Economic growth German style has hit the buffers

Today gives us the opportunity to look at the conventional and the unconventional so let us crack on via the German statistics office.

WIESBADEN – The corona pandemic hits the German economy hard. Although the spread of the coronavirus did not have a major effect on the economic performance in January and February, the impact of the pandemic is serious for the 1st quarter of 2020. The gross domestic product (GDP) was down by 2.2% on the 4th quarter of 2019 upon price, seasonal and calendar adjustment. That was the largest decrease since the global financial and economic crisis of 2008/2009 and the second largest decrease since German unification. A larger quarter-on-quarter decline was recorded only for the 1st quarter of 2009 (-4.7%).

So we start with a similar pattern to the UK as frankly a 0.2% difference at this time does not mean a lot. Also we see that this is essentially what we might call an Ides of March thing as that is when things headed south fast. However some care is needed because of this.

The recalculation for the 4th quarter of 2019 has resulted in a price-, seasonally and calendar-adjusted GDP decrease of 0.1% on the previous quarter (previous result: 0.0%).

For newer readers this brings two of my themes into play. The first is that I struggled to see how Germany came up with a 0% number at the time ( and this has implications for the Euro area GDP numbers too). If they were trying to dodge the recession definition things have rather backfired. The second is that Germany saw its economy turn down in early 2018 which is quite different to how many have presented it. Some of the news came from later downwards revisions which is obviously awkward if you only read page one, but also should bring a tinge of humility as even in more stable times we know less than we might think we do.

Switching now to the context there are various ways of looking at this and I have chosen to omit the seasonal adjustment as right now it will have failed which gives us this.

a calendar-adjusted 2.3%, on a year earlier.

No big change but it means in context that the economy of Germany has grown by 4% since 2015 or if you prefer returned to early 2017.

In terms of detail we start with a familiar pattern.

Household final consumption expenditure fell sharply in the 1st quarter of 2020. Gross fixed capital formation in machinery and equipment decreased considerably, too.

But then get something more unfamiliar when we not we are looking at Germany.

However, final consumption expenditure of general government and gross fixed capital formation in construction had a stabilising effect and prevented a larger GDP decrease.

So the German government was already spending more although yesterday brought some context into this.

GERMAN FINANCE MIN. SCHOLZ: OUR FISCAL STIMULUS MEASURES WILL BE TIMELY, TARGETED, TEMPORARY AND TRANSFORMATIVE. ( @FinancialJuice )

As he was talking about June I added this bit.

and late…….he forgot late….

Actually they have already agreed this or we were told that.

Germany has approved an initial rescue package worth over 750 billion euros to mitigate the impact of the coronavirus outbreak, with the government taking on new debt for the first time since 2013.

The first package agreed in March comprises a debt-financed supplementary budget of 156 billion euros and a stabilisation fund worth 600 billion euros for loans to struggling businesses and direct stakes in companies. ( Reuters )

Warnings

There is this about which we get very little detail.

Both exports and imports saw a strong decline on the 4th quarter of 2019.

If we switch to the trade figures it looks as though they were a drag on the numbers.

WIESBADEN – Germany exported goods to the value of 108.9 billion euros and imported goods to the value of 91.6 billion euros in March 2020. Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports declined by 7.9% and imports by 4.5% in March 2020 year on year.

Ironically this gives us something many wanted which is a lower German trade surplus but of course not in a good way. A factor in this will be the numbers below which Google Translate has allowed me to take from the German version.

Passenger car production (including motorhomes) was compared to March 2019
by more than a third (-37%) and compared to February 2020 by more than a quarter (-27%)
around 285,000 pieces back.

The caveats I pointed out for the UK about seasonality, inflation and the (in)ability to collect many of the numbers will be at play here.

Looking Ahead

The Federal Statistics Office has been trying to innovate and has been looking at private-sector loan deals.

The preliminary low was the week after Easter (16th calendar week from April 13th to 19th) with 36.7% fewer new personal loan contracts than achieved in the previous week. Since then, the new loan agreements have ranged from around 30% to 35% below the same period in the previous year.

That provides food for thought for the ECB and Christine Lagarde to say the least.

Also in an era of dissatisfaction with conventional GDP and the rise of nowcasting we have been noting this.

KÖLN/WIESBADEN – The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 10.9% in April 2020 compared with March 2020. This was an even stronger decline on the previous month than in March 2020, when a decrease of -5.8% on February 2020 had been recorded, until then the largest month-on-month decline since truck toll was introduced in 2005.

That is quite a drop and leaves us expecting a 10%+ drop for GDP in Germany this quarter especially as we note that many service industries have been hit even harder.

Comment

I promised you something unconventional so let me start with this.

Covid-19 has uncovered weaknesses in France’s pharmaceutical sector. With 80 percent of medicines manufactured in Asia, France remains highly dependent on China and India. Entrepreneurs are now determined to bring France’s laboratories back to Europe. ( France24 )

I expect this to be a trend now and will be true in much of the western world. But this ball bounces around like Federer versus Nadal. Why? Well I immediately thought of Ireland which via its tax regime has ended up with a large pharmaceutical sector which others may now be noting. Regular readers will recall the times we have looked at the “pharmaceutical cliff” there when a drug has lost its patent and gone full generic so to speak. That might seem odd but remember there were issues about things like paracetamol in the UK for a bit.

That is before we get to China and the obvious issues in may things have effectively been outsourced to it. Some will be brought within national borders which for Germany will be a gain. But the idea of trade having a reversal is not good for an exporter like Germany as the ball continues to be hit. Perhaps it realises this hence the German Constitutional Court decision but that risks upsetting a world where Germany is paid to borrow and of course a new Mark would surge against any past Euro value.

 

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

Since the first quarter of 2018 the GDP of Germany has grown by a mere 1%

This morning has brought what has become pretty much a set piece event as we finally got the full report on economic growth in Germany in 2019.

WIESBADEN – The gross domestic product (GDP) did not continue to rise in the fourth quarter of 2019 compared with the third quarter of 2019 after adjustment for price, seasonal and calendar variations.

Regular readers of my work will have been expecting that although it did create a small stir in itself. This is because many mainstream economists had forecast 0.1% meaning that they had declare the number was below expectations, when only the highest Ivory Tower could have missed what was happening. After all it was only last Friday we looked at the weak production and manufacturing data for December.

Annual Problems

One quarterly GDP number may not tell us much but the present German problem is highlighted if we look back as well.

In a year-on-year comparison, economic growth decelerated towards the end of the year. In the fourth quarter of 2019, the price adjusted GDP rose by 0.3% on the fourth quarter of 2018 (calendar-adjusted: +0.4%). A higher year-on-year increase of 1.1% had been recorded in the third quarter of 2019 (calendar-adjusted: +0.6%).

As you can see the year on year GDP growth rate has fallen to 0.4%. The preceding number had been flattered by the fall in the same period in 2018. Indeed if we look at the pattern for the year we see that even some good news via an upwards revision left us with a weak number.

After a dynamic start in the first quarter (+0.5%) and a decline in the second quarter (-0.2%) there had been a slight recovery in the third quarter of the year (+0.2%). According to the latest calculations based on new statistical information, that recovery was 0.1 percentage points stronger than had been communicated in November 2019.

If we switch to the half year we see growth was only 0.2% which is how the running level of year on year growth is below the average for the year as a whole.

The Federal Statistical Office (Destatis) also reports that the resulting GDP growth was 0.6% for the year 2019 (both price and seasonally adjusted).

Analysing the latest quarter

Trade

We can open with something that fits neatly with the trade war theme, and the emphasis is mine.

The development of foreign trade slowed down the economic activity in the fourth quarter. According to provisional calculations, exports were slightly down on the third quarter after price, seasonal and calendar adjustment, while imports of goods and services increased.

There is something of an irony here. This is because the German trade surplus was one of the imbalances in the world economy in the run-up to the credit crunch. So more imports by Germany have been called for which would also help the Euro area economy. Actually if we look back to last week’s trade release this may have been in play for a while now.

Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports were up 0.8% from 2018. Imports rose by 1.4%. In 2018, exports increased by 3.0% and imports by 5.6% compared with the previous year. In 2017, exports were 6.2% and imports 8.0% higher than a year earlier.

Those numbers also show a clear trade growth deceleration and for those who like an idea of scale.

in 2019, Germany exported goods to the value of 1,327.6 billion euros and imported goods to the value of 1,104.1 billion euros.

Domestic Demand

There was something extra in the report which leapt off the page a bit.

 After a very strong third quarter, the final consumption expenditure of both households and government slowed down markedly.

That will change the pattern for the German economy if it should persist and it somewhat contradicts the rhetoric of ECB President Lagarde from earlier this week.

support the resilience of the domestic economy

I did point out at the time that the use of resilience by central bankers is worrying. This is because their meaning of the word frequently turns out to be the opposite of that which can be found in a dictionary.

If we switch to investment then they seem to be adopting the British model of prioritising housing.

Trends diverged for fixed capital formation. While gross fixed capital formation in machinery and equipment was down considerably compared to the third quarter, fixed capital formation in construction and other fixed assets continued to increase.

Ch-Ch-Changes

Yesterday the European Commission released its winter forecasts for the German economy. So let us go back a year and see what they forecast for this one.

Overall, real GDP growth is expected to strengthen to 2.3% in 2018 and remain above 2% in 2019.

In fact the message was let’s party.

Economic sentiment continues to improve across sectors, suggesting continued expansion in the coming quarters. Survey data show expectations of improving orders, higher output and greater demand.

Whereas in fact the punch bowl disappeared as growth faded from view.

Yesterday they told us this.

Overall, real GDP growth is forecast to rebound
somewhat to 1.1% in 2020, helped by a strong
calendar effect (0.4 pps.).

That is pretty optimistic in the circumstances perhaps driven by this, where they disagree with what the German statistics office told us earlier today.

Resilient domestic demand supported growth.
Private consumption increased robustly amid
record high employment and strong wage growth.

All rather Lennon-McCartney

Yesterday,
All my troubles seemed so far away,
Now it looks as though they’re here to stay
Oh I believe in yesterday.

Comment

From the detailed numbers one can get a small positive spin as GDP increased by 0.03% in the final quarter of 2019. But the catch is that in doing so you note that the 107.19 of the index is below the 107.21 of the first quarter. Care is needed because we are pinpointing below the margin of error but if we look further back we see that the index was 106.18 at the end of the first quarter of 2018.

There are three main perspectives from that of which the obvious is that growth since then has been only very marginally above 1%. So the European Commission forecasts were simply up in the clouds. But we have another problem which is that looking forwards from then the Markit business surveys ( PMIs) were predicting “Boom! Boom! Boom!” in the high 50s as the economy turned down. They later picked up the trend but missed the turning point. Or if you prefer looked backwards rather than forwards at the most crucial time.

Now we await the impact of the Corona Virus in this quarter. Let me leave you with one more issue which is productivity because if yearly output is only rising by 0.4% then we get a broad brush guide by comparing with this.

The economic performance in the fourth quarter of 2019 was achieved by 45.5 million persons in employment, which was an increase of roughly 300,000, or 0.7%, on a year earlier.

The Investing Channel

Was the Irish election result a case of its the economy stupid?

Back in the day the presidential campaign of Bill Clinton came up with the phrase “Its the economy stupid” which worked on several levels. Firstly Bill got elected and secondly the phrase has echoed around since. But applying it to what has recently happened in Ireland is an example both of the phrase and the way we have these days to look beneath the official statistics.

Let me start the story by looking at GDP growth in Ireland.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.7 per cent for the Q3 quarter of 2019. ( Central Statistics Office or CSO)

Something for an incumbent government to trumpet you might think and this continues with the annual comparison.

Initial estimates for the third quarter of 2019 indicate that there was an increase of 5.0 per cent in GDP in real terms in Q3 2019 compared with Q3 2018.

For these times that is quite a surge which puts Ireland far ahead of the Euro area average and the breakdown starts with a hint of a modern thriving economy.

 Information & Communication made the most positive contribution to the Q3 result, rising by 22.4 per cent with Agriculture recording an increase of 15.2 per cent.

Trouble,Trouble,Trouble

The Taylor Swift lyric appears as we look at some of the detail though.

 Capital formation decreased by 55.3 per cent or €25.2 billion in Q3 compared with the previous quarter.

That is quite a drop but you see we find the cause here with a similar number popping up elsewhere.

 Imports decreased commensurately by 22.5 per cent (€24.2 billion) in Q3 2019 compared with Q2 2019.

These are not the only conventional metrics which are lost in a land of confusion as Genesis would put it.

Exports increased by 2.4 per cent which meant that overall net exports increased by €26.8 billion quarter-on-quarter.

As you can see the economic growth story starts well but then has collapsing investment which is a warning and collapsing imports which is another warning accompanied by a triumph for net exports giving a strong signal.

Now let me bring in some context which is that if we look at Gross Value Added for the Irish economy it was 49.1 billion in the final quarter of 2014 and 79.7 billion in the third quarter of last year on a chain-linked basis. How could you not be re-elected with those numbers? Well regular readers may recall early 2015 which saw a 25.6% quarterly jump.

There are two major issues here which I looked at on December 18th 2017,

Data from the Fiscal Advisory Council (FAC) show that 2.5% of the 5.8% rise in Irish GDP (gross domestic product) in H1 2014, or 43%, came from contract manufacturing overseas, that has no material impact on jobs in the economy. Dell, the PC company, books its Polish output in Ireland for tax avoidance purposes. ( Finfacts )

Manufacturing has boomed but some of it has been the type of contract manufacturing described above. Next comes this issue.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

There is a large impact from intellectual property which sees money wash into and out of Ireland on such a grand scale it even affects the Euro area national account breakdown.

These have led the Central Bank of Ireland to develop this to try and help.

GNI* excludes the impact of redomiciled
companies and the depreciation of intellectual
property products and of leased aircraft from
GNI. When this is done, the level of nominal
GNI* is approximately two-thirds of the level
of nominal GDP in 2016.

Wealth and Debt

According to the Central Bank of Ireland there is a strong position here.

Household net worth reached a new high of €800bn in Q3 2019, which equates to €162,577 per capita. Household debt continued its downward trend, falling by €176m in Q3 2019.

If we look into the detail I note the following and the emphasis is mine.

The increase over Q3 2019 was driven by improvements in both households’ financial assets and housing assets. Financial assets rose by €11.5bn, due primarily to increases in the value of insurance and pension schemes. Housing assets rose to €545bn, an increase of €8.2bn over the quarter, the highest it has been since Q4 2008. Household liabilities remained unchanged at €147bn.

There has been success here too.

Household debt stood at €135bn, its lowest level since Q3 2005. This equates to €27,453 per capita. Household debt has decreased by a third, or €67.8bn, since its peak of €202bn in Q3 2008.

We can see by default that Irish companies borrow quite a bit.

Private sector debt as a proportion of GDP decreased by 2.4 percentage points to stand at 239 per cent in Q3 2019

Or do they as are the companies Irish?

 It should be noted that private sector debt in Ireland is significantly influenced by the presence of large multinational corporations (MNCs) and that restructuring by these entities has resulted in extremely large movements in Irish private sector debt, particularly from 2014 onwards.

Inflation

According to the official data there essentially has not been any in Ireland over the period we are looking at. The official Euro area measure was 101.8 last December after being set at 100 in 2015 so you can see I am guilty of only a slight exaggeration. But we are reminded of its flaw ( which even ECB policy makers are presently admitting) that is highlighted by this from the Irish Times on the 5th of this month.

House price growth is obviously one part of the equation; while it may be finally easing in Dublin, half a decade of double-digit growth has nonetheless pushed the cost of owning a home out of the reach of many.

Indeed as it goes on they have become both more expensive and unaffordable.

But in Ireland, and in many other countries across the globe, rising property prices have been compounded by wage stagnation. Pay rises have only returned in recent years and continue to significantly lag house price growth.

The inflation measure of the Euro area completely ignores the area of owner-occupied housing on the grounds of whatever excuse it thinks it can get away with.

Ireland has its own measure which tried to do better by including mortgage interest-rates but that valiant effort has been torpedoed by the advent of negative interest-rates and QE.

So here we see another problem for the official view as people are told there is no inflation and yet in Dublin the Irish Times tells us this.

Dublin has experienced the third-fastest rate of house price growth in the survey over the last five years, up by a staggering 61.9 per cent.

Although it has also had a relatively strong rate of income growth over the same period – up by 13.2 per cent – that still means there is a huge gap between the rates of increase.

In terms of house purchase real wages have not far off halved. No wonder people are unhappy and should be questioning the inflation data.

The official numbers do pick up rental inflation and both have it being around 17% since 2015. So even on the official data there has been a squeeze here too.

Comment

On today’s journey we have seen that the experience of an ordinary Irish person is very different to that of the official data. They are told it is a Celtic Tiger 2.0 but face ever more expensive housing costs and the concept of buying a home has changed fundamentally. Thus we see how what are fabulous looking metrics of surging GDP and virtually no inflation are for a type of virtual Ireland which is really rather different to the real one where housing costs have surged. This impacts in other sphere as for example national debt to GDP has plunged and Ireland has moved for being a recipient of EU funds to a net payer.

Context is needed as there have been economic improvements in Ireland for example the unemployment rate this January was 4.8% as opposed to the 16% of January 2012. Improved tax revenues have helped provide a budget with a surplus although this relies a bit on higher corporation tax from guess who?

UK GDP growth is services driven these days as manufacturing is in a depression

Today brings the UK into focus as we find out how it’s economy performed at the end of 2019. A cloudy perspective has been provided by the Euro area which showed 0.1% in the final quarter but sadly since then the news for it has deteriorated as the various production figures have been released.

Germany

WIESBADEN – In December 2019, production in industry was down by 3.5% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

France

In December 2019, output decreased in the manufacturing industry (−2.6%, after −0.4%), as well as in the whole industry (−2.8%, after 0.0%).

Italy

In December 2019 the seasonally adjusted industrial production index decreased by 2.7% compared with the previous month. The change of the average of the last three months with respect to the previous three months was -1.4%.

Spain

The monthly variation of the Industrial Production Index stands at -1.4%, after adjusting for seasonal and calendar effects.

These were disappointing and were worse than the numbers likely to have gone into the GDP data. Most significant was Germany due both to the size of its production sector and also the size of the contraction. France caught people out as it had been doing better as had Spain. Italy sadly seems to be in quite a mire as its GDP was already 0.3% on the quarter. So the background is poor for the UK.

Today’s Data

With the background being not especially auspicious then this was okay in the circumstances.

UK gross domestic product (GDP) in volume terms was flat in Quarter 4 (Oct to Dec) 2019, following revised growth of 0.5% in Quarter 3 (July to Sept) 2019.

In fact if we switch to the annual numbers then they were better than the Euro area.

When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 4 2019; down from a revised 1.2% in the previous period.

Marginal numbers because it grew by 1% on the same basis but we do learn a several things. Firstly for all the hype and debate the performances are within the margin of error. Next that UK economic growth in the two halves of 2019 looks the same. Finally that as I have argued all along the monthly GDP numbers are not a good idea as they are too erratic and prone to revisions which change them substantially.

Monthly gross domestic product (GDP) increased by 0.3% in December 2019, driven by growth in services. This followed a fall of 0.3% in November 2019.

Does anybody really believe that sequence is useful? I may find support from some of the economics organisations I have been debating with on twitter as their forecasts for today were based on the November number and were thus wrong-footed. Although of course they may have to deal with some calls from their clients first.

If we look into the detail we see that in fact our economic performance over the past two years has in fact been much more consistent than we might otherwise think.

GDP was estimated to have increased by 1.4% between 2018 and 2019 slightly above the 1.3% growth seen between 2017 and 2018.

Growth, just not very much of it or if we note the Bank of England “speed-limit” then if we allow for margins of error we could call it flat-out.

Switch to Services

Our long-running theme which is the opposite of the “rebalancing” of the now Baron King of Lothbury and the “march of the makers” of former Chancellor Osborne was right yet again.

Growth in the service sector slowed to 0.1% in Quarter 4 2019, while production output fell 0.8%.

So whilst there was not much growth it still pulled away from a contracting production sector and if we look further we see that the UK joined the Euro area in having a poor 2019 for manufacturing and production.

Production output fell by 1.3% in the 12 months to December 2019, compared with the 12 months to December 2018; this is the largest annual fall since 2012 and was led by manufacturing output, which fell by 1.5%.

Meanwhile a part of the services sector we have consistently noted did well again.

The services sector grew by 0.3% in the month of December 2019 after contracting by 0.4% in November 2019. The information and communication sector was the biggest positive contributor on the month, driven by motion pictures, with a number of blockbuster films being released in December (PDF, 192.50KB).

That is something literally under my nose as Battersea Park is used regularly for this.

Balance of Payments

There is an irony here because if we look internationally they do not balance as there are examples of countries both thinking they have a surplus with each other.

The numbers such as they are had shown signs of improvement but like the GDP data actually had a case of groundhog day.

The total trade deficit narrowed by £0.5 billion to £29.3 billion in 2019, with a £9.7 billion narrowing of the trade in goods deficit, largely offset by a £9.2 billion narrowing of the trade in services surplus.

The latter bit reminds me that I wrote to the Bean Commission about the fact that our knowledge of services trade is really poor and today’s release confirms this is still the case.

The trade in services surplus narrowed £5.1 billion in Quarter 4 2019 largely because of the inclusion of GDP balancing adjustments.

Let me explain this as it is different to what people are taught at school and in universities where net exports are part of GDP. The output version of GDP counts it up and then drives the expenditure version which includes trade and if they differ it is the trade and in particular services numbers in this instance which get altered. If they had more confidence in them they would not do that. This way round they become not far off useless in my opinion.

 

Gold and UK GDP

In the UK statisticians have a problem due to this.

For many countries the effect of gold on their trade figures is small, but the prominence of the industry in London means it can have a sizeable impact on the UK’s trade figures.

Rather confusingly the international standard means it affects trade but not GDP.

Firstly, imports and exports of gold are GDP-neutral. Most exports add to GDP, but not gold. This is because the sale of gold is counted as negative investment, and vice versa for imports and the purchase of gold. So, the trade in gold creates further problems for measuring investment.

So as well as the usual trade figures they intend to produce ones ignoring its impact.

Because a relatively small numbers of firms are involved in the gold trade, publishing detailed figures could be disclosive. However, within those limitations, we are now able to show our headline import and export figures with gold excluded.

A good idea I think as the impact on the UK economy is the various fees received not the movement of the gold itself, especially it we did not own it in the first place.

Oh and my influence seems to have even reached the Deputy National Statistician.

Gold, in addition to being a hit song by Spandau Ballet, is widely used as a store of value.

Comment

For all the hot air and hype generated the UK economic performance has in the past two years been remarkably similar. Actually the same is pretty much true of comparing us with the Euro area.As it happens 2020 looks as though we are now doing better but that has ebbed and flowed before.

Looking beneath this shows we continue to switch towards services and as I note the downwards revisions to net services trade I am left wondering two things. What if the services surveys are right and the switch to it is even larger than we are being told? Also it displays a lack of confidence in the services surveys to revise the numbers down on this scale. We know less than sometimes we think we do.

Meanwhile on a much less optimistic theme manufacturing has been in a decade long depression.

Manufacturing output in the UK remained 4.5% lower in Quarter 4 (Oct to Dec) 2019 than the pre-downturn peak in Quarter 1 (Jan to Mar) 2008.

 

 

What are the economic prospects for the Euro area?

As we progress into 2020 there has been a flurry of information on the Euro area economy. However there has been quite a bit of dissatisfaction with the usual indicators so statistics offices have been looking  at alternatives and here is the German effort.

The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 0.6% in December 2019 compared with the previous month.

As a conceptual plan this can be added to the way that their colleagues in Italy are now analysing output on Twitter and therefore may now think world war three has begun. Returning to the numbers the German truck data reminds us that the Euro areas largest economy is struggling. That was reinforced this morning by some more conventional economic data.

Germany exported goods to the value of 112.9 billion euros and imported goods to the value of 94.6 billion euros in November 2019. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports decreased by 2.9% and imports by 1.6% in November 2019 on the same month a year earlier. Compared with October 2019, exports were down 2.3% and imports 0.5% after calendar and seasonal adjustment.

We get a reminder that what was one if the causes of economic imbalance before the credit crunch has if anything grown as we note the size of Germany’s trade surplus.  It is something that each month provides support for the level of the Euro. Switching to economic trends we see that compared to a year before the larger export volume has fallen by more than import volume. This was even higher on a monthly basis as we note that the gap between the two widened. But both numbers indicate a contractionary influence on the German economy and hence GDP ( Gross Domestic Product).

Production

Today’s data opened with a flicker of positive news.

In November 2019, production in industry was up by 1.1% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In October 2019, the corrected figure shows a decrease of 1.0% (primary -1.7%) from September 2019.

However this still meant this.

-2.6% on the same month a year earlier (price and calendar adjusted)

There is a particular significance in the upwards revision to October as some felt that the original numbers virtually guaranteed a contraction in GDP in the last quarter of 2019. In terms of a breakdown the better November figures relied on investment.

In November 2019, production in industry excluding energy and construction was up by 1.0%. Within industry, the production of capital goods increased by 2.4% and the production of consumer goods by 0.5%. The production of intermediate goods showed a decrease by 0.5%.

Only time will tell if the investment was wise. The orders data released yesterday was not especially hopeful.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2019 a seasonally and calendar adjusted 1.3% on the previous month.

Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.

-6.5% on the same month a year earlier (price and calendar adjusted)

Perhaps the investment was for the domestic economy as we look into the detail.

Domestic orders increased by 1.6% and foreign orders fell 3.1% in November 2019 on the previous month. New orders from the euro area were down 3.3%, new orders from other countries decreased 2.8% compared to October 2019.

But if we widen our outlook from Germany to the wider Euro area we see that it was the source of the strongest monthly slowing.

In a broad sweep orders for production rose from 2013 to December 2017 with the series peaking at 117.1 ( 2015=100) but we have been falling since and have now gone back to 2015 at 100.3.

The Labour Market

By contrast there is more to cheer from this area.

The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in November 2019, stable compared with
October 2019 and down from 7.9% in November 2018. This remains the lowest rate recorded in the euro area
since July 2008.

In terms of the broad trend the Euro area is now pretty much back to where it was before the credit crunch and is a long way from the peak of above 12% seen around 2013. But there are catches and nuances to this of which a major one is this.

In November 2019, the unemployment rate in the United States was 3.5%, down from 3.6% in October 2019 and
from 3.7% in November 2018.

That is quite a gap and whilst there may be issues around how the numbers are calculated that still leaves quite a gap. Also unemployment is a lagging indicator but it may be showing signs of turning.

Compared with October 2019, the number of persons unemployed increased by
34 000 in the EU28 and decreased by 10 000 in the euro area. Compared with November 2018, unemployment fell
by 768 000 in the EU28 and by 624 000 in the euro area.

The rate of decline has plainly slowed and if we look at Germany again we wait to see what the next move is.

Adjusted for seasonal and irregular effects, the number of unemployed remained unchanged from the previous month, standing at 1.36 million people as well. The adjusted unemployment rate was 3.1% in November, without any changes since May 2019.

Looking Ahead

There was some hope for 2020 reflected in the Markit PMI business surveys.

Business optimism about the year ahead has also improved
to its best since last May, suggesting the mood
among business has steadily improved in recent
months.

However the actual data was suggested a low base to start from.

Another month of subdued business activity in
December rounded off the eurozone’s worst quarter
since 2013. The PMI data suggest the euro area
will struggle to have grown by more than 0.1% in
the closing three months of 2019.

There is a nuance in that France continues to do better than Germany meaning that in their turf war France is in a relative ascendancy. In its monthly review the Italian statistics office has found some cheer for the year ahead.

The sectoral divide between falling industrial production and resilient turnover in services persists. However, business survey indicators convey first signals of optimism in manufacturing. Economic growth is projected to slightly increase its pace to moderate growth rates of 0.3% over the forecast horizon.

Comment

The problem for the ECB is that its monetary taps are pretty much fully open and money supply growth is fairly strong but as Markit puts it.

At face value, the weak performance is
disappointing given additional stimulus from the
ECB, with the drag from the ongoing plight of the
manufacturing sector a major concern.

It is having an impact but is not enough so far.

However, policymakers will be encouraged by the resilient
performance of the more domestically-focused
service sector, where growth accelerated in
December to its highest since August.

This brings us back to the opening theme of this year which has been central bankers both past and present singing along with the band Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To blockbuster

Hence their move towards fiscal policy which is quite a cheek in the circumstances.

The conceptual issue is that all the intervention and central planning has left the Euro area struggling for any sustained economic growth and certainly slower growth than before. This is symbolised by Italy which remains a girlfriend in a coma.

The Composite Output Index* posted at 49.3 in December,
down from 49.6 in November, to signal a second consecutive fall in Italian private sector output. Moreover, the decline quickened to a marginal pace.

 

Andrew Bailey’s appointment as Governor shows yet again how accurate Yes Prime Minister was

The pace of events has picked up again as whilst there is much to consider about the likely UK public finances something else has caught the eye.

Today, 20 December 2019, the Chancellor has announced that Andrew Bailey will become the new Governor of the Bank of England from 16 March 2020. Her Majesty the Queen has approved the appointment.

In order to provide for a smooth transition, the current Governor, Mark Carney, has agreed to now complete his term on 15 March 2020.

Making the announcement the Chancellor said: “When we launched this process, we said we were looking for a leader of international standing with expertise across monetary, economic and regulatory matters. In Andrew Bailey that is who we have appointed.

Andrew was the stand-out candidate in a competitive field. He is the right person to lead the Bank as we forge a new future outside the EU and level-up opportunity across the country.

It is hard not to have a wry smile at Governor Carney getting yet another extension! I think we have predicted that before. As to Andrew Bailey I guess that the delay means he will be busy in his present role as head of the Financial Conduct Authority covering up yesterday’s scandal at the Bank of England before he can move over. A new definition of moral hazard straight out of the Yes Prime Minister play book. There is the issue of the scandals he has overlooked or been tardy dealing with in his time at the FCA but there is something even more bizarre which was in the Evening Standard in 2016 and thank you to Kellie Dawson for this.

I was interested in the story of Andrew Bailey, new Bank of England chief battling a bear. Turns out his WIFE battled the bear while he was on the phone. Rolls knowing eyes at all women everywhere.

Economic Growth

There was also some good news for the UK economy this morning.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.4% in Quarter 3 (July to Sept) 2019, revised upwards by 0.1 percentage points from the first quarterly estimate…..When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 3 2019; revised upwards by 0.1 percentage points from the previous estimate.

So still an anaemic rate of annual growth but at these levels every little helps. One of the ironies in the Brexit situation is that annual growth is very similar as the Euro area is at 1.2%. As to the UK detail there is this.

Services output increased by a revised 0.5% in Quarter 3 2019, following the weakest quarterly figure in three years in the previous quarter. Manufacturing grew by 0.1% in Quarter 3 2019, as did production output. Construction output experienced a pickup following a weak Quarter 2 (Apr to June), increasing by 1.2%

So the “march of the makers” has in fact turned out to be the opposite of the “rebalancing” promised by the former Bank of England Governor Baron King of Lothbury. As I regularly point out services are becoming an ever larger component of UK GDP.

Also for once there was good news from the trade position.

The current account deficit narrowed to 2.8% of GDP in Quarter 3 2019, its lowest share of GDP since early 2012,

That is obviously welcome but there is a fly in this particular ointment as they seem to be splashing around between trade and investment.

The latest figures mean that net trade is now estimated to have added 1.2 percentage points to GDP growth over this period compared with the almost flat contribution in the previous estimate.

Gross capital formation is now estimated to have subtracted 1.2 percentage points from GDP growth since Quarter 1 2018 compared with the negative contribution of 0.5 percentage points previously recorded.

Also UK business investment over the past year has been revised up from -0.6% to 0.5% which is quite a change and deserves an explanation.

Public Finances

There were some announcements about future government spending in the Queen’s Speech yesterday. From the BBC.

Schools in England are promised more funding, rising by £7.1bn by 2022-23, which the Institute for Fiscal Studies think tank says will reverse the budget cuts of the austerity years.

Also there was this about the NHS.

The five-year plan, which sees the budget grow by 3.4% a year to 2023, was unveiled last year and was included in the Tory election manifesto.

The proposal to help on business rates was more minor than badged so we are seeing something of a mild fiscal expansion that the Bank of England thinks will add 0.4% to GDP. So can we afford it?

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of November 2019 was £1,808.8 billion (or 80.6% of gross domestic product (GDP)), an increase of £39.4 billion (or a decrease of 0.8 percentage points) on November 2018.

As you can see whilst the debt is rising in relative terms it is falling and if we take out the effect of Bank of England policy it looks better.

Debt at the end of November 2019 excluding the Bank of England (mainly quantitative easing) was £1,626.6 billion (or 72.5% of GDP); this is an increase of £46.9 billion (or a decrease of 0.2 percentage points) on November 2018.

I am not sure why they call in QE when it is mostly the Term Funding Scheme but as regular readers will be aware there seems to be a lack of understanding of this area amongst our official statisticians.

It also remains cheap for the UK to borrow with the benchmark ten-year Gilt yield at 0.82% and more relevantly the 50-year yield being 1.2%. We have seen lower levels but as I have seen yields as high as 15% we remain in a cheaper phase.

Current Fiscal Stimulus

The UK has been seeing a minor fiscal stimulus which has been confirmed again by this morning’s data.

Borrowing in the current financial year-to-date (April 2019 to November 2019) was £50.9 billion, £5.1 billion more than in the same period last year; this is the highest April-to-November borrowing for two years (since 2017), though April-to-November 2018 remains the lowest in such a period for 12 years (since 2007).

If we go the breakdown we see this.

In the latest financial year-to-date, central government receipts grew by 2.1% on the same period last year to £485.7 billion, including £356.5 billion in tax revenue.

Over the same period, central government spent £514.6 billion, an increase of 2.8%.

With the rate of inflation declining we are now seeing increases in public spending in real terms and they may well build up as we have not yet seen the full budget plans of the new government.

Care is needed however as the numbers have developed a habit of getting better over time.

PSNB ex in the financial year ending March 2019 has been revised down by £3.3 billion compared with figures presented in the previous bulletin (published on 21 November 2019) as a result of new data.

Comment

We are at times living an episode of Yes Prime Minister as proved by the appointment of the new Governor.

Doesn’t it surprise you? – Not with Sir Desmond Glazebrook as chairman.

 

– How on earth did he become chairman? He never has any original ideas, never takes a stand on principle.

 

As he doesn’t understand anything, he agrees with everybody and so people think he’s sound.

 

Is that why I’ve been invited to consult him about this governorship?

Sir Desmond would be called a “safe pair of hands” too and no doubt would also have run into all sorts of issues if he had been in charge of the FCA just like Andrew Bailey has. Favouring banks, looking the other way from scandals and that is before we get to the treatment of whistle blowers. I do not recall him ever saying much about monetary policy.

Also the timing has taken yesterday’s scandal at the Bank of England off the front pages again like something straight out of Yes Prime Minister. We will never know whether this announcement was driven by that. However should it continue to be so accurate we can expect this next.

If I can’t announce the appointment of Mr Clean as Governor –
Why not announce a cut in interest rates?
Oh, don’t be silly, I What? Announce a cut in interest rates The Bank couldn’t allow a political cut – particularly with Jameson.
It would with Desmond Glazebrook.
Now, if you appoint him Governor, he’ll cut Bartlett’s interest rates in the morning – you can announce both in your speech.
– How do you know?
He’s just told me.

UK GDP growth is as flat as a pancake

Today brings us the last major set of UK economic data before the General Election on Thursday at least for those who vote in person. It is quite a set as we get trade, production, manufacturing and construction data but the headliners will be monthly and quarterly GDP. As the latter seem set to be close to and maybe below zero no doubt politicians will be throwing them around later. Let’s face it they have thrown all sorts of numbers around already in the campaign.

The UK Pound

This has been the economic factor which has changed the most recently although it has not got the attention it deserves in my opinion. At the time of writing the UK Pound £ is above US $1.31, 1.18 to the Euro and nearing 143 Yen. This means that the effective or trade-weighted index calculated by the Bank of England is at 81.1 which is about as good as it has been since the post EU leave vote fall ( there were similar levels in April of last year). This particular rally started on the 9th of August from just below 74 so it has been strong or if you prefer for perspective we opened the year at 76.4.

Thus using the old Bank of England rule of thumb we have seen the equivalent of more than a 1% rise in official interest-rates or Bank Rate in 2019 so far. This has produced two economic developments or at least contributed to them. The first is that inflation prospects look good and I mean by my definition not the Bank of England one. The CPI versions could head below 1% in the months to come and RPI towards 1.5%. The other is that it may have put a small brake on the UK economy and contributed to our weak growth trajectory although many producers are probably used to swings in the UK Pound by now.

Some good news

The trade figures will be helped by this from UK wind.

GB National Grid: #Wind is currently generating 13.01GW (33.08%) out of a total of 39.34GW

The catch is that of course we are reliant on the wind blowing for a reliable supply. Also that it is expensive especially in its offshore guise, as it it both outright expensive to add to the costs of a back-up.

GDP

As to growth well our official statisticians could not find any.

UK GDP was flat in the three months to October 2019.

If we look at the different sectors we see what has become a familiar pattern.

The services sector was the only positive contributor to gross domestic product (GDP) growth in the three months to October 2019, growing by 0.2%. Output in both the production and construction sectors contracted, by 0.7% and 0.3%, respectively. The weakness seen in construction was predominantly driven by a fall of 2.3% in October.

So services grew and production shrank with construction erratic but also overall lower. If you wish to go to another decimal place you can find a small smidgeon of growth as services pushed GDP up by 0.17%, production cost 0.1% and construction cost 0.02% leaving a net 0.05%. But that is spurious accuracy as that puts the numbers under too much pressure.

Services

There was something of note in the monthly series ( October).

Services also grew by 0.2% in October, with widespread growth in several industries. The most notable of these were real estate activities and professional, scientific and technical activities, which both contributed 0.06 percentage points to gross domestic product (GDP) growth. The latter was driven by strength in both architectural and engineering activities, and research and development.

Two things stand out from this. Firstly the quarterly growth was essentially October  and next that much of it was from real estate and architecture. Is Nine Elms booming again? But more seriously something is perhaps going on here that has not been picked up elsewhere.

Production

Here the news has been pretty gloomy all round although the energy part is good news in terms of better weather and less expense for consumers.

Total production output decreased by 0.7% for the three months to October 2019, compared with the three months to July 2019; this was led by manufacturing output, which fell by 0.7%, followed by falls in mining and quarrying (2.6%) and electricity and gas (1.0%).

This reminds us that these areas have been seeing a depression in the credit crunch era.

Production output in the UK remained 6.2% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008……..Manufacturing output in the UK remained 3.5% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008.

It was not so long ago that it looked like manufacturing was about to escape this but then the trade war happened.

There was a flicker in October alone but the impact of the swings in the pharmaceutical industry are usually much stronger than that.

The growth of 0.1% in total manufacturing output in October 2019, compared with September 2019, was mainly because of widespread strength, with 8 of the 13 subsectors displaying upward contributions. The largest of these came from the volatile pharmaceutical products subsector, which rose by 2.1%, following two consecutive periods of significant monthly weakness during August and September 2019.

Trade

The issue here is the uncertainty of the data which today has illustrated,

The total UK trade deficit (goods and services) widened £2.3 billion to £7.2 billion in the three months to October 2019, as imports grew faster than exports

That seems clear but then again maybe not.

Excluding unspecified goods (which includes non-monetary gold), the total trade deficit narrowed £4.3 billion to £2.9 billion in the three months to October 2019.

The oversea travel and tourism problems have still not be solved.

For earlier monthly releases of UK Trade
Statistics that have also been affected by this error, the versions on the website should be amended
to make clear to users that the errors led the Authority to suspend the National Statistics
designation on 14 November 2014.

Moving on there is also this.

In current prices, the trade in goods deficit widened £6.8 billion to £35.6 billion, largely driven by rising imports; the trade in services surplus widened £4.4 billion to £28.4 billion, largely driven by rising exports.

So there is hope for the UK services exports which seem to be doing well and I have long suspected have been under recorded. For example smaller businesses are likely to be missed out. The scale of this is simply unknown and as we have issues here this must feed into the wider GDP numbers which are so services driven.

So our trade problem is a case of definitely maybe.

Comment

We perhaps get the best perspective from the annual rate of GDP growth which is now 0.8% using the quarterly methodology. If we take out the spring blip that has been declining since the 2% of August 2018. There are some ying and yangs in the detail because of we start with the positive which is services growth ( 1.3%) it has been pulled higher by the information and communication category which is up by 5.4% and education which is up by 3%. But on the other side of the coin the depression in production and manufacturing has worsened as both have fallen by 1.5%. I have little faith in the construction numbers for reasons explained in the past but growth there has fallen to 0%.

There are lots of permutations for the General Election but yet another interest-rate cut by the Bank of England just got more likely. It meets next week. Also political spending plans are getting harder to afford in terms of economic growth,

 

 

 

Greece GDP growth is a tactical success but a strategic disaster

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

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

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

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

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

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

What about the economy?

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

Manufacturing

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

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

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

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

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

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

Also there was some optimism for next year.

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

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

We gotta get right back to where we started from

Retail Trade

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

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

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

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

Trade

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

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

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

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

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

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

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

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

GDP

Today has brought the latest GDP data from Greek statistics.

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

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

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

Comment

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

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

Not what you would hope for in a recovery period.

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