Germany is facing the credit crunch era version of stagflation

Some days a topic appears that has become an economic theme plus links with the discussions of earlier in the week and today is such a day. Since late summer last year we have began observing some backfires in the engine of the German economy and that turned into a second half of 2018 that saw economic output as measured by Gross Domestic Product actually fall.  This meant that the 2.2% economic growth of 2016 and 2017 decelerated to 1.4% in 2018. Apparently that is enough to turn Germans to drink.

WIESBADEN – As reported by the Federal Statistical Office, the beer producing and storing establishments in Germany sold 2.0 billion litres of beer in the first quarter of 2019. That was an increase of 2.4% from the corresponding period of the previous year.

However that report from earlier failed to provide enough support for the retail sales numbers.

Retail turnover, March 2019
-0.2% on the previous month (in real terms, calendar and seasonally adjusted, provisional)
-0.5% on the previous month (in nominal terms, calendar and seasonally adjusted, provisional)
-2.1% on the same month a year earlier (in real terms, provisional)
-1.7% on the same month a year earlier (in nominal terms, provisional)

If we concentrate on the real or volume figures we see the retail sales fell by 0.5% on the February numbers and were 2.1% on last year. This would be a troubling development if it persisted because one of the issues of the pre credit crunch era was the German export surplus which we know has if anything grown since. There has been a lot of establishment rhetoric about it but it has been hot air as we sing along with Bob Seeger and the Silver Bullet Band.

Cause you’re still the same
You’re still the same
Moving game to game
Some things never change
You’re still the same.

A proposed win-win situation out of this would be for German domestic consumption to rise and thereby boost imports to reduce the export surplus. This would be a win-win because the imports would be others exports and might lead to a virtuous circle where they could afford more German exports. But the March signal from retail sales is the consumption is not only not booming but maybe falling.

This is a change on what we had seen so far in 2019 and as ever in the retail sales series we wonder about how reliable the seasonal adjustment has been.

The Easter holiday situation had a negative impact on March 2019 sales when compared to March 2018.

Manufacturing

This is an area where the news has progressively gone from bad to worse. This mornings Markit business survey continued the theme.

Latest PMI® data from IHS Markit and BME revealed a further marked contraction of Germany’s manufacturing sector at the start of the second quarter, albeit with the rates of decline in output and new orders easing slightly since March.

Before this phase the phrase “marked contraction” was something definitely not associated with German manufacturing, and especially its up until now very successful car industry.

Behind the decrease in output in April was a seventh straight monthly reduction in new orders. Despite easing slightly since March, the rate of decline remained sharp and quicker than at any other point over the past ten years. This was also the case for new export orders. Where firms reported a decrease in inflows of new work, this was often linked to a slowdown in the automotive industry.

So we see that the automotive slow down is rippling though other parts of industry. Earlier this month Germany’s statisticians focused in on this.

In the course of 2018, however, the production of motor vehicles, trailers and semi-trailers decreased markedly….. the Federal Statistical Office (Destatis) reports that production in the second half of 2018 was a calendar and seasonally adjusted 7.1% lower than in the first half of the year.

They went onto point out that it was 4.7% of the German economy in 2016 and employed 880.000 people directly.

If we look ahead then the outlook also looks none too bright.

Finally, April’s survey showed manufacturers growing
gloomier about the outlook for output over the next 12
months. The degree of pessimism was the greatest seen
since November 2012.

Even this was happening.

another modest decrease in employment

However this just feels like stating the obvious.

Capacity pressures meanwhile continued to dissipate.

Stagflation?

This from Tuesday added a little fuel to the fire.

WIESBADEN – The inflation rate in Germany as measured by the consumer price index is expected to be 2.0% in April 2019. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that the consumer prices are expected to increase by 1.0% on March 2019.

Actually the Euro standard HICP measure or what we in the UK call CPI rose to an annual rate of increase of 2.1%. As to what drove it we see that the annual rate of energy costs has risen from 2.3% in January to 4.6% in March but a larger impact has come from services inflation rising from 1.4% to 2.1% because it is 53% of the index ( These breakdowns are from the German CPI).

As we so often find rental inflation at 1.4% pulls the number lower as it has been 1.4% every month in 2019 so far. Also it is time for my regular reminder that owner-occupied housing costs are ignored.

Given the tight market situation in 2018, prices in Germany as a whole advanced at nearly the same pace as in the preceding years, with house and apartment prices up by an average 8% in the 126 cities. ( Deutsche Bank )

They expect 7.9% this year which will have central bankers rubbing their hands at the wealth effects, after all if you ignore the inflation here it just disappears doesn’t it?

Principally because of low-interest rates, aggregate private household wealth in the entire cycle since 2009 has risen successively by roughly EUR 3,800 bn or over 40%,
according to the Federal Statistical Office, with property asset growth largely paralleling that of financial assets. ( Deutsche Bank)

Also I note that they think that rental inflation for new properties was 5% last year and 4.5% this which begs a question of the official data.

Comment

Whilst comparisons with the stagflation of the 1970s leave us well short of the absolute level of inflation it is also true that wage growth is much lower. The Ivory Towers will need a very cloudy day to avoid spotting that inflation has risen when according to their models it should be falling. So not much growth and some inflation makes us mull that temporarily at least Germany is something of a sick man of Europe.

The irony is that as I reported on Tuesday the pick-up in narrow money growth means that the Euro area has better economic prospects than it did. So other nations look like they will do better than Germany for a while and Spain for example already has been, Thus they may support it and stop things getting as bad as some think. But let me leave you with some manufacturing PMI numbers that this time last year would have been considered as “unpossible”.

Greece 56.6,  UK 53.1,  Germany 44.4

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UK Retail Sales are booming again and are being driven by lower inflation

The beat of UK economic data goes on as our official statisticians do their best to flood us with it on certain days which sadly has the effect that some matters get missed. It is sadly to report that those at the top of the Office for National Statistics have rather lost the plot and if the evidence they gave to the recent parliamentary enquiry is any guide are prioritising chasing clicks rather than providing information. The labour market release which used to be fairly clear is now something of a shambles of separate releases.

Let us however buck the trend by looking at the numbers which give us an international comparison for our national debt and deficit. Regular readers will be aware that the UK ONS has its own methodology which is neither international nor understood much as I recall Stephanie Flanders when she was BBC economics editor suddenly realising some of the reality. Let me illustrate with the numbers.

At the end of December 2018, UK general government gross debt was £1,837.5 billion, equivalent to 86.7% of gross domestic product (GDP) . This represents an increase of £51.4 billion since the end of December 2017, although debt as a percentage of GDP fell by 0.4 percentage points from 87.1% over the same period. This fall in the ratio of debt to GDP implies that GDP is currently growing at a greater rate than government debt.

That quote does a fair job of explaining how the debt is now rising at a slower rate than economic output meaning it is rising in absolute terms but falling in real ones.

If we move to the annual deficit we see this.

In 2018, UK general government deficit was £32.3 billion, equivalent to 1.5% of gross domestic product (GDP) ; the lowest annual deficit since 2001. This represents a decrease of £5.8 billion compared with borrowing in 2017.

In the financial year ending March 2018, the UK government deficit was £43.3 billion (or 2.1% of GDP), a decrease of £3.0 billion compared with the previous financial year.

As you can see the pattern is familiar of a falling deficit and if we start with the deficit there is something of an irony as we note this.

This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.

Although in debt terms we are way over.

General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.

Rather confusingly the ONS points us towards the January so let us look at the deficit in tax year terms.

Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

So only a small difference here but the debt figures show a much wider one in absolute terms.

Debt (public sector net debt excluding public sector banks) at the end of January 2019 was £1,782.1 billion (or 82.6% of gross domestic product (GDP))

The two main differences are the switch from net to gross debt and the switch from public finances to central government which means a difference of around 4% of GDP.

But we see that the numbers still show a considerable improvement.

Retail Sales

The present upbeat springlike mood got an extra boost this morning from this.

The monthly growth rate in the quantity bought in March 2019 increased by 1.1%, with food stores and non-store retailing providing the largest contributions to this growth. Year-on-year growth in the quantity bought increased by 6.7% in March 2019, the highest since October 2016, with a range of stores noting that the milder weather this year helped boost sales in comparison with the “Beast from the East” impacting sales in March 2018.

The weather probably helped as noted and in case you were wondering the numbers are seasonally adjusted for Easter. But as I noted value growth of 7.3% that meant that a rough guide to inflation is 0.6% or my January 2015 theme has worked one more time.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time. ( January 29th 2015)

This poses quite a problem for central bankers as they want to push inflation back to and in some cases ( as we have recently analysed) above 2% per annum. This would weaken retail sales and other measures as the reduce real wages by doing so. Or if you prefer they would be ignoring the reality of “sticky wages” and preferring Ivory Tower theory. Maybe that is why they seem keener on targeting climate change than inflation these days as we are deflected away from their main job.

As this series is erratic on a monthly basis we need to run a check looking further back but when we do so the answer changes little.

In the three months to March 2019 (Quarter 1), the quantity bought in retail sales increased by 1.6% when compared with Quarter 4 (Oct to Dec) 2018, following sustained growth throughout the first three months of the year. All store types except department stores and household goods stores increased in the quantity bought in the three months to March 2019, when compared with the previous three months.

It seems that the UK consumer has not waited to spend the benefits of higher real wages. At least for once we may not be observing a debt financed splurge although this does on the downside pose a worry about the trade figures, especially if this morning’s PMI survey suggesting economic growth has slowed again in the Euro area is accurate.

Putting this into song it is time for the Spencer Davis Group.

So keep on running
Keep on running,

Comment

As we approach Easter on Maundy Thursday we see that much of the UK economic data is in tune with the spring and the warm sunny weather that has arrived in London. This week has seen mostly steady inflation with continuing wage and employment growth and now has retail sales on a bit of an apparent tear. This is reinforced by the delayed debt and deficit data that matches international standards. Of course the economic output or GDP data is much more sanguine as we wait to see which will be right.

All of these numbers have their flaws. If we take an even-handed view we see that the omission of the self-employed from the wages numbers is a handicap but on the other side the omission of frankly a fair bit of modern life with things like Whatsapp being free and not being in GDP is a rising problem there.

Let me wish you a happy Easter as the UK takes a long weekend and add something else. Next month Japan will take a long break due to the accession of a new Emperor as what is called Golden Week becomes more like a Golden Fortnight. Some seem to approach this with trepidation, has the control freakery become so high, it has come to this?

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?
Original pirate material
Your listening to the streets  ( The Streets)

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Public Finance and Retail Sales numbers are upbeat about UK economic prospects

Before we even got to the latest in the current round of UK economic data there has been something of a change in financial markets. So let us reflect this via a tweet from me as I am the only person pointing this out.

Simply extraordinary! The UK ten-year Gilt yield is a mere 1.1% and we can borrow very cheaply. A combination of this week’s £3.4 billion QE from the Bank of England and the US Fed folding last night.

I suppose it is my time in the Gilt Market which means I follow it but there has been quite a shift which is getting ignored. Let me shift to the economic implications of this of which the most obvious is that the UK government can borrow very cheaply. Even if we look at the thirty-year yield at 1.59% it is very low in historical terms and but for the fact we have seen negative yields elsewhere ( and very briefly here) I would call it ultra low. No doubt its move lower last night was influenced by the £3.4 billion of purchases by the Bank of England this week especially the £1.1 billion of our 2057 Gilt. Added to that was the way that as we expected here the US Federal Reserve folded like a deck chair last night as placed a Powell put option under the US stock market.

UK Public Finances

Another area where I have been on a lonely journey is this which I reflected on last week ahead of the Spring Statement in the UK.

 However it does provide an opportunity to make clear how much the UK public finances have improved in the last few years. This often gets ignored in the media maelstrom as the priority is more often to score a political point.

In fact the January figures had been really good but maybe a little too good to be true.

Whilst some tax may have been paid earlier this year and flattered the Income Tax self assessment season the direction of travel is and has been clear.

So let us now find out.

Borrowing (public sector net borrowing excluding public sector banks) in February 2019 was £0.2 billion, £1.0 billion less than in February 2018; this was the lowest February borrowing since 2017.

So that is hopeful as there was no reverse swing but as ever we need to take some perspective for a clearer picture.

Borrowing in the current financial year-to-date (April 2018 to February 2019) (YTD) was £23.1 billion, £18.0 billion less than in the same period last year; the lowest YTD borrowing for 17 years (April 2001 to February 2002).

We see that we have maintained the same trend as the difference between this and January is within the likely error at £500 million. Also the driving force here was as hoped a strong tax collecting season.

combined self-assessed Income Tax receipts were £18.7 billion, of which £14.7 billion was paid in January and £4.0 billion was paid in February; an increase of £1.7 billion compared with the same period in 2018…….Combined Capital Gains Tax receipts were £8.8 billion, of which £6.8 billion was paid in January and £2.0 billion was paid in February; an increase of £1.3 billion compared with the same period in 2018.

I have to confess I am a little surprised at the relative size of the capital gains take and can only think that higher asset prices have helped. Do readers have any insight on it?

This means that looked at in isolation the UK fiscal position now looks very strong and we may be approaching fiscal balance which has been 2/3  years away since about 2012! Of course it may be spent and if we widen our outlook there are plainly plenty of good causes out there such as the Universal Credit shambles and the police for starters.

The national debt position is more complex.

Debt (public sector net debt excluding public sector banks) at the end of February 2019 was £1,785.6 billion (or 82.8% of gross domestic product (GDP)); an increase of £22.7 billion (or a decrease of 1.4 percentage points of GDP) on February 2018.

As you can see the rate of rise has slowed very sharply and such that even the low rate of economic growth we have seen has exceeded it causing the debt to GDP ratio to fall. Now I was asked on here about the banks last week and replied with this.

But it misses out the banks which would add another £283 billion to this. So much less than they did but still there.

So if we put them back in then the debt to GDP ratio is more like 96% but as I then pointed out the poor design of the Bank of England Term Funding Scheme amongst other things means this happens too.

Also they impact in another way as the Bank of England adds £185 billion to the national debt mostly via help to the banks.

So if we knock that off then a more realistic ratio is perhaps 87%.

Retail Sales

These showed yet again that the UK consumer seems to have “spend,spend,spend” on the brain.

The monthly growth rate in the quantity bought in February 2019 increased by 0.4%, with a decline of 1.2% in food stores offset by growth in all other main sectors.

As an aside I have noticed more than a few articles in the media telling us that people are stockpiling food and someone posted a receipt on twitter for over £600 after doing exactly that. But if we move from the media world to the much wide real one we see this.

The monthly fall in food stores was the strongest decline since December 2016 at negative 1.5%, reversing the increase of 0.9% in January 2019, with food retailers suggesting that “getting back to normal” following the January sales had contributed to this fall.

If they stockpiled a few months ago I will only be eating tinned or frozen food at their place.

Moving to the annual picture tells us this.

Year-on-year growth in the quantity bought in February 2019 increased by 4.0%, with growth in all main sectors, while the only sub-sector to show a decline within non-food stores was household goods stores at negative 1.3%.

Those who follow my theme from January 2015 that lower inflation boosts retail sales may like to note that the figures below suggest that at 0.3% it has been at play again.

Both the amount spent and the quantity bought in the retail industry showed strong growth of 4.3% and 4.0% respectively in February 2019 when compared with a year earlier.

If we look at wage growth at over 3% we see that in terms of retail sales we are seeing substantial real wage growth if the official data is any guide.

Comment

We find that the UK economic news continues to be pretty good. There are good signs for consumption from retail sales and the strong public finances do relate to what is strong tax take.

In the current financial YTD (April 2018 to February 2019), central government received £674.9 billion in income, including £512.2 billion in taxes. This was 5% more than in the same period in 2017.

So these numbers suggest we are doing better than we would otherwise have thought and if we also factor in the real wage growth that they might continue. A little caution is required as the money supply data is weak but perhaps GDP growth could continue to bumble on at 0.3% per quarter or so. At the moment if we add in an international perspective that does not look too bad.

Meanwhile some things just cannot be avoided it would seem.

In February 2019, the UK’s GNI and VAT contribution to the European Union (EU) was £2.9 billion, £1.0 billion higher than in February 2018; the highest cash payment in any month on record (monthly records began in January 1993). This is due largely to the timing of payments made to the EU by all member states rather than a reflection of any budgetary increase.

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What is the purpose of the Monetary Policy Committee of the Bank of England?

This week has been one where we have found ourselves observing and analysing the both the reality and the consequences of the global economic slow down. Yesterday gave us an opportunity to peer into the mind of a Bank of England policymaker and first Gertjan Vlieghe was keen to establish why he is paid the big bucks.

When the global economy is doing well, the UK usually tends to do well too. When the global economy is
sluggish, the UK economy tends to be sluggish too.

Thanks for that Gertjan! Next comes something that has been an issue since the credit crunch hit which has been the issue of what David Bowie called ch-ch-changes.

We are in a period of unusual uncertainty around the economic outlook.
There is a tendency to say every quarter that things are more uncertain than before, and of course that
cannot always be true. It must be that sometimes uncertainty is less than it was before.

Now put yourself in Gertjan’s shoes as someone who has been consistently wrong and has turned it into something of an art form. The future must be terrifying to someone like that and indeed it is.

Setting monetary policy requires making decisions even when the outlook is uncertain.

Actually the outlook is always uncertain especially if we look back for Gertjan and his colleagues.

The Forward Guidance Lie

Here is Gertjan making his case.

Rather, we need to respond to news about the economy as
we receive it, in a systematic and predictable way that agents in the economy can factor into their decisions.

There are several problems with this. Firstly how many people even take notice of the Bank of England. Secondly that situation will have only have been made worse by the way that the Forward Guidance has not only been wrong it has been deeply misleading, For example in August 2016 after more than two years of hints and promises about a Bank Rate rise Gerthan voted instead for a Bank Rate cut and £60 billion of Sledgehammer QE. So those who had taken the Forward Guidance advice and for example remortgaged into a fixed-rate were materially disadvantaged.

Not content with that Gertjan seems on the road to doing it again. So let us remind ourselves of the official view.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Yet Gertjan has got cold feet again.

I will discuss what news we have had about the economy in recent quarters, and how that has changed my
thinking about the appropriate path of monetary policy.

Why do I have a feeling of deja vu? Here is the old Vlieghe.

When I first spoke about the future path of Bank Rate a year ago, I thought one to two quarter point hikes per
year in Bank Rate was the most likely central case

Here is the new Vlieghe.

On the assumption that global growth does not slow materially further than it has so far, that the path to Brexit
involves a lengthy transition period in line with the government’s stated objectives, that pay growth continues
around its recent pace, and that we start to see some evidence of pay growth leading to upward consumer
price pressure, a path of Bank Rate that involves around one quarter point hike per year seems a reasonable
central case.

As you can see Gertjan is trying to present himself in the manner of an engineer perhaps fine tuning an aircraft wing design. The first problem is that last time he tried this his aircraft crashed on take-off as a promised Bank Rate rise turned into a cut. Next comes the issue of why you would raise Bank Rate once a year? After all it would feel like forever before anything materially changed. Five years of it would get Bank Rate to only 2%!

The reality is that if we look at his view of a slowing world economy it is hard to believe that he wants to raise interest-rates at all. Also as his speech is very downbeat about Brexit as the Bank of England consistently is then it is hard not to mull what he told the Evening Standard back in April 2016.

“Theoretically, I think interest rates could go a little bit negative.”

Even that was an odd phrase as of course quite a few countries had them including the country where he was born. Anyway here is my immediate response on twitter to his speech.

Shorter Gertjan Vlieghe : Can I vote for a Bank Rate cut yet please Governor?

If we step back and look at the overall Bank of England picture we see that the Monetary Policy Committee is becoming an increasing waste of time. We are paying eight people to say “I agree with Mark” and flatter the Governor’s ego.

Retail Sales

Here Gertjan Vlieghe had almost impeccable timing.

Domestic growth has slowed somewhat more than expected, especially around the turn of the year.

Just in time for this official release today about UK Retail Sales.

Year-on-year growth in the quantity bought in January 2019 was 4.2%, the highest since December 2016; while year-on-year average store prices slowed to 0.4%, the lowest price increase since November 2016.

Those figures confirm my theme that lower inflation leads to better consumption data via higher real wages. This is a very awkward issue for the Bank of England as it wants to push the 0.4% inflation above up to 2% in what would be a clear policy error.

In the three months to January 2019, the quantity bought increased by 0.7% when compared with the previous three months.The monthly growth rate in the quantity bought increased by 1.0% in January 2019, following a decline of 0.7% in December 2018.

A good January has pulled the quarterly numbers higher and the driving force is show below.

The quantity bought in textile, clothing and footwear stores showed strong year-on-year growth at 5.5% as stores took advantage of the January sales, with a year-on-year price fall of 0.9%.

Comment

This speech just highlights what a mess the situation has become at the Bank of England. A policymaker gives a speech talking about interest-rate rises whilst the meat of the speech outlines a situation more suited to interest-rate cuts. The economy is smaller due to Brexit morphs into world economic slow down and yet Gertjan apparently thinks we are silly enough to believe he intends to raise interest-rates. Even in a Brexit deal scenario he doesn’t seem to have even convinced himself.

If a transition period is successfully negotiated, and a near term “no deal” scenario is therefore avoided, I
would expect the exchange rate to appreciate somewhat. The degree of future monetary tightening will in
part depend on how large this appreciation is.

Also 2018 taught us how useful the money supply data can be in predicting economic events and yet they have been ignored by Gertjan as we see a reason why he is groping in the dark all the time. That brings me to my point for today which is that the Bank of England has become one big echo chamber with a lack of diversity in any respect but most importantly in views. External members are supposed to bring a fresh outlook but this has failed for some time now. So it would be simpler if we saved the other eight salaries and let Governor Carney set interest-rates as really all they are doing is saying “I agree with Mark”. After all even the Bank of Japan with its culture of face manages to produce some dissent these days.

 

 

Oh Italia!

Sometimes events just seem to gather their own momentum in the way that a rolling stone gathers moss so let me take you straight to the Italian Prime Minister this morning.

Italy Dep PM Di Maio: Low Growth Views `Theater Of The Absurd’: Messaggero ( @LiveSquawk )

I have to confess that after the way that the Italian economy has struggled for the last couple of decades this brought the Doobie Brothers to mind.

What a fool believes he sees
No wise man has the power to reason away
What seems to be
Is always better than nothing
And nothing at all

Then the Italian statistics office produced something of a tour de force.

In December 2018 the seasonally adjusted industrial production index decreased by 0.8% compared with
the previous month. The percentage change of the average of the last three months with respect to the
previous three months was -1.1.

As you can see these numbers are in fact worse than being just weak as they show a monthly and a quarterly fall. But they are in fact much better than the next one which is really rather shocking.

The calendar adjusted industrial production index decreased by 5.5% compared with December 2017
(calendar working days being 19 versus 18 days in December 2017); for the whole year 2018 the
percentage change was +0.8 compared with 2017.
The unadjusted industrial production index decreased by 2.5% compared with December 2017.

Just for clarity output was 2.5% lower but as there was an extra working day this year then on a like for like basis it was some 5.5% lower. I would say that was a depressionary type number except of course Italy has been in a long-standing depression.

Digging deeper into the numbers we see that on a seasonally adjusted basis there was a rally in industrial production as the 100 of 2015 nearly made 110 in November 2017, but now it has fallen back to 103.9. But even that pales compared to the calendar adjusted index which is now at 93.3. So whilst the different indices can cause some confusion the overall picture is clear. We do not get a lot of detail on manufacturing except that on a seasonally adjusted basis output was 5.5% lower in December than a year ago.

The drop is such that we could see a downwards revision to the Italian GDP data for the fourth quarter of last year which was -0.2% as it is. Actually the annual number at 0.1% looks vulnerable and might make more impact if the annual rate of growth falls back to 0%. Production in a modern economy does not have the impact it once did and Italy’s statisticians were expecting a fall but not one on this scale.

Monthly Economic Report

After the above we advance on this with trepidation.

World economic deceleration has spilled over into Q4, particularly in the industrial sector, which has
experienced a broad-based loss of momentum in many economies and a further slowing in global trade growth.
In November, according to CPB data the merchandise World trade in volume decreased 1.6%.

So it is everyone else’s fault in a familiar refrain, what is Italian for Johnny Foreigner? This is rather amusingly immediately contradicted by the data.

In Italy, real GDP fell by 0.2% in Q4 2018, following a 0.1% drop in the previous quarter. The negative result is
mainly attributable to domestic demand while the contribution of net export was positive.

So in fact it was the domestic economy causing the slow down. This thought is added to by the trade data where the fall in exports is dwarfed by the fall in imports at least in November as we only have partial data for December.

As for foreign trade, in November 2018 seasonally-adjusted data, compared to October 2018, decreased both
for exports (-0.4%) and for imports (-2.2%). Exports drop for EU countries (-1.3%) and rose for non EU
countries (+0.6%). However, according to preliminary estimates in December also exports to non-EU
countries decreased by 5.0%.

Now let me give an example of how economics can be the dismal science. Because whilst in isolation the numbers below are welcome with falling output they suggest falling productivity.

In the same month, the labour market, employment stabilized and the unemployment rate decreased only
marginally.

The future looks none too bright either,

In January 2019, the consumer confidence improved while the composite business climate
indicator decreased further. The leading indicator experienced a sharp fall suggesting a
worsening of the Italian cyclical position in the coming months.

Indeed and thank you for @liukzilla for pointing this out the Italian version does hint at some possible downgrades, Via Google Translate.

The data of industrial production amplify the tendency to reduce the rhythms of
activity started in the first few months of 2018 (-1.1% the economic variation in T4).

Also a none too bright future.

Data on industry orders also showed a negative trend, with a decrease for both markets in the September-November quarter (-1.3% and -1.0% respectively on the market).
internal and foreign).

The Consumer

Yesterday’s data provided no cheer either.

In December 2018, both value and volume of retail trade contracted by 0.7% when compared with the previous month. Year-on-year growth rate fell by 0.6% in value terms, while the quantity sold decreased by 0.5%.

Although on a quarterly basis there was a little bit assuming you think the numbers are that accurate,

In the three months to December (Quarter 4), the value of retail trade rose by 0.1%, showing a slowdown
to growth in comparison with the previous quarter (+0.4%), while the volume remained unchanged at
+0.3%.

Actually there was never much of a recovery here as the index only briefing rose to 102 if we take 2015 as 100 and now is at 101.5 according to the chart provided. Odd because you might reasonably have expected all the monetary stimulus to have impacted on consumer spending.

Population

This is now declining in spite of a fair bit of immigration.

On 1 st January 2019, the population was estimated to be 60,391,000 and the decrease on the previous year was
around 90,000 units (-1.5 per thousand)………The net international migration amounted to +190 thousand, recording a slight increase on the previous year (+188
thousand). Both immigration (349 thousand) and emigration (160 thousand) increased (+1.7% and +3.1%
respecitvely).

Bond Markets

I have pointed out many times that Italian bond yields have risen for Italy in both absolute and relative terms. Let me present another perspective on this from the thirty-year bond it issued earlier this week.

Today Italy issued 8bln 30yr BTPs. Had it issued the same bond last April, it would have received around 1.3 bilion more cash from the market. ( @gusbaratta ).

Comment

This is quite a mess in a lovely country. Also the ironies abound as for example expanding fiscal policy into an economic decline was only recently rejected by the Euro area authorities. They also have just ended some of the monetary stimulus by ending monthly QE at what appears to be exactly the wrong time. So whilst the Italian government deserves some criticism so do the Euro area authorities. For example if the ECB has the powers it claims why is it not using them?

Of course I don’t want to speculate about what contingency would call for a specific instrument but if you look at the number of instruments we have in place now, we can conclude that it’s not true that the ECB has run out of fuel or has run out of instruments. We have all our toolbox still available. ( Mario Draghi )

But just when you might have thought it cannot get any worse it has.

Me on The Investing Channel

Chinese economic growth looks set to slow further in 2019

This morning brings us up to date on what has been a theme for a little while now as we have observed one of the main engines of world economic growth starting to miss a beat or two. This from Bloomberg gives us some context and perspective.

China accounted for more than 36% of global GDP growth in 2016.

That sort of growth has led to this according to the Spectator Index.

China’s GDP as a share of US GDP. (nominal) 2009: 35.4% 2019: 65.8%

This has led to all sorts of forecasts around China overtaking the US in terms of total size of its economy with of course the same old problem so familiar of simply projecting the past into the future. Let us know switch to the official view published this morning.

In 2018, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the general working guideline of making progress while maintaining stability, committed to the new development philosophy, promoted high quality development, focused on the supply-side structural reform, stayed united and overcame difficulties.

And I thought I sometimes composed long sentences! It also provokes a wry smile if we convert that to the country where we are in as I mull Theresa May telling the UK we “stayed united and overcame difficulties.”

Gross Domestic Product

Firstly we are told a version of tractor production being on target.

According to the preliminary estimation, the gross domestic product (GDP) of China was 90,030.9 billion yuan in 2018, an increase of 6.6 percent at comparable prices over the previous year, achieving the set target of around 6.5 percent growth for the year.

But then we get a version of slip-sliding away.

Specifically, the year-on-year growth of GDP was 6.8 percent for the first quarter, 6.7 percent for the second quarter, 6.5 percent for the third quarter, and 6.4 percent for the fourth quarter.

The trend is exactly as we have been expecting. Also let us take a moment to note how extraordinary it is that a nation as described below can produce its economic output data in only 21 days. There’s mud in the eye of the western capitalist imperialists.

By the end of 2018, the total population of mainland China was 1,395.38 million  an increase of 5.30 million over that at the end of 2017.

That brings us to a clear problem which is that we can I think have confidence in the GDP trend but not in the outright number. Not everyone seems to believe that as many have repeated this sort of line.

According to just-released official statistics, ‘s grew 6.6% in 2018. While it’s the lowest annual annual expansion in almost 30 years, it still is quite a robust rate for an that faced — and is facing — several internal and external uncertainties.

That was Mohammed El-Erian of Allianz.

Industrial Production

Perspective is provided as I note that 6.2% growth is described as “slow but stable” and we remain on message with this.

the value added of the state holding enterprises was up by 6.2 percent……. and enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan, up by 4.8 percent.

A clear superiority of the state over foreign private investors and especially the pesky Taiwanese. But they cannot hide this.

In December, the total value added of the industrial enterprises above the designated size was up by 5.7 percent year-on-year, 0.3 percentage point higher than that of last month, or up by 0.54 percent month-on-month.

We are told about the monthly improvement which is welcome but it is still below the average.

The real growth of the total value added of the industrial enterprises above the designated size in 2018 was 6.2 percent, with slow yet stable growth.

So with 6.2% being slow and stable if 5.7% just slow? Many countries would love such a rate of growth but not China.

Services

Again we see a monthly rise being reported.

In December, the Index of Services Production was up by 7.3 percent year-on-year, 0.1 percentage point higher than that of last month.

However this is also against a backdrop of a weakening over the full year.

In 2018, the Index of Services Production increased by 7.7 percent over that of last year, maintained comparatively rapid growth.

That theme continues as we note that year on year growth was 8.3% in December of 2017.

Retail Sales

We find ourselves in familiar territory.

In 2018, the total retail sales of consumer goods reached 38,098.7 billion yuan, up by 9.0 percent over last year which kept fast growth……..In December, the growth of total retail sales of consumer goods was 8.2 percent year-on-year, or 0.55 percent month-on-month.

If we look back the reported growth rate in December 2017 was 10.2%.

Property

This has been an area that has fueled growth in China but Reuters now have their doubts about it.

Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2 percent in December from a year earlier, down from 9.3 percent in November, according to Reuters calculations based on data released by National Bureau of Statistics (NBS) on Monday.

That was just ahead of the slowest pace of growth last year at 7.7 percent recorded for October.

So the two lowest numbers were at the end of the year and compare to this.

For the full year, property investment increased 9.5 percent from the year-earlier period, down from 9.7 percent in January-November.

I note that in the official data whilst prices are still rising volume growth has slowed to a crawl in Chinese terms.

The floor space of commercial buildings sold was 1,716.54 million square meters, up by 1.3 percent. Specifically, the floor space of residential buildings sold was up by 2.2 percent. The total sales of commercial buildings were 14,997.3 billion yuan, up by 12.2 percent, among which the sales of residential buildings were up by 14.7 percent.

Trade

This was a factor in things slowing down as we note the faster import growth over 2018 as a whole.

The total value of exports was 16,417.7 billion yuan, up by 7.1 percent; the total value of imports was 14,087.4 billion yuan, up by 12.9 percent.

Those who consider the trade surplus to be one of the world’s economic imbalances should echo the official line.

the Trade Structure Continued to Optimize

Comment

So we find that the official data is catching up with our view of an economic slow down in China. Those late to the party have the inconvenience of December showing some data a little better on a monthly basis but the trend remains clear. Looking ahead then even the official business survey shows a decline because the 54s and 53s were replaced by 52.6 in December.

However if we switch to my favourite short-term indicator which is narrow money we see that the economic brakes are still on. The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

Still it is not all bad news as it has been a while since there has been so little publicity about the annual shindig in Davos. Perhaps someone has spotted that flying to an Alpine resort to lecture others about climate change has more than a whiff of hypocrisy about it.

Hard Times at the Bank of England on both Forward Guidance and inflation expertise

It is time for us to dip back into the data in the UK economy as we look at retail sales, But before we get there we have seen another development and it has come from UK Gilt yields which are the cost of borrowing for the UK government. I have been writing for some time that they have been very low due to the fear for some or expectation for others that the Bank of England will start a new phase of QE ( Quantitative Easing) bond purchases. At the nadir the UK ten-year yield dipped below 1.2% which still left plenty of margin as the Sledgehammer QE drove it down to 0.5%. I still consider that to be madness but it is something the media and other economists do not understand so any debate stalls. But the Gilt yield issue is that it has risen to 1.37% which if it goes a little further will have economic effects via fixed-rate mortgages and business borrowing.

In terms of context other bond yields have also risen but the UK has seen its rise faster. Even I cannot entirely avoid politics so let me add that there were roads this week when Brexit developments ,might have led to UK Gilt yields falling due to expectations of more Bank of England QE in spite of the international trend. Should fixed-rate mortgages rise in price then we can perhaps expect a little more of this.

The UK housing market ended 2018 on a weak note with uncertainty still biting, alongside continuing lack of stock and affordability issues, according to the December 2018 UK Residential Market Survey. ( Royal Institute of Chartered Surveyors or RICS)

Also they expect things to get worse.

Moving forward, however, over the next three months sales expectations are now either flat or negative across the UK. The headline net balance of -28% represents the poorest reading since the series was formed in 1999. The twelve-month outlook is a little more upbeat, suggesting that some of the near-term pessimism is linked to the lack of clarity around what form of departure the UK might make from the EU in March.

Worse for them I mean as lower house prices would benefit first time buyers who have seen house prices accelerate away from them in nominal and real terms in the credit crunch era.

Also they seem to have their doubts about the promised future supply.

Meanwhile it is hard to see developers stepping up the supply pipeline in this environment. Getting to the government’s 300,000 building target was never going to be easy but pushing up to anywhere near this figure will require significantly greater input from other delivery channels including local authorities taking advantage of their new-found freedom.

That of course would be a case of history on repeat or as the Four Tops put it.

Now it’s the same old song
But with a different meaning
Since you been gone

Ben Broadbent

The issues above will not make the Bank of England very happy and this will add to the dark cloud around Deputy Governor Broadbent otherwise known as the absent-minded professor. Here is an excerpt from something I posted on the Royal Statistics Society website in October.

” there are fewer than 10 million owner occupier mortgages. Is the cost of a house to someone who happens
already to have paid off his or her mortgage really zero?”

So we see that we cannot use something which is used around 10 million times but we can use the Imputed Rents which are used precisely zero times! I do not recall anyone arguing for mortgage costs to be used for those who do not have one, in the way he is calling for rents to be used for those who do not pay them. For example the RPI has mortgage costs, but also as a considerably larger component house prices  via  the use of depreciation.

The absent-minded professor spoke up strongly for the Rental Equivalence model which the House of Lords rejected this week. Also they were disappointed with other aspects of his performance.

Let me end by congratulating the Lords and Baroness Bowles on pressing the Deputy Governor responsible for the RPI on the issue of what Yes Prime Minster satirised as “Masterly Inaction”. As they point out there are changes which could have been made as opposed to the state of play during his tenure.

“That process seems to have stalled.”

Retail Sales

These were something of a journey and had a kicker that seems to have been missed in the melee so let me explain.

When compared with the previous month, the quantity bought in December 2018 decreased by 0.9%, as all sectors except food stores and fuel stores declined on the month.

So down except we know the numbers are regularly erratic and are likely to be even more so with the advent of Black Friday in November. Let us therefore look for more perspective.

In the three months to December 2018, estimates in the quantity bought decreased by 0.2% with declines across all main sectors except fuel.

As to the wider impact Rupert Seggins has crunched some numbers.

UK retail sales fell -0.2%q/q in the final quarter of 2018, indicating that the retail sector took -0.01% off GDP growth in Q4.

If we move to the annual comparison though we get some relief as the volume figures were 3% higher if we return to the December numbers with fuel sales and 2.6% without or a 0.17% addition to GDP using Rupert’s calculator. But there has been a slowing even with such numbers.

Looking at annual growth rates, the whole of 2018 increased by 2.7% in the quantity bought; an annual slowdown in comparison with the peak of 4.7% experienced in 2016.

One of the things which bemuses me from time to time is that it is often those who support issues such as climate change who seem most unhappy about a decline in retail sales growth missing the logical link. But my main point here is that if we compare the volume and sales figures retail inflation is a mere 0.7% on an annual basis.

Comment

It was only last week that I suggested that the Bank of England was giving the wrong Forward Guidance about interest-rates as the economic outlook darkens. If the rough and ready calculator for retail inflation is in any way accurate then that is reinforced by today;s number and that adds to the lower consumer inflation numbers we saw earlier this week. Added to that the Bank of England has publicly backed the wrong horse in the inflation measurement stakes.

Even worse it has backed the establishment line driven by Her Majesty’s Treasury which is precisely the body it is supposed to be independent from. Perhaps that is something to do with the fact that the Deputy-Governors are HM Treasury alumni in a case of what in another form we call “regulatory capture”.

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