Eurobonds To be? Or not to be?

We find that some topics have a habit of recurring mostly because they never get quite settled, at least not to everyone’s satisfaction. At the time however triumph is declared as we enter a new era until reality intervenes, often quite quickly. So last night’s Franco-German announcement after a virtual summit caught the newswires.

France and Germany are proposing a €500bn ($545bn; £448bn) European recovery fund to be distributed to EU countries worst affected by Covid-19.

In talks on Monday, French President Emmanuel Macron and German Chancellor Angela Merkel agreed that the funds should be provided as grants.

The proposal represents a significant shift in Mrs Merkel’s position.

Mr Macron said it was a major step forward and was “what the eurozone needs to remain united”. ( BBC)

Okay and there was also this reported by the BBC.

Mrs Merkel, who had previously rejected the idea of nations sharing debt, said the European Commission would raise money for the fund by borrowing on the markets, which would be repaid gradually from the EU’s overall budget.

There are a couple of familiar features here as we see politicians wanted to spend now and have future politicians ( i.e not them face the issues of paying for it). There is an undercut right now in that the choice of Frau Merkel reminds those of us who follow bond markets that Germany is being paid to borrow with even its thirty-year yield being -0.05%. So in essence the other countries want a slice of that pie as opposed to hearing this from Germany.

Money, it’s a crime
Share it fairly but don’t take a slice of my pie
Money, so they say
Is the root of all evil today
But if you ask for a raise it’s no surprise that they’re
Giving none away, away, away ( Pink Floyd)

Actually France is often paid to borrow as well ( ten-year yield is -0.04%) but even it must be looking rather jealously at Germany.Here is how Katya Adler of the BBC summarised its significance.

Chancellor Merkel has conceded a lot. She openly agreed with the French that any money from this fund, allocated to a needy EU country, should be a grant, not a loan. Importantly, this means not increasing the debts of economies already weak before the pandemic.

President Macron gave ground, too. He had wanted a huge fund of a trillion or more euros. But a trillion euros of grants was probably too much for Mrs Merkel to swallow on behalf of fellow German taxpayers.

She has made a technical error, however, as Eurostat tends to allocate such borrowing to each country on the grounds of its ECB capital share. So lower borrowing for say Italy but not necessarily zero.

The ECB

Its President Christine Lagarde was quickly in the press.

So there is zero risk to the euro?

Yes. And I would remind you that the euro is irreversible, it’s written in the EU Treaty.

Of course history is a long list of treaties which have been reversed. Also there was the standard tactic when challenged on debt which is whataboutery.

Every country in the world is seeing its debt level increase – according to the IMF’s projections, the debt level of the United States will reach more than 130% of GDP by the end of this year, while the euro area’s debt will be below 100% of GDP.

Actually by trying to be clever there, she has stepped on something of a land mine. Let me hand you over to the French Finance Minister.

French Finance Minister Bruno Le Maire said on Tuesday, the European Union (EU) recovery fund probably will not be available until 2021.

The 500 bln euro recovery fund idea is a historic step because it finances budget spending through debt, he added. ( FXStreet )

So the height of the pandemic and the economic collapse will be over before it starts? That is an issue which has dogged the Euro area response to not only this crisis but the Greek and wider Euro area one too. It is very slow moving and in the case of Greece by the time it upped its game we had seen the claimed 2% per annum economic growth morph into around a 10% decline meaning the boat had sailed. In economic policy there is always the issue of timing and in this instance whatever you think of the details of US policy for instance it has got on with it quickly which matters in a crisis.

Speaking of shooting yourself in the foot there was also this.

Growth levels and prevailing interest rates should be taken into account, as these are the two key elements.

The latter is true and as I pointed out earlier is a strength for many Euro area countries but the former has been quite a problem. Unless we see a marked change we can only expect the same poor to average performance going ahead. Mind you we did see a hint that her predecessor had played something of a Jedi Mind Trick on financial markets.

Outright Monetary Transactions, or OMTs, are an important instrument in the European toolbox, but they were designed for the 2011-12 crisis, which was very different from this one. I don’t think it is the tool that would be best suited to tackling the economic consequences of the public health crisis created by COVID-19.

They had success without ever being used.

Market Response

Things have gone rather well so far. The Euro has rallied versus the US Dollar towards 1.10 although it has dipped against the UK Pound. Bond markets are more clear cut with the Italian bond future rising over a point and a half to above 140 reducing its ten-year yield to 1.62%. The ten-year yield in Spain has fallen to 0.7% as well. It seems a bit harsh to include Spain after the economic growth spurt we have seen but nonetheless maybe it did not reach escape velocity.

Comment

Actually there already are some Eurobonds in that the ESM ( European Stability Mechanism) has issued bonds in the assistance programmes for Greece, Italy, Portugal and Spain. Although they were secondary market moves mostly allowing countries to borrow more cheaply rather than spend more. On that subject I guess life can sometimes come at you fast as how is this going?

Taking into account these measures, the
government remains committed to meeting the
primary fiscal surplus for 2020 and forecasts a
primary surplus at  3.6% of GDP ( Greece Debt Office)

On the other side of the coin it will be grateful for this.

81% of the debt stock is held by official sector creditors,
allowing for long term maturity profile and low interest
rates

On a Greek style scale the 500 billion Euros is significant but now we switch to Italy we see that suddenly the same sum of money shrinks a lot. I notice that Five Star ( political party not the band) have already been on the case.

It’s just too little, too late
A little too long
And I can’t wait ( JoJo)

This brings me to the two real issues here of which the first is generic. In its history fiscal policy finds that it can not respond quickly enough which is why the “first responder” is monetary policy. The problem is that the ECB has done this so much it is struggling to do much more and the European Union is always slow to use fiscal policy. Such as it has then the use has been in the other direction via the Stability and Growth Pact.

Next comes the fact that there are 19 national treasuries to deal with for the Euro and 27 for the European Union as I note that last night’s deal was between only 2 of them. Perhaps the most important ones but only 2.

Where next for the economy of Spain and house prices?

We can pick up on quite a lot of what is happening economically by taking a look at Spain which has been something of a yo-yo in the credit crunch era. It was hit then began to recover then was affected by the Euro area crisis but from around 2014/15 was maybe the clearest case of the Euro boom as it posted GDP (Gross Domestic Product) growth as high as 4.2% in late 2015. Since then in something of a contradiction for the policies of the ECB economic growth has slowed but nonetheless Spain was an outperformer. Indeed such that things were quiet on the usual metrics such as national debt and so on. It shows how a burst of GDP growth can change things.

Of course that was this and we are now in the eye of the economic storm of the Covid-19 pandemic. At the end of last month Spain’s official statisticians fired an opening salvo on the state of play.

The Spanish GDP registered a variation of ─5.2% in the first quarter of 2020 with respect to the previous quarter in terms of volume. This rate was 5.6 points lower than that
recorded for the fourth quarter…….. Year-on-year GDP variation of GDP stood at ─4.1%, compared with 1.8% in the previous quarter.

To be fair to them they had doubts about the numbers but felt they had a duty to at least produce some.

Today

Markit INS offered us some thoughts earlier.

Record falls in both manufacturing and service sector output ensured that the Spanish private sector overall experienced a considerable and unprecedented contraction of economic activity during April. After accounting for seasonal factors, the Composite Output Index* recorded a new low of 9.2, down from 26.7 in March.

A single-digit PMI still comes as a bit of a shock as we recall that Greece in its crisis only fell to around 30 on this measure. Here is some more detail from their report.

The sharp contraction was driven by rapid reductions in
demand and new business as widespread government
restrictions on non-essential economic activity – both
at home and abroad – weighed heavily on company
performance. There was a record reduction in composite
new business and overall workloads – as measured by
backlogs of work – during April.

We can spin that round to an estimated impact on GDP.

Allowing for a likely shift in the traditionally strong linear relationship between GDP and PMI data, we estimate the economy is currently contracting at a quarterly rate of around 7%.

They then confess to something I have pointed out before about the way they treat the Euro area.

Whilst startling enough, this figure may well prove
to be conservative, with the depth of the downturn
undoubtedly greater than anything we have ever seen
before.

For our purposes we see that a double-digit fall in GDP seems likely and even this morning’s forecasts from the European Commission are on that road.

For the year as whole, GDP is forecast to
decline by almost 9½%.

I do like the 1/2% as if any forecast is that accurate right now! One element in the detail that especially concerns me is the labour market because it had been something of a laggard in the Spanish boom phase.

The unemployment rate is expected to rise rapidly, amplifying the shock to the economy, although job losses should be partly reabsorbed as activity picks up again. However, the recovery in the labour market is expected to be slower amid high uncertainty, weak corporate balance-sheet positions, and the disproportionate impact of the
crisis on labour intensive sectors, such as retail and
hospitality.

This was the state of play at the end of March.

The unemployment rate increased 63 hundredths and stood at 14.41%. In the last 12 months, this rate decreased by 0.29 hundredths.

Actually if we note the change in the inactivity rate then the real answer was more like 16%. As Elton John would say.

It’s sad, so sad (so sad)
It’s a sad, sad situation.

This bit is like licking your finger and putting it out the window to see how fast your spaceship is travelling.

This, together with a strong positive
carry-over from the last quarters of 2020, would bring annual GDP growth to 7% in 2021, leaving
output in 2021 about 3% below its 2019 level.

Perhaps the European Commission is worried about the effect on its own income which depends on economic output in the member states and does not want to frighten the horses.

ECB

I have already pointed out that Euro area monetary policy has been out of kilter with Spain. In fact the ECB got out the punch bowl when the Spanish economy was really booming in 2015 as an annual economic growth rate of 4.2% was combined with an official interest-rate of -0.2% and then -0.3%. Oh Well! As Fleetwood Mac would say.

One area that will have benefited is the Spanish government via the way that the QE bond buying of the ECB has reduced sovereign bond yields. Thus Spain can borrow very cheaply as it has a ten-year yield of 0.86% which reflects the 271 billion Euro purchased by the ECB. This will have oiled the public expenditure wheels although this gets very little publicity as the official bodies which tend to be copied and pasted by the media have no interest in pointing it out.

Yesterday though there was something to get Lyndsey Buckingham singing.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

This was when we learnt a couple of things from the German Constitutional Court. Firstly it would appear that judges everywhere were a quite ridiculous garb. Next that they discovered something they had previously overlooked was an issue and posed questions for the ECB QE programme or at least the Bundesbank version of it. This did affect Spain as whilst it still borrows cheaply yields have risen this week.

Comment

The first context is one of sadness as the Spanish economy recovery not only grinds to a halt but engages reverse gear and at quite a rate. As an aside I wonder what those who use “output gap” style analysis are doing now? I would say they would be hoping we have forgotten that but it is like an antibiotic resistant bacteria that keeps coming back. As to 2021 I find it amazing that we have forecasts when we do not even know where we are now!

Switching to the Bank of Spain ( which operates QE in Spain on behalf of the ECB) it must be having a wry smile. I expect a Euro area version of Yes Prime Minister to play out where the German Constitutional Court ends up taking so long to act that by the the new PEPP programme is over. There is a deeper issue though about the fact that the ECB has found itself trapped in a spiders web of QE and negative interest-rates from which it has been unable to escape from.

Also an important area for Spain which will have benefited from the NIRP policy is this.

The annual rate of the Housing Price Index (HPI) in the fourth quarter of 2019 decreased one
percentage point, standing at 3.6%. This was the lowest since the first quarter of 2015.

Let me leave that as a question. What do readers think will happen next?

The Investing Channel

 

What to do when we do not know GDP,Inflation or even Unemployment levels?

Today has brought a whole raft of data for our attention and much of it is eye-catching. So let is begin with La Belle France a subject on my mind after watching the film Waterloo last night.

In Q1 2020, GDP in volume terms fell sharply: –5.8%, the biggest drop in the series’ record, since 1949. In particular, it is bigger than the ones recorded in Q1 2009 (–1.6%) or in Q2 1968 (–5.3%). ( Insee )

I have to confess I am a little in the dark as to 1968 and can only think it may have been related to the student riots of the era. The Covid-19 vibe is established by the way that domestic demand plunged.

Household consumption expenditures dropped (–6.1%), as did total gross fixed capital formation in a more pronounced manner (GFCF: –11.8%). Overall, final domestic demand excluding inventory changes fell sharply: it contributed to –6.6 points to GDP growth.

I guess no-one is going to be surprised by this either.

Overall production of goods and services declined sharply (–5.5%). It fell the hardest in construction (–12,6%), while output in goods declined –4.8% and output in manufactured goods dropped –5.6%. Output in market services declined by –5.7% overall.

Such production as there was seems to have piled up.

Conversely, changes in inventories contributed positively to GDP growth (+0.9 points).

At a time like this GDP really struggles to deal with trade so let me use France as an example on the way to explaining the issue.

Exports also fell this quarter (–6.5%) along with imports (–5.9%), in a less pronounced manner. All in all, the foreign trade balance contributed negatively to GDP growth: –0.2 points, after –0.1 points the previous quarter.

As you can see the net effect here is rather small especially in these circumstances. But there is a lot going on as we see large moves in both exports and imports. Another way of looking at this is provided by the Bureau of Economic Analysis in the US.

Imports, which are a subtraction in the calculation of GDP, decreased

A lot less detail for a start. Let me help out as imports in the US fell heavily by US $140.1 billion in fact and exports only fell by US $56.9 billion. So net exports rose by US $83.3 billion and boosted the numbers. This is really awkward when a signal that the US is doing badly raises GDP by 2.32% on its own and in net terms by 1.3% ( care is needed with US numbers because they are annualised).

So here is a major caveat that the US may appear to be doing better but the trade breakdown hints strongly things are much worse than that.

Spain

Spain had been having a good run but sadly that is now over.

Spanish GDP registers a -5.2% variation in the first quarter of 2020 compared to the previous quarter in terms of volume. This rate is 5.6 points less than the Registered in the fourth quarter. ( INE)

The chart is quite extraordinary as the good run since around 2014 is replaced by quite a plummet. We see that it is essentially a domestic game as like France the international factor small.

For its part, external demand presents a contribution of 0.2 points, three tenths lower than that of the previous quarter.

We do get a hint of what is about to hit the labour market and indeed unemployment which had remained high in Spain.

The employment of the economy, in terms of hours worked, registers a variation of ,5.0% compared to the previous quarter.

Inflation

Let me return to France to illustrate the issues here.

Over a year, the Consumer Price Index (CPI) should rise by 0.4% in April 2020, after +0.7% in the previous month, according to the provisional estimate made at the end of the month. This drop in inflation should result from an accentuated fall in energy prices and a sharp slowdown in service prices.

A problem leaps off the page and ironically they have unintentionally described it

an accentuated fall in energy prices

That is because the weight for energy is too high as for example factories stopped work and there was much less commuting. Then there is this.

Food prices should rebound sharply, due to a strong rise in fresh food product prices.

Fresh food prices rose by 18.1% in March but are weighted at a mere 2.3% as opposed to the 8.1% of energy, when we know that there was heavy demand to stock up. I do not wish to demean their efforts but the claim that other food prices rose by 1.4% compared to 2.3% this time last year looks dodgy and may well be suffering from this

The price collection carried out by collectors on the field (about 40% in the CPI) has been suspended since 16 March:

Also it was a rough month for smokers as tobacco rose by 13.7%.

If we look at Spain we see the energy/fuel problem emerge again.

The preliminary data that is presented today through the leading indicator of the CPI, places its annual variation at –0.7% in April, seven tenths below that registered in March, influenced for the most part by the drop in fuel prices and fuels, compared to the increase registered in 2019.

Also with food prices albeit it on a lower scale.

It is remarkable the behavior of food prices, whose annual rate passes from 2.5% in March to 4.0% in April. Of these, fresh food reaches a rate of 6.9%, three points above that of the previous month, and packaged foods, place their annual rate at 2.2%, six tenths above that of March.

Although to be fair to INE in Spain they are trying to adapt to the new reality.

the prices of the products included in the goods special group COVID-19 increased 1.2% in April, compared to the previous month. While the services COVID-19 decreased 1.4% in April compared to March.

Unemployment

This may well be the biggest statistical fail I have seen in the world of economics.

In March 2020, in comparison with the previous month, employment slightly decreased and unemployment sharply fell together with a relevant increase of inactivity.

Yes you did read the latter part correctly.

In the last month, also the remarkable fall of the unemployed people (-11.1%, -267 thousand) was
recorded for both men (-13.4%, -169 thousand) and women (-8.6%, -98 thousand). The unemployment
rate dropped to 8.4% (-0.9 percentage points) and the youth rate fell to 28.0% (-1.2 p.p.).

They had two issues to contend with but tripped over a theoretical flaw. The issues were having to do the survey by telephone and a sample size some 20% lower. The flaw is that to be unemployed you have to be available for work and in this situation I am sure many reported that they were not. Indeed you can see this below.

In the last three months, also the number of unemployed persons decreased (-5.4%, -133 thousand), while
a growth among inactive people aged 15-64 years was registered (+1.5%, +192 thousand)……..On a yearly basis, the decrease of employed people was accompanied by a fall of unemployed persons
(-21.1%, -571 thousand) and a growth of inactive people aged 15-64 (+4.4%, +581 thousand).

Comment

I summarised the situation on social media yesterday.

Reasons not to trust the US GDP print

1. Advance estimates only have ~50% of the full data

2. Inflation estimates will be nearly hopeless at a time like this.

3. Output of say planes for no one to fly in them has obvious issues….

Let me add a fourth which is the impact of imports that I have described above.

Switching to the unemployment numbers from Italy I do not blame those compiling the numbers and find them helpful when I have an enquiry. But someone higher up the chain should at least have put a large warning on these numbers and maybe even stopped their publication as statistics are supposed to inform not mislead. They seem to have taken Talking Heads a little too literally.

Stop making sense
Quit talking
Stop making sense
Start falling
Stop making sense
Hold onto me
You’re always at your best
When you’re not making sense

Me on The Investing Channel

The spectre of mass unemployment is starting to haunt us

Today’s topic is one that I hoped never to have to write. If we look back to the last century then mass unemployment scarred the economic landscape on several occasions and particularly so in the Great Depression. The credit crunch era initially brought higher unemployment but fortunately we managed to reduce that over time. Indeed from around 2013 we saw considerable improvements on that front in mnay countries. The leader of the pack in this regard has been Japan where the unemployment rate has fallen as low as 2.2%. The UK and US saw strong improvements too with the unemployment rate falling below 4%. More latterly the Euro area has seen unemployment fall too although its progress has been slower leading to its unemployment rate being more like 7%

That was the good news section of the labour market as employment rose and unemployment fell. Although there always was the issue of under employment as a cloud in the sky as we wondered what jobs were being taken and how employment is defined? The waters also had something of a shark in them as the strong quantity numbers were accompanied by at best weak real wage growth something my country the UK has been particularly affected by. Especially troubling is the way the establishment has responded which is to impose poorer measures of inflation  ( the Imputed Rent driven CPIH ) to flatter the figures and mislead the unwary. Along the way the economic Ivory Towers had plenty of troubles too as the unemployment rate fell below their definitions of “full employment ” and made their “output gap” theories crumble. I am sure many of you still remember when Governor Carney of the Bank of England signposted a 7% unemployment rate as significant before exhibiting the sort of behaviour that led to him being called the “Unreliable Boyfriend ”

The US

Last week this provided something of a forerunner of what we can now expect.As Politico points out below even that shock may have been an understatement.

Last week’s headline number of 3.28 million claims — itself a more than 1,000 percent increase — is also expected to be revised upward, in part because of stark discrepancies between data that states reported at the ground level and what the Department of Labor recorded.

Florida’s initial claims hit a record for the week ended March 21, and then tripled to 222,054 for the week ended March 28, according to the state Department of Economic Opportunity.Florida’s initial claims hit a record for the week ended March 21, and then tripled to 222,054 for the week ended March 28, according to the state Department of Economic Opportunity…..Florida’s initial claims hit a record for the week ended March 21, and then tripled to 222,054 for the week ended March 28, according to the state Department of Economic Opportunity.

So as you can see the situation in the United States looks as though it may be even worse than we feared even last week. The old saying that a week is a long time in politics is being outdone by economics at the moment.

The UK

Yesterday brought a moment to the UK which we had feared was about to arrive.

Nearly a million people have successfully applied for universal credit in the last fortnight, in a rush to welfare support that reveals the depth of the jobs crisis caused by the UK’s lockdown.

Despite the government’s job support schemes offering 80% of earnings to employees and the self-employed who cannot work, 950,000 people applied for the main income support benefit between 16 and 31 March. There are normally about 100,000 applicants for the benefit in any given two-week period.

Applications started flooding in as soon as Boris Johnson told the nation to stop non-essential contact with others and cease all unnecessary travel. ( The Guardian)

Care is needed here as these are social security payments rather than a labour force measure or indeed a claimant count but we do get a very string hint from the data here.Out of it there is at least a small positive.

The DWP said it had moved more than 10,000 staff to deal with claims and was recruiting more.

The numbers above compare to a situation only a couple of weeks ago when we were told this by our official statisticians.

For November 2019 to January 2020, an estimated 1.34 million people were unemployed. This is 5,000 more than a year earlier but 515,000 fewer than five years earlier. The small increase on the year is the first annual increase in unemployment since May to July 2012, and it was caused by a 20,000 increase for men.

Sadly we seem set to go through 2 million fairly quickly and maybe 3 million. However the numbers will need some interpreting because it looks as though those who are “furloughed” will continue to be counted as in employment. Personally I think it would be better if a new category was created.

Let me welcome the effort by the Office of National Statistics to produce some new data although sadly even the new weekly measures are of course now well behind the times.

Over a quarter (27%) of responding businesses said they were reducing staff levels in the short term in the period 9 March to 22 March 2020, while 5% reported that they were recruiting staff in the short term.

Spain

This mornings news from Spain was grim too.

MADRID (Reuters) – The rise in Spanish jobless numbers in March is the highest monthly increase ever recorded, Labour Minister Yolanda Diaz said at a news conference on Thursday.

The number of jobless jumped 9.3% from the previous month bringing the total number of unemployed people to around 3.5 million. That total number was still below record highs of 2013.

The recent better phase of economic growth for Spain had played its part in bringing unemployment down from a bit over 5 million to just over 3 million last summer. But sadly the mood music had changed and is now dark.

Comment

This is a grim phase with echoes of the 1920s and 30s. I fear for the unemployment numbers that will come from Italy which had its own economic problems ( the essentially 0% economic growth of our “Good Italy: Bad Italy” theme ) before the pandemic started. Some yesterday were promoting this as good news.

The unemployment rate slightly decreased to 9.7% (-0.1 percentage points) while the youth rate stayed stable to 29.6%.

Sadly they did not seem to have read this bit.

This press release is referred to February 2020, therefore it is related to the pre-COVID-19 health emergency phase.

Italy and many other countries are about to see a tsunami of unemployment and our best hope is that it will be brief.

Meanwhile maybe attitudes will change as the other day I looked up at a residential care home where a worker was assisting an elderly lady on her balcony. As she had no protective clothing I could see she put herself at risk. I was thinking of that as I read this from Sarah O’Connor in the Financial Times.

This precarious army labours around the clock. On Monday I spoke to a domiciliary care worker who visits bed-bound clients in their homes (she did not want to be named for fear of punishment by her employer). She was in the middle of a 10-hour shift, having worked 14 hours on Saturday and 14 on Sunday. “We’re all putting the effort in,” she said. She is paid £9.75 an hour at weekends and £8.75 in the week, which amounts to about £1,700 a month.

It got worse.

Unison, the union for many care staff, has been raising concerns about the lack of personal protective equipment. The care worker I spoke to had gloves but no mask; she had purchased her own hand sanitiser. Her company, which employs her on a zero-hours contract, would only pay statutory sick pay of £94.25 a week if she developed symptoms and had to self-isolate. “Before, I would have gone into work with a cold or a cough — now I’d have to stay off but then I don’t know how I would pay the bills.”

Let me say welcome back from maternity leave to Sarah who is easily the FT’s best journalist.

The Investing Channel

The ECB is now resorting to echoing Humpty Dumpty

Focus has shifted to the Euro area this week as we see that something of an economic storm is building. For a while now we have seen the impact of the trade war which has reduced the Germany economy to a crawl with economic growth a mere 0.4% over the past year. Then both Italy (0.3%) and France ( 0.1%) saw contractions in the final quarter of 2019. Now in an example of being kicked when you are down one of the worst outbreaks of Corona Virus outside of China is being seen in Italy. Indeed the idea of Austria stopping a train with people from Italy suspected of having the virus posed a question for one of the main tenets of the Euro area as well as reminding of the film The Cassandra Crossing.

Tourism

This is a big deal for Italy as The Local explained last summer.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product.

The food and wine tourism sector continued to be the most profitable of all.

The study’s authors found that “the daily per capita expenditure for a food and wine holiday is in fact in our country is about 117 euros. Meanwhile it was 107 for trips to the mountains and 91 on the coast.”

The numbers were for 2017 and were showing growth but sadly if we look lower on the page we come to a sentence that now rather stands out.

Visitor numbers are only expected to keep growing. Many in the tourism industry predict 2019 will busier than ever in Italy, partly thanks to a growing Chinese tourism market.

Maybe so, but what about 2020? There have to be questions now and Italy is not the only country which does well from tourism.

Tourism plays a major role in the French economy. The accommodation and food  services sector, representing the largest part of the tourism sector, accounts for between
2.5% and 3% of GDP while the knock-on effects of tourism are also felt in other sectors, such as transport and leisure. Consequently, the total amount of internal tourism
consumption, which combines tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents). ( OECD)

Spain

The Gross Domestic Product (GDP) contribution associated with tourism, measured through the total tourist demand, reached 137,020 million euros in 2017. This figure represented 11.7% of GDP, 0.4% more than in 2016. ( INE )

Last summer Kathimerini pointed out that tourism was not only a big part of the Greek economy but was a factor in its recent improvement.

Tourism generates over a quarter of Greece’s gross domestic product, according to data presented on Wednesday by the Institute of the Greek Tourism Confederation (INSETE). The data highlight the industry’s importance to the national economy and employment, as well as tourism’s quasi-monopolistic status in the country’s growth.

According to the latest figures available, at least one percentage point out of the 1.9 points of economic expansion last year came from tourism.

It wondered whether Greece relied on it too much which I suspect many more are worried about today, although fortunately Greece has only had one case of Corona Virus so far. It not only badly needs some good news but deserves it. After all another big sector for it will be affected by wider virus problems.

That also illustrates the country’s great dependence on tourism, as Greece has not developed any other important sector, with the possible exception of shipping, which accounts for about 7 percent of GDP.

Economic Surveys

Italy has released its official version this morning.

As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) improved passing from 99.2 to 99.8.

That for obvious reasons attracts attention and if we look we see there may be a similar problem as we saw on the Markit IHS survey for Germany.

The confidence index in manufacturing increased only just from 100.0 to 100.6. Among the series included
into the definition of the climate, the opinions on order books bettered from -15.5 to -14.3 while the
expectations on production decreased from 5.6 to 4.7

As you can see the expectations  for production have fallen. Perhaps we should note that this index averaged 99.5 in the last quarter of 2019 when the economy shrank by 0.3%

France had something similar yesterday.

In February 2020, households’ confidence in the economic situation has been stable. The synthetic index has stayed at 104, above its long-term average (100).

This continued a theme begun on Tuesday.

In February 2020, the business climate is stable. At 105, the composite indicator, compiled from the answers of business managers in the main market sectors, is still above its long-term mean (100). Compared to January, the business climate has gained one point in retail trade and in services.

Really? This is a long-running set of surveys but we seem to be having a divorce from reality because if we return to household confidence I note that consumption fell in December.

Household consumption expenditure on goods fell in December (–0.3%) but increased over the fourth quarter (+0.4%).

Money Supply

This may give us a little clue to the surveys above. From the ECB earlier.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.9% in January, compared with 8.0% in December.

Whilst the number has dipped recently from the two 8.4% readings we saw in the latter part of 2019 it is much better than the 6.2% recorded last January. So maybe the surveys are in some sense picking an element of that up as the interest-rate cut and recommencement of QE bond buying feeds into the data.

Comment

If we switch to the ECB looking for clues as to what is happening in the economy then I would suggests it discounts heavily what the European Commission has just released.

In February 2020, the Economic Sentiment Indicator (ESI) increased in both the euro area (by 0.9 points to 103.5) and the EU (by 0.5 points to 103.0).

 

 

That does not fit with this at all.

GERMANY’S VDA SAYS CORONAVIRUS IS AFFECTING SUPPLY CHAINS OF CAR MANUFACTURERS AND SUPPLIERS ( @PriapusIQ )

Anyway the newly appointed Isabel Schnabel of the ECB has been speaking today and apparently it is a triumph that its policies have stabilised economic growth somewhere around 0%.

Although the actions of major central banks over the past few years have succeeded in easing financial conditions and thereby stabilising growth and inflation, current and expected inflation rates remain stubbornly below target, in spite of years of exceptional monetary policy support.

Next she sings along with The Chairmen of the Board.

Give me just a little more time
And our love will surely grow
Give me just a little more time
And our love will surely grow

How?

This implies that the medium-term horizon over which the ECB pursues the sustainable alignment of inflation with its aim is considerably longer than in the past.

Another case of To Infinity! And Beyond! Except on this occasion we are addressing time rather than the amount of the operation which no doubt will be along soon enough.

Indeed she echoes Alice in Wonderland with this.

For the ECB, this means that the length of the “medium term” – which is an integral part of its definition of price stability – will vary over time.

Which sounds rather like.

When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Although briefly she seems to have some sort of epiphany.

central banks often have only a limited understanding of the precise configuration of the forces

But it does not last and as ever I expect the result to be even lower interest-rates and more QE as the “lower bound” she mentions gets well er lower again.

Some of this is beyond the ECB’s control as there is not much it can do about a trade war and nothing about a virus outbreak. But by interfering in so many areas it has placed itself in the game and is caught in a trap of its own making. Or returning to The Chairmen of the Board.

There’s no need to act foolishly
If we part our hearts won’t forget it
Years from now we’ll surely regret it

The success story of Spain faces new as well as old challenges

Back in the Euro area crisis the Spanish economy looked in serious trouble. The housing boom and bust had fit the banking sector mostly via the cajas and the combination saw both unemployment and bond yields soar. It seems hard to believe now that the benchmark bond yield was of the order of 7% but it posed a risk of the bond vigilantes making Spain look insolvent. That was added to by an unemployment rate that peaked at just under 27%. The response was threefold as the ECB bought Spanish bonds under the Securities Markets Programme to reduce the cost of debt. There was also this.

In June 2012, the Spanish government made an official request for financial assistance for its banking system to the Eurogroup for a loan of up to €100 billion. It was designed to cover a capital shortfall identified in a number of Spanish banks, with an additional safety margin.

In December 2012 and January 2013, the ESM disbursed a total of €41.3 billion, in the form of ESM notes, to the Fondo de Restructuración Ordenada Bancaria (FROB), the bank recapitalisation fund of the Spanish government. ( ESM)

Finally there was the implementation of the “internal competitiveness” model and austerity.

What about now?

Things are very different as Spain has been in a good run. From last week.

Spanish GDP registers a growth of 0.4% in the third quarter of 2019 compared to to the previous quarter in terms of volume. This rate is similar to that recorded in the
second trimester.The interannual growth of GDP stands at 2.0%, similar to the previous quarter.

There are two ways of looking at this in the round. The first is that for an advanced economy that is a good growth rate for these times, and the second is that it will be especially welcome on the Euro area. Combining Spain with its neighbour France means that any minor contraction in Germany does not pull the whole area in negative economic growth.

However there is a catch for the ECB as Spain has slowed to this rate of economic growth and had thus exceeded the “speed limit” of 1.5% per annum for quite a while now. That will keep its Ivory Tower busy manipulating, excuse me analysing output gaps and the like. In fact once the dog days of the Euro area crisis were over Spain’s economy surged forwards with annual economic growth peaking at 4.2% in the latter part of 2015 and then in general terms slowing to where we are now. As to why the ESM explanation is below.

 Strong job creation followed the economic expansion, and employment has recovered by more than 2.5 million. Structural reforms have been paying off: competitiveness gains have supported economic rebalancing towards tradable sectors, and exports of goods and services have stabilised at historical highs (above 30% of GDP). The large and persistent current account deficit, which had reached 9.6% of GDP in 2007, has turned into a surplus averaging 1.5% of GDP in 2014-18.

Actually the IMF must be disappointed it did not join the party as turning around trade problems used to be its job before it came under French management. But Spain certainly rebounded in economic terms.and has been a strength of the Euro area.

Looking at the broader economy, Spain returned to economic growth in 2014 and continues to perform above the euro area average in that category

Over the past six months external trade has continued to boost the economy in spite of conditions being difficult.

On the other hand, the demand external presents a contribution of 0.2 points, eight tenths lower than the quarter past.

The impact of all this has improved the employment situation considerably.

In interannual terms, employment increases at a rate of 1.8%, rate seven tenths
lower than the second quarter, which represents an increase of 332 thousand jobs
( full time equivalents) in one year.

In terms of a broad picture GDP in Spain peaked at 104.4 in the latter part of 2007 then had a double-dip to 94.3 in the autumn of 2013 and now is at 110.9. So it has recovered and moved ahead albeit over the 12 years not made much net progress.

Problems?

According to the ESM the banks remain a major issue.

Several legacy problems also remain in the banking sector. These include larger and more persistent-than-expected losses of SAREB, which pose a contingent liability to the state. Banks have adequate capital buffers, but should further strengthen them towards the euro area average to withstand any future risks. In addition, the privatisation of Bankia and the reform of cajas need to be completed.

Of course banking reform has been just around the corner on a Roman road in so many places. Also the balance sheet of the Spanish banks has received what Arthur Daley of the TV series Minder would call a “nice little earner”.

Housing prices rise 1.2% compared to the previous quarter.The annual variation rate of the Housing Price Index has decreased 1.5 points to 5.3%,

Annual house price growth returned in the spring of 2014 which the banks will welcome. The index based in 2015 is now at 124.2.

However not all ECB policies are welcomed by the banks.

Finally, banks still face pressure on profitability due to the low interest rate environment, and potentially from a price correction in financial assets if the macro environment deteriorates. ( ESM )

An official deposit rate of -0.5% does that to banking profitability. I do not recall seeing signs of the Spanish banks passing this on in the way that Deutsche Bank announced yesterday but the heat is on. I see that the ESM is covering its bases should house prices fall again.

If we look at mortgage-rates then they are falling again as the Bank of Spain records them as 1.83% in September which looks as though it may be an all time low but we do not have the full data set.

Comment

The new phase of economic growth has brought better news on another problem area as the Bank of Spain reports.

Indeed, the non-financial private sector debt ratio
relative to GDP stood at 132%, 5 pp down on a year earlier and 4 pp below the euro area average.

The ratio of the national debt to GDP has fallen to this.

Also, in June 2019 the public debt/GDP ratio stood at 98.9%, a level still 13 pp higher than the euro area average.

 

and these days it is much cheaper to finance as the 7% yields of the Euro area crisis have been replaced by some negative yields and even the benchmark ten-year being a mere 0.31%.

On the other side of the coin first-time buyers will not welcome the new higher house prices and there are areas of trouble.

In this respect, consumer credit grew in June 2019 at a year-on-year rate of around 12%, and non-performing consumer loans at 26%, raising the NPL ratio slightly to 5.6% ( Bank of Spain)

What could go wrong?

Another signal is the way that the growth in employment has improved things considerably but Spain still has an unemployment rate that has only just nudged under 14%.So there is still much to do just as we fear the next downturn may be in play.

A fifth successive monthly deterioration in Spanish
manufacturing operating conditions was signalled in October as a challenging business climate negatively impacted on sales and output……At 46.8, down from 47.7 in September, the index also posted its lowest level for six-and-half years.   ( Markiteconomics )

 

The economy of Spain provides some welcome good news for the ECB

A rush of economic data over the past 24 hours allows us as to follow Sylvia’s “I’m off to sunny Spain”. This gives us another perspective as we switch from the third largest economy ( Italy) yesterday where economic growth has ground to a halt again whereas in the fourth largest it is doing this according to the statistics office.

The Spanish GDP registers a growth of 0.6% in the third quarter of 2018 to the previous quarter in terms of volume. This rate is similar to that registered in the second quarter of the year. The annual growth of GDP stands at 2.5%, a rate similar to that of the quarter preceding.

As you can see two countries which were part of the Euro area crisis are now seeing very different circumstances. At the moment Spain is a case of steady as she goes because quarterly growth has been 0.6% for each of 2018’s quarters so far.

If we back for some perspective we are reminded of the trouble that hit Spain. It did begin to recover from the initial impact of the credit crunch but then the Euro area crisis arrived at economic growth headed into negative territory in 2011-13 peaking at a quarterly decline of 1% at the end of 2013. This was followed by improvements in 2014 such that quarterly growth reached 1.2% in the first quarter of 2015. Since then quarterly growth has been strong for these times varying between the current 0.6% and the 0.9% of the opening of 2017.

So we see that Spain saw the hard times with annual economic growth falling to -3.5% late in 2012 but can rebound as illustrated by the 4.1% of late 2015. Those who have followed my updates on Greece will recall that I often refer to the fact that after its precipitous and sustained decline it should have had in terms of economic recovery a “V-shaped” rally in economic growth. Well Spain gives an example of that whereas Greece has not. If we switch to yesterday’s theme Spain is a much happier case for the “broad-based economic expansion” claims of Mario Draghi and the ECB because whilst economic growth has slowed it is still good and is pulling the Euro area average higher.

Inflation

If we continue with the mandate of the ECB we were told this by Spain statistics yesterday.

The annual change in the flash estimate of the CPI stands at 2.3% in October, the same registered in September
The annual rate of the flash estimate of the HICP is 2.3%.

So inflation is over target and has been picking up in 2018 with the current mix described below.

In this behavior, the decrease in the prices of electricity stand out, compared to the increase
registered in 2017, and the rise in gas prices.

From the point of the ECB if we look at inflation above target and the economic growth rate and point out that it is withdrawing the stimulus provided by monthly QE. However the water gets somewhat choppier if we look at another inflation measure.

The annual variation rate of the Housing Price Index (HPI) in the second quarter of 2018 increased six tenths, standing at 6.8%. By type of housing, the variation rate of new housing stood at 5.7%, remaining unchanged
as compared with the previous quarter. On the other hand, the annual variation of second-hand housing increased by seven tenths, up to 7.0%.

The first impact is the rate of annual change and this is more awkward for the ECB as it is hard not to think of the appropriateness of its -0.4% deposit rate for Spain. Its impact on mortgage rates especially when combined with the other monetary easing has put Spain on a road which led to “trouble,trouble,trouble” last time around. For those of you wondering what Spanish mortgage rates are here via Google Translate is this morning’s update.

In mortgages on homes, the average interest rate is 2.62% (4.3%) lower than August 2017) and the average term of 24 years. 59.8% of mortgages on housing is made at a variable rate and 40.2% at a fixed rate. Mortgages at a fixed rate they experience an increase of 3.9% in the annual rate. The average interest rate at the beginning is 2.43% for mortgages on variable-rate homes. (with a decrease of 5.5%) and 2.99% for fixed rate (3.1% lower).

As fixed-interest mortgages are only around half a percent per annum higher the number taking variable-rate ones seems high. However I have to admit my view is that Mario Draghi has no intention of raising interest-rates on his watch and the overall Euro area GDP news from yesterday backs that up. Of course we are switching from fact to opinion there and as a strategy I would suggest that any narrowing of the gap between the two types gives an opportunity to lock in what are in historical terms very low levels.

Labour Market

The economic growth phase that Spain has seen means we have good news here.

The number of employed increases by 183,900 people in the third quarter of 2018 compared to the previous quarter (0.95%) and stands at 19,528,000. In terms seasonally adjusted, the quarterly variation is 0.48%. Employment has grown by 478,800 people (2.51%) in the last 12 months.

Higher employment does not necessarily mean lower unemployment but fortunately in this instance it does.

The number of unemployed persons decreased this quarter by 164,100 people (-4.70%) and it stands at
3,326,000. In seasonally adjusted terms, the quarterly variation is -2.29%. In recent months unemployment has decreased by 405,800 people (-10.87%).  The unemployment rate stands at 14.55%, which is 73 hundredths less than in the previous quarter. In the last year this rate has fallen by 1.83 points.

But whilst the news is indeed better we get some perspective by the fact that the unemployment rate at 14.55% is not only still in double-digits but is well over that Euro area average. Indeed it is more than 10% higher than in the UK or US and around 12% higher than Japan.

As to the youth employment situation the good news is that the number of 16-19 year olds employed rose by nearly 12% to 165.500 over the past year. However some 137,800 are recorded as unemployed.

Comment

The Spanish economy has provided plenty of good news for the Euro area in the past few years, but that does not mean that there are no concerns. We have already looked at the issue of house prices and the past fears which arise from their development. Also for those who consider this to be because of the “internal competitiveness” model will be worried by this described by El Pais.

External demand, which helped in the worst moments to pull the Spanish economy, subtracted 0.5 points per year from GDP. And in the quarter, exports fell by 1.8%, entering for the first time negative rates since the third quarter of 2013. While it is true that imports also decreased by 1.2%.

Some of this no doubt relates to the automotive sector which for those who have not followed developments has been a success for Spain albeit that some of the gains have come from cannibalising production from elsewhere in the Euro area. An example of a troubled 2018 has been provided by Ecomotor today by revealing that VW Navarra has cut its production target by 10,000 cars for 2018. Oh and I nearly forgot to mention the Spanish banks especially the smaller ones hit by the court ruling on Stamp Duty.

But returning to the good news the economic growth means that Spain has seen the debt to GDP ratio that had nudged above 100% drop back to 98.3%. That is the road to a ten-year bond yield less than half that of Italy at 1.56% in spite of the fact that the planned fiscal deficit at 2.7% is higher.

Will the Spanish economic boom be derailed by separatism?

There is a truism that political problems invariably follow economic ones. If that is true in Spain at the moment then there has been quite a lag as it was several years ago now that the consequences of the Euro area crisis reached a crescendo. If we look back we see the economy as measured by GDP peaked at 103.7 in 2008 and then fell to 100 in the (benchmark) 2010 as the credit crunch hit. But then the Euro area crisis hit as GDP fell to 96.1 in 2012 and 94.5 in 2013 and the latter year saw the unemployment rate rise above 26%. So that was the nadir in economic terms as a recovery began and saw GDP rise again to 95.8 in 2014 and then 99.1 in 2015 followed by 102.3 in 2016.  So we see that in essence there has been something of a lost decade as earlier this year the output of 2007 was passed as well as a recent strong recovery. If economics was the driver one might have expected political issues to arise in say 2014.

What about now?

At the end of last week the Bank of Spain published its latest projections for the economy. Firstly it is nice to see that they have fallen in line with my argument that the lower oil price provided a boost to the Spanish economy mostly via consumption.

In particular, compared with the expansionary fiscal policy stance of the period 2015‑16 and the declines in oil prices observed between mid‑2014 and 2016 Q1

Of course that is a clear contradiction of the official inflation target of 2% per annum being good for the economy but I doubt many will point that out. You may note that they try to cover off the consumption rise as a response to the crunch.

Moreover, the expansionary effect resulting, in recent years, from certain spending (on consumer durables) and investment decisions being taken after their postponement during the most acute phases of the crisis is expected to gradually peter out.

Factoring in everything it expects this.

Indeed it is estimated that, in 2017 Q3, GDP growth could have decelerated somewhat, as anticipated in the June projections. As a result of all the above, it is estimated that, after growing by 3.1% this year, GDP will grow by 2.5% in 2018 and by 2.2% in 2019.

A driver of the economic growth seen so far has been export success.

Accordingly, for example in 2016, GDP growth was more reliant on the external component than had been estimated to date.

Also there are hopes that this will continue.

The data on the Spanish economy’s external markets in the most recent period have been more favourable than was expected a few months ago.

Although there is a worry which will be familiar to readers of my work.

owing to the exchange rate appreciation effect,

Oh and there is a thank you Mario Draghi in there as well!

by the continuing favourable financial conditions.

What could go wrong? Well……

Turning to the risks surrounding these GDP growth projections, on the domestic front, the political tension in Catalonia could potentially affect agents’ confidence and their spending decisions and financing conditions

This issue is currently playing out in the banking sector where some are fearful of no longer being backed by the Bank of Spain and hence ECB. Banco Sabadell has just announced it will have a board meeting this afternoon to consider moving its corporate address to Alicante in response. Of course if you wanted custom in Catalonia this is not the way to go about it as we mull the words of the Alan Parsons Project.

I just can’t seem to get it right
Damned if I do
I’m damned if I don’t

What about the business surveys?

Firstly the Euro area background is the best it has been for some time.

The final September PMI numbers round off an impressive third quarter for which the surveys point to GDP rising 0.7%.
The economy enters the fourth quarter with business energized by inflows of new orders growing at the fastest rate for over six years and expectations of future growth reviving after a summer lull.

However that sort of economic growth has been something of a normal situation for Spain in recent times. Let us look at the detail for it.

New orders rose across the service sector for the fiftieth month running, with the latest expansion the strongest since August 2015. Where an increase in new business was recorded, this was attributed by panellists to improving economic conditions.

From this there was a very welcome side-effect.

Responding to higher workloads, service providers increased their staffing levels solidly in September

If we move to the economy overall then we see this.

Taken alongside faster growth in the manufacturing sector, these figures point to a positive end to the third quarter of the year. Over the quarter as a whole, we look to have seen only a slight slowdown from Q2, suggesting a further robust GDP reading is likely. IHS Markit currently forecasts growth of 0.7% for Q3.”

Today’s Euro area survey on retail sales does not reach Spain but yesterday’s retail sales release shows they are struggling relatively with annual growth in August at 1.7% but retail sales are erratic.

Population and Demographics

There has also been some better news on this front as highlighted by this below.

The resident population in Spain grew in 2016 for the first time since 2011. It stood at 46,528,966 inhabitants on January 1, 2017, with an increase of 88,867 people.

This matters because the decline in population exacerbated a problem highlighted by Edward Hugh back in 2015. One of his worries was the ratio of births to deaths which had been shifting unfavourably and was -259 last year. This led to this and the emphasis is mine.

Furthermore, INE projections suggest the over-65s will make up more than 30% of the population by 2050 (almost 13 million people) and the number of over-eighties will exceed 4 million, thus representing more than 30% of the total 65+ population.
International studies have produced even more pessimistic estimates and the United Nations projects that Spain will be the world’s oldest country in 2050, with 40% of its population aged over 60. At the present time the oldest countries in Europe are Germany and Italy, but Spain is catching up fast.

Comment

Spain is an example of what is called a V shaped economic recovery as it has bounced strongly as opposed to the much sadder state of play in Greece which has seen an L shaped or if you prefer little bounce-back at all. If you were using economics to predict secessionist trouble you would be wrong about 100 times out of 100 using it. However if we move to what caused trouble in Greece when it had its recent political crisis we see that the driving force was the monetary system of which a signal is that the ECB is still providing over 32 billion Euros of Emergency Liquidity Assistance to it.

So as we stand the impact on the Spanish economy is small as businesses may be affected but moves if they physically happen will boost GDP and shift mostly from one region to another. However if there is any large movement of funds then all this changes as eyes will turn to the banking system at a point when people are wondering if and not when the Bank of Spain will step in? After all would it help a bank that is no longer in Spain? There are rumours that UK banks could have gone to the ECB if they had back in the day thought ahead about their locations. But imagine the scenario if a bank in Catalonia tries to go to the ECB when there is doubt over whether it was in the European Union?

Personally I would expect, after a suitable delay, the ECB would step in but the price would be high as Greece has found out from the years of the Troika which have been so bad they change their name to the institutions.

Tomorrow

I have a morning appointment with my knee specialist so I intend to post an article but it could easily be somewhat later than usual.

 

 

 

 

Spain continues to see a strong economic recovery

At the moment we could do with some good news. Saturday night’s dreadful terror attack was at a place I know well beginning from childhood as one set of grandparents lived near to Borough Market. A place that has found some economic good news in the past couple of years or so has been Spain. This followed something of a double whammy as the initial impact of the credit crunch was then followed by the Euro area crisis. As I look back it feels a little strange to see its ten-year bond yield above 7% as it was in July of 2012 when the latter crisis was raging. Of course those with the courage and foresight to buy Spanish government bonds back then were well rewarded if they held onto the position.

Today’s business survey

From Markit:

The recent strong growth rates generated by the
Spanish service sector continued in May. Further
sharp increases were recorded in business activity
and new orders. With workloads rising, and the
prospect of new projects in future, companies took
on extra staff again. Meanwhile, inflationary
pressures moderated during the month.

As you can see there are several points to not here. For example the situation looking ahead is strong.

Moreover, sentiment picked up to the highest in 26
months. More than 55% of respondents predict
output to be higher in 12 months’ time than current
levels.

Also we see that employment is on the rise which is welcome considering the still troubled unemployment picture.

Spanish service providers increased their staffing
levels during May, with new hires needed to work
on current and future projects. The rate of job
creation was solid and only slightly weaker than
April’s nine-month high.

Added to this is a decline in inflationary pressure which starts to make this look rather like a situation where Goldilocks porridge is at exactly the right temperature.

Inflationary pressures showed signs of easing in the
sector during May, with both input costs and output
charges rising at weaker rates than recorded in April.

At the end Markit are very bullish on GDP growth this quarter.

with nearly 1% being signalled for Spain

Should that prove to be true then the forecasts of the Bank of Spain will start to look a little pessimistic.

Based on our estimates, GDP could rise by 2.8% this year, before slipping to more moderate growth rates of 2.3% and 2.1%, respectively, in 2018 and 2019.

Although to be fair it was expecting a growth spurt based on something you do not often hear or read associated with the Euro area.

the expansionary fiscal policy

Official GDP growth

The first quarter of this year was a good one for economic activity in Spain according to its statistics office.

The Spanish economy registers a quarterly growth of 0.8% in the first quarter of 2017. This rate was one tenth higher than that registered in the fourth quarter of 2016.  The growth compared to the same quarter last year stands at 3.0%, the same rate as that recorded the previous quarter.

A phrase so beloved of economists can be deployed which is, export-led growth.

The contribution of net foreign demand of the Spanish economy to annual growth of the quarterly GDP was 0.8 points………Goods and services exports accelerated its rate of growth, increasing from 4.4% to 8.4%

This morning has brought more good news on this front. From Spanish statistics via Google Translate.

The total expenditure of international tourists who visit Spain in April increases by 19.7% compared to the same month of 2016. Average daily spending stands at 137 euros, 5.5% more than in April 2016……..During the first four months of 2017 the total expenditure of international tourists increased by 15.3% compared to the same period of the previous year, reaching 20,394 millions of euros.

Actually Spain was also a good global citizen in that it shared some of the benefits around too.

Imports of goods and services experienced an increase of 4.1 points, from 2.3% to 6.4%

As well as export-led growth there was also investment led growth.

Gross fixed capital formation registered a growth rate of 3.8%, indicating an increase of 1.6 points as compared with the previous quarter.

Unemployment

This is the achilles heel of the Spanish economy as the latest official quarterly survey informs us. Via Google Translate.

The unemployment rate stands at 18.75%, which is 12 cents higher than in the Previous quarter. In the last year this rate has fallen by 2.25 points.

The problem is shown by the fact that even after 3 good years for economic growth unemployment is still at a rate of 18.75% meaning that 4,255,000 Spaniards are recorded as unemployed. The good news is that until this quarter the rate has been falling and with the rate of economic growth the increase seems strange. As does the quarterly fall in employment of 69.800 which tells a different story to the GDP report.

Employment of the economy in terms of jobs equivalent to full-time employment registered a quarterly variation of 0.7%, three tenths higher than that registered in the previous quarter.

Over the past year we see that the two roads give similar answers ( 408k versus 435k) so if pressed one would say that the fall in employment from the labour market survey seems most suspect here. Maybe the 65,000 households surveyed had seen a particularly poor phase.

Monetary policy

This is a little awkward for Spain as the very expansionary policy does not go well with the economic strength we have looked at above. If we look for any sign of the “punch bowl” being taken away as the party gets started we see only a reduction in monthly ECB bond purchases to 60 billion Euros a month from 80 billion. The deposit rate at the ECB remains at -0.4% and helped by some 182.5 billion Euros of buying by the ECB the Spanish government can borrow at negative interest-rates on short-dated bonds and only 0.06% for five year ones. A little bit of a brake will have been applied by the rise in the Euro to around 1.12 versus the US Dollar.

Accordingly policy could not be much looser and it is hard to think of an economy in the past that has tried this sort of experiment in terms of expansionary monetary policy in such a boom.

House prices

So far we are not getting much of a clue from the various indices which tell us that they may be going up or down! This was interesting via Spanish property insight.

The outlier is the 7.74% increase reported by the registrars, using their repeat sales methodology that only looks at the price of property that has sold twice in the period of study.

The catch is that it must be a rather small sample size. Spanish statistics has the annual increase at 4.5%. So is this a case of once bitten twice shy? The index provided by Spanish notaries was set at 100 in 2007 and  was 70.7 at the end of 2016. Mind you for PropertyEU up seems to be the new down or something like that.

Looking at property performance returns in Europe in the last 10 years, Spain is second on the list after Sweden with a 13% return, followed by Ireland and then Portugal with 12 per cent.

Some of the gap can perhaps be provided by rents where as I reported on the 27th of January there has been a boom. From RTN online.

THE AVERAGE price of rental housing in Spain rose 8.8 per cent in the first quarter of 2017 due to increasing demand, according to the rental price evolution report published on Wednesday by Idealista.

Comment

The good news theme coming out of Spain was reinforced by Real Madrid retaining the football Champions League trophy on Saturday evening. The dangers for now seem to be a combination of monetary policy which if we allow for the fact that policy changes take 18 months or so to operate seems way too lax and the way that if a housing boom is underway it is in the rental sector this time around.

Also there is still some ground to be gained as even the really good growth of the last few years has only just got Spain back to its previous peak. With 2010 set as 100 that was the 104.4 of the second quarter of 2008 which if the releases above are accurate should now have been regained. Whichever way you look at that it remains odd that Banco Popular has hit trouble now I think.

Economists letters

In spite of the track record of such events it would appear that some are not deterred.

https://www.theguardian.com/news/2017/jun/03/the-big-issue-labour-manifesto-what-economy-needs

2017 is seeing the return of the inflation monster

As we nearly reach the third month of 2017 we find ourselves observing a situation where an old friend is back although of course it is more accurate to describe it as an enemy. This is the return of consumer inflation which was dormant for a couple of years as it was pushed lower by falls particularly in the price of crude oil but also by other commodity prices. That windfall for western economies boosted real wages and led to gains in retail sales in the UK, Spain and Ireland in particular. Of course it was a bad period yet again for mainstream economists who listened to the chattering in the  Ivory Towers about “deflation” as they sung along to “the end of the world as we know it” by REM. Thus we found all sorts of downward spirals described for economies which ignored the fact that the oil price would eventually find a bottom and also the fact that it ignored the evidence from Japan which has seen 0% inflation for quite some time.

A quite different song was playing on here as I pointed out that in many places inflation had remained in the service-sector. Not many countries are as inflation prone as my own the UK but it rarely saw service-sector inflation dip below 2% but the Euro area for example had it at 1.2% a year ago in February 2016 when the headline was -0.2%, Looking into the detail there was confirmation of the energy price effect as it pulled the index down by 0.8%. Once the oil price stopped falling the whole picture changed and let us take a moment to mull how negative interest-rates and QE ( Quantitative Easing) bond buying influenced that? They simply did not. Now we were expecting the rise to come but quite what the ordinary person must think after all the deflation paranoia from the “deflation nutters” I do not know.

Spain

January saw quite a rise in consumer inflation in Spain if we look at the annual number and according to this morning’s release it carried on this month. Via Google Translate.

The leading indicator of the CPI puts its annual variation at 3.0% In February, the same as in January
The annual rate of the leading indicator of the HICP is 3.0%.

Just for clarity it is the HICP version which is the European standard which is called CPI in the UK. It can be like alphabetti spaghetti at times as the same letters get rearranged. We do not get a lot of detail but we have been told that the impact of the rise in electricity prices faded which means something else took its place in the annual rate. Also we got some hints as to what is coming over the horizon from last week’s producer price data.

The annual rate of the General Industrial Price Index (IPRI) for the month of January is 7.5%, more than four and a half points higher than in December and the highest since July 2011.

It would appear that the rises in energy prices affected businesses as much as they did domestic consumers.

Energy, whose annual variation stands at 26.6%, more than 18 points above that of December and the highest since July 2008. In this evolution, Prices of Production, transportation and distribution of electrical energy and Oil Refining,
Compared to the declines recorded in January 2016.

In fact the rise seen is mostly a result of rising commodity prices as we see below.

Behavior is a consequence of the rise in prices of Product Manufacturing Basic iron and steel and ferroalloys and the production of basic chemicals, Nitrogen compounds, fertilizers, plastics and synthetic rubber in primary forms.

The Euro will have had a small impact too as it is a little over 3% lower versus the US Dollar than it was a year ago.

Belgium

The land of beer and chocolate has also been seeing something of an inflationary episode.

Belgium’s inflation rate based on the European harmonised index of consumer prices was running at 3.1% in January compared to 2.2% in December.

The drivers were mostly rather familiar.

The sub-indices with the largest upward effect on inflation were domestic heating oil, motor fuels, electricity, telecommunication and tobacco.

These two are the inflation outliers at this stage but the chart below shows a more general trend in the major economies of the Euro area.

The United States

In the middle of this month the US Bureau of Labor Statistics confirmed the trend.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index rose 2.5 percent before seasonal adjustment.

This poses some questions of its own in the way that it confirmed that the strong US Dollar had not in fact protected the US economy from inflation all that much. The detail was as you might expect.

The January increase was the largest seasonally adjusted all items increase since February 2013. A sharp rise in the gasoline index accounted for nearly half the increase,

Egypt

A currency plummet of the sort seen by the Egyptian Pound has led to this being reported by Arab News.

Inflation reached almost 30 percent in January, up 5 percent over the previous month, driven by the floatation of the Egyptian pound and slashing of fuel subsidies enacted by President Abdel-Fattah El-Sisi in November.

Ouch although of course central bankers will say “move along now……nothing to see here” after observing that the major drivers are what they call non-core.

Food and drinks have seen some of the largest increases, costing nearly 40 percent more since the floatation, figures from the statistics agency show. Some meat prices have leaped nearly 50 percent.

Comment

There is much to consider here and inflation is indeed back in the style of Arnold Schwarzenegger. However some care is needed as it will be driven at first by the oil price and the annual effect of that will fade as 2017 progresses. What I mean by that is that if we look back to 2016 the price of Brent Crude oil fell below US $30 per barrel in mid-January and then rose so if the oil price remains around here then its inflationary impact will fade.

However even a burst of moderate inflation will pose problems as we look at real wages and real returns for savers. If we look at the Euro area with its -0.4% official ECB deposit rate and wide range of negative bond yields there is an obvious crunch coming. It poses a particular problem for those rushing to buy the German 2 year bond as with a yield of 0.94% then they are facing a real loss of around 5/6% if it is held to maturity. You must be pretty desperate and/or afraid to do that don’t you think?

Meanwhile so far Japan seems immune to this, of course there will eventually be an impact but it is a reminder of how different it really is from us.

UK National Statistician John Pullinger

Thank you to John and to the Royal Statistical Society for his speech on Friday on the planned changes to UK inflation measurement next month. Sadly it looks as if he intends to continue with the use of alternative facts in inflation measurement by the use of rents to measure owner-occupied housing costs. These rents have to be imputed because they do not actually  exist as opposed to house prices and mortgage costs which not only exist in the real world but are also widely understood.