readers noticed less traffic on the roads?


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

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

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

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

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


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

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

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

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

Sub-prime car loans anyone?

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

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

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

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

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

The IMF analysis

The Financial Times has summarised it like this.

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

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

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

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

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

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

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

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

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

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

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

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

The Euro area view

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

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

What was that Klaus?

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

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

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

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

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

Really? What was that about fake news again?

Retail Sales

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

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

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

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

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

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


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

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

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

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

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




The Greek economic depression continues to the sound of silence

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

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

An economic depression

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

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

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

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

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

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


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

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

Retail Trade

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

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

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

May must have been dreadful mustn’t it?

The Monetary System

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

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

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

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

That means the credit crunch is ongoing.

Export Led Growth

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

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

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

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

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

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

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

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

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

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

Any thoughts as to why?


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

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

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

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

By systemic they mean toxic under the Britney definition.

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

Meanwhile the Greek depression continues to the Sound of Silence.

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


The new Bank of England QE program explained

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

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

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

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

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

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

The Purchases

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

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

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

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

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

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

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

The consequences

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

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

Differences with the ECB

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

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


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

Today’s data

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

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

This news added to yesterday’s.

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

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

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

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

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

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

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

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

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

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

Trade problems

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

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

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


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

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

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

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







Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

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.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

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.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.


The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.


Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake



There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.




Is that it for UK Retail Sales?

Today sees the publication of one of the bedrocks of the recent UK economic improvement where lower inflation led to higher real wages which resulted in strong retail sales numbers. This has boosted Gross Domestic Product via consumption. If you go back to January 29th last year you will see that I pointed out this would be a beneficial impact on the UK economy of the oil price fall. However as I pointed out on Tuesday we are seeing the influence of that move start to wane a little and it makes us wonder about real wages and retail sales. This is reinforced by the fact that wage growth has not only not picked up it has moved between flatlining and fading.

Average weekly earnings for employees in Great Britain increased by 2.1% including bonuses.


The mostly clothes based retailer Next has weighed in on the subject already today.

The outlook for consumer spending does not look as benign as it was at this time last year. Although employment rates are at record highs, growth in real earnings (the difference between wage growth and inflation) slowed markedly from September last year. In addition, growth in output across services, manufacturing and construction all decelerated throughout the course of the year.

They also expect to do worse than the general trend.

we also believe that there may be a cyclical move away from spending on clothing back into areas that suffered the most during the credit crunch.

Indeed for a company which has been doing well the numbers are rather downbeat.

We now expect NEXT Brand full price sales growth for the full year to be between -1.0% to +4.0%, with a mid-point of +1.5%…….However at this stage we think it is best to prepare ourselves for what could be a difficult year.

Oh and did I say downbeat?

The year ahead may well be the toughest we have faced since 2008.

Some care is needed here as Next has done well and some of this will be specific to it and some to the clothing industry but of course that is a component of UK retail sales. The share price is down over 8% as I type this.

Why are so many central banks cutting interest-rates?

This week has seen several moves making I think 48 in total now for 2016. This morning has seen this which provides some insight as to what is happening in China. From Bloomberg.

The central bank lowered the benchmark discount rate by another 12.5 basis points to 1.5 percent, it said in a statement Thursday in Taipei.

It was also be remiss of me not to welcome a new member to the negative interest-rates club.

The Monetary Council of the Magyar Nemzeti Bank reduced the central bank base rate by 15 basis points to 1.20%, in effect from 23 March 2016.

This made the overnight rate some -0.05% in Hungary. Have you spotted the size of the moves ( 0.125% and 0.15%). I would make them wear a clown’s outfit if they wanted to announce such moves as who believes such a move has any material impact?

However the international scene remains troubled which has implications for us in the UK.

UK Retail Sales

Firstly the news continues to be good.

Year-on-year estimates of the quantity bought in the retail industry showed growth for the 34th consecutive month in February 2016, increasing by 3.8% compared with February 2015. The underlying pattern in the data, as suggested by the 3 month on 3 month movement in the quantity bought, showed growth for the 27th consecutive month, increasing by 0.8%.

We also see the same main driver.

Average store prices (including petrol stations) fell by 2.5% in February 2016 compared with February 2015, the 20th consecutive month of year-on-year price falls.

We are spending some 1.4% extra to get volume gains of 3.8%. Excellent! I would make all the “deflation nutters” have to write that on a blackboard in the manner of Bart in The Simpsons.

However we also are getting signs that the peak may well has passed us by.

The amount spent in the retail industry increased by 1.4% compared with February 2015 and decreased by 0.7% compared with January 2016……..Compared with January 2016, the quantity bought in the retail industry is estimated to have decreased by 0.4%.

Also we see what may have spooked Next.

In February 2016, the quantity bought in textile, clothing and footwear stores decreased by 2.4% compared with February 2015 and by 0.4% compared with January 2016.

For once the weather may genuinely be to blame but let’s not go there as it gets the blame far too often.

Imputed Rent

This is an important topic which gets little media time. It is required in the income version of the GDP numbers to make them balance with the expenditure and output ones. Believe it or believe it not but house owners are “imputed” to receive rent and this is added to GDP. In my opinion this causes a litany of problems and if you read my articles on the subject not the least of this is our lack of knowledge of UK rents inflation as the CPIH shambles uses the same data.

Yesterday saw another piece of odd behaviour in this area. From the Office for National Statistics.

The decrease in weight is being driven by three classes. The largest decrease, the Imputed Rentals class is unique to CPIH. The class has fallen by 13ppt from 178ppt to 165ppt.

So in the middle of a housing boom when they have only just told us that house prices are rising at an annual rate of 7.9% and we have estimates of rent increases of 3.3% which both far exceed inflation we see a reduction in weights! Eh?  I would like to add that the Imputed Rental series has seen substantial revisions in recent years.

You may enjoy this bit as you note above that the weight has fallen because the explanation tells us this.

Further improvements to the methodology for actual and imputed rentals in the National Accounts will be introduced in BB16. The changes will result in further upward revisions in the expenditure on imputed rents, which will in turn increase the OOH weight in CPIH

Up is the new down.

Oh and never believe anything until it is officially denied.

The revision to the OOH index will therefore directly affect the relevant household expenditure current price estimates in the National Accounts, but not the volume estimates.

So you have more inflation but it does not affect volume. Odd because the past changes  boosted it and GDP  was Yazz right about this series?

The only way is up baby

Good job we do not rely on the GDP numbers…….


The UK Retail Sales series has been a good news story for the UK economy and I do not expect that to end but we are entering a phase which will see some slip-sliding away. If we look at the runes the price of crude oil may well be dipping again as it falls below US $40 for Brent Crude today but a return to past lows would not be as cheap after we buy it with a depreciated UK Pound £ which is below US $1.41 as I type this. However we should be grateful for what we have seen as by contrast the media hype about economic recovery in Italy has seen this reality today. From Istat.

The average of the last three months compared to the previous three months decreased by 0.1%.The unadjusted index decreased by 0.8% with respect to January 2015.

If we move to the GDP numbers then we have the issue of what to do about Imputed Rent? There are theoretical issues but today let us stay with the simple practical one that we in the UK have enormous trouble in measuring it and this song seems appropriate.

With their up diddley up-up and their down diddley down-down.Up! down! Flying around!Looping the loop and defying the ground!

Let me finish by wishing you all Happy Easter and a good news story from Dave Grohl of the Foo Fighters who responded to a call for help with this letter to Cornwall Council.

I believe that it is crucial that children have a place to explore their creativity and establish a sense of self through song. The preservation of such is paramount to the future of art and music. Without them, where would we be?




If you want to know more about the UK current account and its problems in an audio format here is a piece I did for Share Radio.


Meanwhile if we move to the world of video here is me on TipTV discussing central banking policy.







Better news for UK Public Finances accompanies a slowing of Retail Sales growth

Back just before Christmas I wrote how the claimed austerity of the UK government was in fact looking awfully like a fiscal boost. After all we have had a sustained period of economic growth now which has run for 3 years and yet the claimed Holy Grail of a balanced budget does not appear to be getting much closer. Indeed it is not here right now as it was supposed to be because we are now in the year that the original coalition forecasts from the summer of 2010 told us we would reach it. Actually we are supposed to be in surplus on both the cyclically adjusted current budget and cyclically adjusted net borrowing. However in spite of the get out clauses provided in those two definitions we are nowhere near.

Temporary factors

The official review of the November numbers wants us to ignore the long-term issues described above and to concentrate on what it regards as temporary and one-off factors which the OBR ( Office for Budget Responsibility) defines as follows.

but receipts were also boosted last November by £1.1 billion of fines levied on banks by the Financial Conduct Authority related to failings in foreign exchange business practices. This month’s data include only £0.1 billion of FCA fines;

Were we planning on relying for our nations finances on bad behaviour in the finance industry? Whilst I agree that this is clearly a growth area it poses questions. Also if we move to the expenditure side of the ledger we see this.

central government spending relative to last November was boosted by a £1.0 billion rise in EU contributions and a £0.8 billion rise in DfID spending related to payments to the World Bank, with the effects of both expected to unwind next month.

The swirling around from the extra EU payments and the smaller repayment has created a land of confusion and I have to confess that such large payments to the World Bank are a new one on me.

Economic growth

If we are not doing so well in a period when we have solid economic growth then a question is begged as to what will happen if things slow. If we look at the latest figures we may be seeing something of that. The January Economic Review put it like this.

GDP grew by 0.4% in Q3 2015, revised down from the previously published estimate of 0.5%. Growth averaged 0.5% during the first three quarters of 2015, following growth of 0.7% per quarter during 2014.

Whilst any quarterly figures are unreliable we seem to have a weakening trend and of course we saw this added to it.

by 2.1% when compared to the same quarter of the previous year……(partly due to)  0.2 percentage point downward revision for growth compared to the previous year.

Index Linked Gilts (Gilt-Edged Stock)

A factor often ignored is the impact of the lower inflation rate on the cost of UK debt. I have just quickly added up the amount of UK index-linked Gilts and come to £369 billion as the amount that is indexed. Now whilst the government would love to be paying CPI or pretty much nothing in 2015 they are linked to the Retail Price Index.But you would still rather be adding the 1% or so of 2015 than the 2%+ of most of 2014 and much more so than the 5%+ of much of 2011.

It is also true that the cost on normal Gilts is very low as in spite of all the interest-rate promises of Bank of England Governor Mark Carney we can borrow for ten years at only 1.68%.

Today’s retail sales figures

This morning’s numbers have thrown a little more unease into the mix. Let me open with what has been a familiar pattern as oil prices have driven inflation lower and real wages higher.

Year-on-year estimates of the quantity bought in the retail industry showed growth for the 32nd consecutive month in December 2015, increasing by 2.6% compared with December 2014.

So the year on year boom continues as does the disinflation which has helped to drive it.

Average store prices (including petrol stations) fell by 3.2% in December 2015 compared with December 2014, the 18th consecutive month of year-on-year price falls.

However the situation here also shows a possible sign of a turn downwards.

Compared with November 2015, the quantity bought in the retail industry is estimated to have decreased by 1.0%.

There was also an interesting little quirk which will impact on such things as VAT (Value Added Tax) revenues.

The amount spent in the retail industry decreased by 1.0% in December 2015 compared with December 2014 and decreased by 1.4% compared with November 2015.

Prices fell by more than volumes rose and is a type of deflation although only a nominal one.

Care is needed with any single month of retail sales data as it is an erratic series and the advent of Black Friday in the November figures seems only likely to exacerbate that. However wasn’t Black Friday supposed to have been a disappointment? The ONS (Office for National Statistics) believes it had a weaker impact than last year which on its own should have boosted the monthly change. If we look for some perspective the worries return.

Throughout most of 2015, the retail sales growth rate has fluctuated around the 4.0% to 5.0% range, which is higher than just before the downturn. However, the latest data shows an easing in retail sales growth to 3.7% in the 3 months to December 2015, the lowest rate for 2015, when compared with growth of 5.1% in the 3 months to November 2015.

Still there is always that standby scapegoat which is the weather!

Sales of clothing and footwear fell 4.2% due to mild weather in Dec 15

This month’s public finances

There was some better news in December from the headline borrowing figure.

Public sector net borrowing excluding public sector banks decreased by £4.3 billion to £7.5 billion in December 2015 compared with December 2014.

The revenue figures were as they have mostly been in 2015 pretty solid with taxes on income and sales (VAT) doing well and only slightly undermined by a dip in Corporation Tax. However the cut in expenditure was by UK standards pretty spectacular.

Central government expenditure (current and capital) in December 2015 was £58.5 billion, a decrease of £1.1 billion, or 1.8%, compared with December 2014.

It has otherwise been rising in this financial year ( 0.8% including December) but as we look into the detail some may wonder if the reduction was in the right area.

central government net investment (capital expenditure) decreased by £0.9 billion, or 24.5%

The picture regarding local authorities is rather opaque but was £1.4 billion better than December 2014.

If we move to the longer perspective we see this.

Public sector net borrowing excluding public sector banks decreased by £11.0 billion to £74.2 billion in the current financial year-to-date (April 2015 to December 2015) compared with the same period in 2014.

This is in spite of a better month and is progress at a snail’s pace.

Corporate Debt

We get plenty of protestations from politicians about “paying down the (national) debt” whereas it continues to rise.

£1,542.6 billion, equivalent to 81.0% of Gross Domestic Product; an increase of £53.2 billion compared with December 2014.

However the UK has reduced one debt burden according to the Bank of England

with the net debt stock of UK non-financial corporates falling by more than 20% of nominal GDP.

Of course it cannot be the banks fault so the companies themselves have to take the rap.

In this post, I argue that the root cause of this divergence was a fall in UK corporates’ demand for debt, rather than a hit to credit supply.


It is nice to see a better month for the UK Public Finances and in terms of good news a continuation of retail sales growth. However the picture for the public finances remains troubled and disappointing overall and worryingly for next week’s economic growth or GDP number retail sales have dipped. This has possible implications for future public finance numbers.Also if we were looking to reduce a debt burden we would not have wanted to reduce the corporate one especially after the over three years of the Funding for Lending Scheme which was supposed to boost it.