China reports year on year economic growth

This has been a year where China has been especially in focus. Even before it began there were plenty of eyes on its economic performance but the Coronavirus pandemic that looks to have emerged from the Huhan Province upped the ante. Today gives us the opportunity to note the official view on economic developments since then.

The economic growth of the first three quarters shifted from negative to positive, the relations between supply and demand gradually improved, the vitality and dynamic of market were enhanced, and the employment and people’s livelihood were well guaranteed. The national economy continued the steady recovery and the overall social stability was maintained.

So quite an apparent triumph with the pattern for the year show below.

Specifically, the GDP for the first quarter declined by 6.8 percent year on year, increased by 3.2 percent for the second quarter, and up by by 4.9 percent for the third quarter.

They use numbers that are compared to the previous year for that quarter so let us now switch to looking at quarterly and annual growth.

The GDP for the third quarter grew by 2.7 percent quarter on quarter……..According to the preliminary estimates, the gross domestic product (GDP) of China was 72,278.6 billion yuan in the first three quarters, a year-on-year growth of 0.7 percent at comparable prices.

So the overall picture we are left with her is of an economy which has weathered the pandemic and in fact grown albeit very slightly. If you want the pattern which has brought us here it is shown below.

The quarter-on-quarter growth of quarterly GDP since 2019 were 1.9 percent, 1.3 percent, 1.0 percent, 1.6 percent, -10.0 percent, 11.7 percent and 2.7 percent respectively.

The Breakdown

In terms of industry China is emphasising that there has been plenty of high-tech growth.

 In the first three quarters, the value added of high-tech manufacturing and equipment manufacturing grew by 5.9 percent and 4.7 percent year on year. In terms of the output of products, in the first three quarters, the production of trucks, excavators and shoveling machinery, industrial robots, and integrated circuits grew by 23.4 percent, 20.2 percent, 18.2 percent and 14.7 percent year on year respectively.

I am not quite sure why they needed so many extra trucks, excavators and shovelling machinery. Unless of course they were dealing with the swine flu problems of pork production.

Specifically, the output of poultry grew by 6.5 percent, and output of beef, mutton and pork dropped by 1.7 percent, 1.8 percent and 10.8 percent respectively, a decline narrowed by 1.7 percentage points, 0.7 percentage points and 8.3 percentage points compared with that of the first half of this year. The pig production capacity gradually recovered. By the end of the third quarter, 370.39 million pigs were registered in stock, up by 20.7 percent year on year, among which, 38.22 million were breeding sows, up by 28.0 percent.

Overall industry was an outperformer.

Specifically, that of the third quarter grew by 5.8 percent year on year, 1.4 percentage points faster than that of the second quarter.

Services

Again the picture here is of a modern thriving economy.

In the first three quarters, of modern service industries, the value added of the information transmission, software and information technology services, and financial services grew by 15.9 percent and 7.0 percent respectively, or 1.4 percentage points and 0.4 percentage points higher than that of the first half of this year.

However the overall position like elsewhere is of a services sector in decline.

The Index of Services Production dropped by 2.6 percent year on year, a decline narrowed by 3.5 percentage point compared with that of the first half of the year; specifically, that of September grew by 5.4 percent, 1.4 percentage points faster than that of August.

We see that retail sales have had their struggles by the way we are guided towards September rather than the whole third quarter.

In September, the total retail sales of consumer goods reached 3,529.5 billion yuan, up by 3.3 percent year on year, 2.8 percentage points faster than that of August, maintaining the growth for two consecutive months.

Investment

This has managed to just become positive.

In the first three quarters, the investment in fixed assets (excluding rural households) reached 43,653.0 billion yuan, up by 0.8 percent year on year, shifting from negative to positive for the first time in 2020, while that of the first half of this year was down by 3.1 percent.

Looking into the detail we see that one definition of investment ( manufacturing) fell but construction carried on growing.

the investment in manufacturing dropped by 6.5 percent, a decline narrowed by 5.2 percentage points compared with that of the first half of 2020; the investment in real estate development grew by 5.6 percent, 3.7 percentage points faster than that of the first half of 2020.

The latter is very different to what we have seen elsewhere.

Trade

This of course was a contributor to the imbalances that led to the credit crunch. As you can see it has got worse rather than better this year.

In the first three quarters…….The value of exports was 12,710.3 billion yuan, up by 1.8 percent, and the value of imports was 10,404.8 billion yuan, down by 0.6 percent.

I note that they use value rather than volume but suspect this may just be a translation issue. The imbalance situation did improve in September but as ever we need to be cautious about trade figures for a single month.

The Exchange-Rate

This merits a mention as it has not behaved as people continue to expect.There have been plenty of reports published about a weaker Renminbi but in fact in the second half of this year it has been strengthening. The nadir was on the 28th of May at 7.17 versus the US Dollar compared to 6.7 this morning.

What this means beyond the obvious is complex because the Renminbi is neither fixed nor floating and is a managed currency.

Comment

There are several layers in an analysis of this. So let me start from the beginning which is that GDP is calculated differently in China to elsewhere.

While GDP growth in most countries is a measured output that depends on volatile real economic activity, Chinese GDP is an input into the economic process in which local governments are required to add whatever additional economic activity is needed to achieve the targeted GDP growth rate, whether or not this activity adds to welfare or productive capacity ( Michael Pettis )

So a version of “tractor production is always rising” if you like. The debate has gone on for years and a new view on it is around inflation measurement which if you look at the thrust of my work raises a wry smile. Essentially it is not the basic numbers used but it is the inflation measure or deflator that has “smoothed” things since 2012. Taking that view Capital Economics in China suggest GDP has been overstated by around 12%. They back up their view in this way.

For example, the formerly tight link between construction activity and cement output stops working. (See the chart.) Industrial value-added (and monthly IP) become eerily stable, but direct measures of output from industry don’t.

It’s harder to find proxies for services (partly because much of it is lumped together as “other” services, which have apparently been growing very fast). But we see the same abrupt drop in volatility as in industry.

This fits with what we have noted in the past as for example the phase whereby electricity production did not fit what we were told. However, this is a movable feat as once the Chinese noticed this they became “smoothed” too.

So China looks as though it is doing better than us western capitalist imperialists in 2020 which I guess is no great surprise.After all they have much more experience of running a centrally planned economy.We keep stopping ours. However they have been to coin a phrase “somewhat economical with the figures” since around 2012.

There is a subplot to that too as back on the 12th of August I pointed out a really odd move in the UK Deflator.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020.

We failed to follow what Level 42 would call The Chinese Way however as we reduced our GDP by around 5%.

Podcast

 

Turkey is facing the consequences of another currency collapse

Today we have an example of an exception proving the rule. Indeed it is something so rare in these days of negative interest-rates that I hope you are all sitting comfortably.

ISTANBUL (Reuters) – Turkey’s central bank raised the interest rate in its lira swap operation to 11.75% from 10.25% on Friday, continuing additional tightening steps in the face of a weakening lira after unexpectedly hiking its benchmark interest rate last month.

Following the rate hike in its swap transactions, the lira  rebounded to near 7.90 against the U.S. dollar from a record low of 7.9550 earlier in the day. It had eased back to 7.9375 as of 1010 GMT.

Today is full of hints or more interest-rate cuts in China and Europe but Turkey has found itself raising them again, albeit in an official way. But as you can see the initial reaction in terms of the Turkish Lira was along the lines of “meh”.Actually the Turkish Lira did rally later to 7.84, but that was from another perspective only back to where it was on Wednesday and this morning it is back to 7.89.

Turkish Lira Troubles

It has been a hard year as Bloomberg points out.

Turkey’s lira depreciated to a record against U.S. dollar, decoupling from other emerging-currencies amid mounting geopolitical risks in the region.

The lira fell as much as 0.9% to 7.8692 per dollar, extending losses this year to more than 24%, the second-biggest slide in emerging markets after Brazil’s real.

As you can see that level got replaced and in spite of the unofficial interest-rate rise we are below it now. Regular readers may well recall that the Lira was slip-sliding away and hitting new lows back in the summer of 2018 and the move through 6 versus the US Dollar was regarded as significant whereas now we are on the verge of 8 being the big figure.

Because of the economic links the exchange-rate with the Euro is significant. Indeed some Euro area banks must be mulling their lending to Turkish borrowers as well as Euro area exporters struggling with an exchange-rate of 9.32. That is some 43% lower than a year ago.

Whilst we are discussing big figure changes we see that the UK Pound £ now buys more than ten Turkish Lira.

Inflation Surges

This is the obvious initial consequence of an exchange-rate depreciation.

In August, consumer prices rose by 0.86% and annual inflation remained flat at 11.77%. While annual inflation rose in core goods, energy and food groups, it remained unchanged in the services group. Meanwhile, annual inflation in the alcoholic beverages and tobacco group declined significantly due to the high base from tobacco products

That is from the latest Minutes of the Turkish central bank or TCMB and in fact the impact is even larger in essential goods.

Annual inflation in food and non-alcoholic beverages increased by 0.78 points to 13.51% in August. The rise in annual unprocessed food inflation by 1.51 points to 15.36% was the main driver of this increase.

As important is what happens next and here is the TCMB view.

In September, inflation expectations continued to increase. The year-end inflation expectation rose by 64 basis points to 11.46%, and the 12-month-ahead inflation expectation increased by 45 basis points to 10.15%.

With the ongoing fall in the Lira that looks too low to me. On the other hand I think that Ptofessor Steve Hanke is too high.

Today, I measure #Inflation in #Turkey at 35.67%/yr.

I can see how goods inflation might have such influences but other prices will not respond so mechanically.

Trade Problems

You might think that an ever more competitive economy in terms of the exchange-rate would lead to a balance of payments triumph. However this morning’s figures tell a different story.

The current account posted USD 4,631 million deficit compared to USD 3,314 million surplus observed in the same month of 2019, bringing the 12-month rolling deficit to USD 23,203 million. ( August data).

There are two highlights here. It is significant that the release is in US Dollars and not Turkish Lira. But we also note that Turkey has gone from surplus to deficit about which we get more detail here.

This development is mainly driven by the net outflow of USD 5,347 million in the good deficit increasing by USD 3,948 million, as well as the net inflow of USD 1,179 million in services item decreasing by USD 4,602 million compared to the same month of the previous year.

One factor at play in the services sector weakness is tourism. If we look at the year so far we see this is confirmed by a surplus of US $4.15 billion as opposed to one of US $19.17 billion in the same period in 2019. Another way of looking at this is that 3,225,033 visitors are recorded as opposed to 13,349,256 last year.

The problem here is also what is called the reverse J Curve effect where imports have become more expensive but it takes time for volumes to shift as well as it taking time for more orders to come in for the relatively cheaper exports. At the moment that is exacerbated by the pandemic as for example if we stay with tourism international travel has fallen and with further restrictions possible it may not matter how cheap you are.

Staying with theoretical economics we should be seeing the J Curve effect from the 2018 devaluation but right now as we have noted with tourism practicalities are trumping theory.

Foreign Debt

We get some context here if we note this from Bloomberg.

Meanwhile, Turkey paid a premium as it sold $2.5 billion of debt to international investors on Tuesday, it’s first foray into global markets since February. The bonds priced at 6.4%, compared with 4.25% for similar-maturity notes issued in February.

We note the fact that we have another trend reversal here as most countries have seen lower debt costs whereas Turkey is paying more. The theme of borrowing in US Dollars is a Turkish theme though and in terms of the money raised each one has so far been a success as in it would have been more expensive later. The catch is when we get to interest payments and repayments which have got ever more expensive in Turkish Lira. So if your income is in US Dollars or other overseas currencies you are okay but if it is in Lira you are in trouble.

According to the TCMB here is what is coming up from its July data.

Short-term external debt stock on a remaining maturity basis, calculated based on the external debt maturing within 1 year or less regarding of the original maturity, recorded USD 176.5 billion, of which USD 15.9 billion belongs to the resident banks and private sectors to the banks’ branches and affiliates abroad. From the borrowers side, public sector accounted for 23.9 percent, Central Bank accounted for 11.4 percent and private sector accounted 64.7 percent in total stock.

August saw an outflow from the TCMB as well.

Official reserves recorded net outflow of USD 7,602 million.

They started the year at US $81.2 billion and are now US $41.4 billion.

Comment

So far we have noted a financial sector which is in distress with rising interest-rates a falling currency and overseas borrowing in a toxic mix. Let us now switch to the real economy where these will impact via general inflation highlighted by foreign goods and services being much more expensive. So living-standards will be lower. The normal mechanisms where a currency depreciation can help an economy are in many cases being blocked by the Covid-19 pandemic. Only on Friday we observed that the UK has been importing less which is pretty much a 2020 generic. This is added to be the fact that a Turkish economic strength ( tourism) has had an especially rough 2020.

There are other issues here as the continual foreign currency depreciation has led to a surge in demand for safe assets.

A significant part of the deterioration in the current account balance is due to gold imports. This year, gold imports will exceed $ 20 billion. ( Hakan Kara)

Gold of course exacerbates the US Dollar issue as it becomes increasingly important in Turkey. Actually the central bank has joined the game as its Gold reserves have risen by some US $17 billion so far this year and whilst some of that is a higher price it must also have bought some more.

Will more interest-rate increases help? I am not so sure as they are usually much smaller than the expected fall in the currency and they will crunch the economy even further. It would help of course if Turkey was not either actually in a war or acting belligerently on pretty much every border it has. Putting it another way government’s in economic trouble often look for foreign scapegoats.

Podcast

UK GDP shows that we are experiencing a depression rather than a recession

Today gives us an opportunity to find out what the UK economy was up to in August so let me start with the good news which is that it grew. Indeed in ordinary times this would be considered stellar growth. Although of course these times are quite some distance from ordinary.

Monthly gross domestic product (GDP) grew by 2.1% in August 2020 following growth of 6.4% in July, 9.1% in June and 2.7% in May.

As you can see we have had four months of very strong growth but the pattern has been very erratic. Although as I will come to later there is a worrying trend if you just look at the last three months.

The Services Sector

As we are looking at August I doubt many will be surprised where much of the growth came from.

In August 2020, the services sector grew by 2.4%, following growth of 5.9% in July. The accommodation and food services sub-sector was the largest contributor to the increase in August, in particular, the food and beverage service activities industry, which grew 69.7% as the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants.

So the Eat Out to Help Out Scheme was successful in its initial aim although with local lockdowns spreading it seems likely that the boost will fade. In fact the whole sector was on a bit of a tear in August.

The accommodation industry also grew by 76% as international travel restrictions boosted domestic “staycations”. These industries contributed 1.25 percentage points to the 2.1% growth in GDP for August 2020.

Even with this growth we have a fair distance still to travel.

In August 2020, the Index of Services was 9.6% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic.

Some sectors have further to go than others.

There were four industries that failed to reach 50% of their pre-February 2020 level; these were travel agencies, air transport, rail transport, and creative, arts and entertainment.

Also I note significant growth being recorded for education ( worth 0.35% of GDP) and health ( 0.13%) of GDP as we begin to correct the extraordinary inflation recorded by out statisticians in these areas in the second quarter.

Production

This also played its part in August.

Production output rose by 0.3% between July 2020 and August 2020, with manufacturing providing the largest upward contribution, rising by 0.7%; electricity and gas also rose (1.6%), partially offset by a fall in mining and quarrying (4.1%).

But as you can see on a much smaller scale especially as mining and quarrying was a brake. However over the pandemic period as a whole it has done better than services.

production output is 6.0% lower than the level in February 2020, with manufacturing 8.5% lower.

Construction

Regular readers will know that even in much calmer times these numbers had what Taylor Swift would call “trouble,trouble,trouble” which will be even worse now. But with that caveat here they are.

Monthly construction output growth slowed to 3.0% in August 2020, following record monthly growth of 21.8% in June 2020 and growth of 17.2% in July 2020.

So the surge has slowed substantially and even so this is where we think we are.

The level of construction output in August 2020 remains 10.8% below the February 2020 level.

More Perspective

We find out a little more from this.

Gross domestic product (GDP) grew by 8.0% in the three months to August 2020 as restrictions on movement eased across June, July and August.

An extraordinary burst of growth but it is much smaller than the fall. The pattern is rather different from what we have become used to.

All the headline sectors provided a positive contribution to GDP growth in the three months to August 2020. The services sector grew by 7.1%, production by 9.3% and construction by 18.5%.

So the usual leader of the pack which is services have been an under performer. This is in spite of the fact that we have surge a surge in accommodation and hospitality of 85.5% and 16.4% in education.

So a very different structure from normal as we see that this is a services driven depression.

Back to Normal?

Er no.

August 2020 GDP is now 21.7% higher than its April 2020 low. However, it remains 9.2% below the levels seen in February 2020, before the full impact of the coronavirus (COVID-19) pandemic.

In terms of structure we have this.

The production sector remains 6.0% lower than the level in February 2020, before the main impacts of the coronavirus were seen…….The services sector remains 9.6% lower than the level in February 2020……The construction sector remains 10.8% lower than the level in February 2020.

Seasonal Adjustment

GDP numbers rely quite a bit on this and as you will see tucked away in it is some hope for September.

In normal times this works well: education outputis smoothed through the year, effectively ‘looking through’ the school holidays as they come and go.

We are back to education so let’s have some Alice Cooper who was on the ball this year.

School’s out for summer
School’s out forever
School’s been blown to pieces

How have our statisticians dealt with this?

Observing a steady increase in school attendance in June and July, and with early evidence that classroom numbers were much closer to normal in September, we will instead smooth the path of education output over the holidays. That means education output will be higher in August than July, but lower than our September estimate……As schools have returned, attendance levels have been much higher than before the school holidays. Everything else being equal, this points to a much stronger September estimate.

The whole issue of seasonal adjustment this year is quite a minefield.

A Trade Surplus

I have been pointing out that we now have a trade surplus for several months now and we have another one.

The UK total trade surplus, excluding non-monetary gold and other precious metals, increased £3.8 billion to £7.7 billion in the three months to August 2020, as exports grew by £21.4 billion and imports grew by a lesser £17.5 billion.

Unlike in the GDP arena this seems to be a services thing.

The widening of the total trade surplus in the three months to August 2020, excluding non-monetary gold and other precious metals, was driven by an £11.9 billion increase in services exports, compared with a lesser £8.9 billion increase in services imports.

Even on an annual basis we now have a surplus.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £33.9 billion to a £4.9 billion surplus in the 12 months to August 2020,

Whilst a surplus for the UK is welcome after decades of deficits the smile changes Cheshire Cat style as we note this.

 Imports of goods decreased by £76.9 billion, while exports decreased by a lesser £39.4 billion.

Comment

This morning’s release is both welcome and sobering. The welcome bit is that we have growth but the sobering bit is that we have a long way to go still. It has been a very poor day for those claiming we are in the middle of a “V-Shaped” recovery. Let me illustrate with this from Bank of England chief economist Andy Haldane.

Four months on, we now expect GDP to be around 3-4% below its pre-Covid level by the end of the third
quarter. In other words, the economy has already recovered just under 90% of its earlier losses. Having
fallen precipitously by 20% in the second quarter, we expect UK GDP to have risen by a vertiginous 20% in
the third quarter – by some margin its largest-ever rise. Put differently, since May UK GDP has been rising,
on average, by around 1.5% per week.

The man I have described as a “loose cannon on the decks” has been free wheeling again. Of course we might grow by 5-6% in September but in August we grew in a month by what he thought would take not much more than a week. Still I am pleased he has been doing some reading albeit of a book I read as a child.

Now is not the time for the economics of Chicken Licken.

For those of you who have never read this Chicken Licken was worried about the sky falling down. Well it looks like it has on Andy’s forecasts and on Andy himself who is now a figure of fun even amongst those that previously cheered him.

Central bankers aren’t known as innovators or thought leaders, but Andrew Haldane, a senior official at the Bank of England, is an exception. ( Time 100)

Oh how Time magazine must wish they could redact that! But the more important point is something I have been making all along. This is a depression much more than a recession and it looks as though it is going to last much longer than some claimed. Yes we have seem bounce backs in some areas but others are plainly in a mess.

As it would have been John Lennon’s 80th birthday let me finish with this.

Nobody told me there’d be days like these
Nobody told me there’d be days like these
Nobody told me there’d be days like these
Strange days indeed — strange days indeed

 

 

Australia sees a GDP plunge whilst it prepares for a trade war

This morning has brought us much more up to date on the state of economic play in a land down under. Even what we have come to call the South China Territories could not keep up its record of economic expansion this year.

Gross Domestic Product (GDP) fell a historic 7.0% this quarter, as the COVID-19 pandemic and the corresponding movement restrictions continued to impact economic activity. The June quarter release records the first annual estimate of GDP for 2019/20, which fell 0.2%,ending Australia’s longest streak of continuous growth, 28 years. ( Australia Statistics)

We find ourselves in curious times as we note two things. Firstly that this is a depression which will only end when output regains the lost ground. Also that a quarterly fall of 7% is a relatively good performance which does question some of the things we keep being told as locked down Australia has done better than the more laissez faire Sweden. Curiously the media seem to be concentrating on this being a recession ( GDP fell by 0.3% in the first quarter) which seems to be quite an under playing of it.

The Detail

We see a familiar pattern of a sharp decline in private demand.

Private demand detracted 7.9 percentage points from GDP, with household final consumption expenditure driving the fall. Public demand partly offset the fall, contributing 0.6 percentage points, as government increased spending in response to COVID-19.

Indeed so much of what has happened was a consumption plunge.

Household final consumption expenditure fell a record 12.1%, detracting 6.7 percentage points from GDP. Household expenditure fell 2.6% for the 2019/20 financial year, the first annual fall in recorded history.

The next bit is intriguing as we have seen elsewhere rises in purchases of food as a type of stockpiling.

Spending on services fell 17.6% reflecting temporary shutdown of businesses and movement restrictions. Spending on goods fell 2.8% driven by record falls in operation of vehicles and clothing and footwear, while spending on food recorded the biggest decline since June 1983.

There was something of a space oddity in the trade data however. One might reasonably think that as China was something of an epicentre for the pandemic then supplying it with resources was not going to be a winner. But net trade provided a boost.

The record fall in imports (-12.9%) was greater than the fall in exports (-6.7%). Imports of goods fell 2.4%, reflecting reduced imports of consumption and capital goods. Imports of services fell 50.5% with travel services falling 98.7% in response to travel bans. Exports of goods fell 3.5%, driven by falls in non-rural and rural goods due to a fall in global demand. Exports of services fell 18.4%, reflecting the travel bans.

Whilst no-one will be surprised at the travel data we know that national accounts struggle to measure services trade with any degree of accuracy. It seems more than a little curious that in a pandemic physical trade was barely affected whereas services and especially imports of services were hammered. If we put the number below back we get close to what Sweden did.

Net exports contributed 1.0 percentage point to GDP

There was another curiosity in the shop.

Health care and social assistance value added experienced its greatest fall since September 1997, down 7.9% in June quarter. The fall was driven by a decline in both private and public health services with reduced demand for medical aids, hospital services and allied health services as face to face visits to practitioners were limited.

The last bit is really rather Orwellian as a reduction in supply is reported as a reduction in demand! This issue of course goes way beyond Australia as whilst some health care areas were flat out others pretty much shut down. It looks quite a mess frankly.

Savings and Wages

There are two separate trends here as some did well.

The household saving to income ratio rose to 19.8%, the highest rate since June 1974. This was driven by the record fall in consumption. Gross disposable income rose 2.2%, driven by an historic 41.6% increase in social assistance benefits, due to both an increase in the number of recipients and additional COVID-19 support payments.

But the wages numbers suggest the well-off may have done okay but the poorest did not. The emphasis is mine.

Compensation of employees fell a record 2.5% this quarter. Average compensation per employee rose an 3.1% this quarter reflecting a compositional shift in the work force with reduced employment in part-time and lower paid jobs.

Reserve Bank of Australia

It seems that the RBA has its eyes on the housing market.

Investment in new and used dwellings fell 7.3% in the quarter due to weakened demand and COVID-19 restrictions, the largest fall since December 2000. ( Australia Statistics)

This is because yesterday it announced new moves to pump it up as it copies the Bank of England.

Under the expanded Term Funding Facility, authorised deposit-taking institutions (ADIs) will have access to additional funding, equivalent to 2 per cent of their outstanding credit, at a fixed rate of 25 basis points for three years. ADIs will be able to draw on this extra funding up until the end of June 2021………To date, ADIs have drawn $52 billion under the Term Funding Facility and further drawings are expected over coming weeks. Today’s change brings the total amount available under this facility to around $200 billion.

The first point is that “banks” are so unpopular now that they have apparently had their name changed to “authorised deposit-taking institutions ” or ADIs. That is curious when we are discussing lending rather than depositing. I see the RBA looking at its impact like this.

There is a very high level of liquidity in the Australian financial system and borrowing rates are at historical lows.

Let us go straight to the heat of the action as the RBA is repeating a policy designed to get mortgage interest-rates lower. We see why it has announced an expansion as we note mortgage rates. Variable rates for new borrowers were 3.5% in July last year and were 2.92% this. So we have two contexts of which the first is that they have not moved much when we consider the Cash Rate was also cut to 0.25% and we are seeing QE (of which more later). Also they are relatively high if we look internationally.

The picture looks better for the RBA if we look at fixed-rate mortgages. If we look at ones for up to three-years we see that it fell over the year to June from 3.43% to 2.3% making fixed-rates look attractive to say the least. Apologies for the way they have one set of numbers for the year to July and another to June but I think we get the picture.

There is a chart comparing these rates with swap rates so the cost of the banks intermediation is in fact 2% of the 2.3%.

Comment

There are some particularly Australian features here. Let me address the issue of a boost from trade via this I spotted from @chigrl

India, Australia and Japan on Tuesday agreed to launch an initiative to ensure the resilience of supply chains in the Indo-Pacific, with the move coming against the backdrop of tensions created by China’s aggressive actions across the region.

The creation of the “Supply Chain Resilience Initiative” was mooted by Japan amid the Covid-19 crisis, which has played havoc with supply and manufacturing chains,  ( Hindustan Times)

I doubt that will be welcomed by Australia’s largest customer and that has clear trade implications.

Next let me return to the RBA. As I am a polite man I will call this quite a cheek.

 Government bond markets are functioning normally, alongside a significant increase in issuance.

In fact they are so normal they had to buy a barrel load…….Oh hang on.

Over the past month, the Bank bought a further $10 billion of Australian Government Securities (AGS) in support of its 3-year yield target of 25 basis points. Since March, the Bank has bought a total of $61 billion of government securities. Further purchases will be undertaken as necessary.

Number Crunching

The Governor of the Bank of England Andrew Bailey will be interviewed by the Treasury Select Committee and I have put in a question request.

With Apple now worth more than the UK FTSE 100 will someone please ask the Governor why he is buying Apple Corporate Bonds?

Even if this quarter sees economic growth of 7% Germany has gone back in time to 2015

Today has brought the economic engine of the Euro ares into focus as we digest a barrage of data from and about Germany. We find that the second effort at producing economic output figures for the second quarter has produced a small improvement.

WIESBADEN – The gross domestic product (GDP) fell sharply by 9.7% in the 2nd quarter of 2020 on the 1st quarter of 2020 after adjustment for price, seasonal and calendar variations. According to the Federal Statistical Office (Destatis), the GDP drop in the 2nd quarter of 2020 was not quite as steep as reported in the first release of 30 July 2020 (-10.1%).

This means that the comparison with last year improved as well.

11.3% on the same quarter a year earlier (price-adjusted)

The last figure is revealing in that it reminds us that the German economy had been in something of a go-slow even before the Covid-19 pandemic hit. Also we note that the hit was in broad terms double that of the credit crunch.

The slump in the German economy was thus much larger than during the financial and economic crisis of 2008/2009 (-4.7% in the 1st quarter of 2009) and the sharpest decline since quarterly GDP calculations for Germany started in 1970.

The Details

With a lockdown in place for a fair bit of the quarter this was hardly a surprise.

As a consequence of the ongoing corona pandemic and the restrictions related with it, household final consumption expenditure fell sharply by 10.9% in the 2nd quarter of 2020.

What is normally considered to be a German strength fell off the edge of a cliff as investment plunged.

Gross fixed capital formation in machinery and equipment even dropped by as much as 19.6%.

Which made the annual picture this.

 Gross fixed capital formation in machinery and equipment fell sharply by 27.9% after already dropped considerably by 9.5% in the 1st quarter.

Also a platoon of PhD’s from the ECB will be on their way to work out what has gone on here?

Gross fixed capital formation in construction also declined markedly (-4.2%) in the 2nd quarter, which was due in particular to the exceptionally strong 1st quarter (+5.1%).

The ECB PhD’s may be able to write a working paper describing what their bosses would consider a triumph. Or at least, something described as a triumph on the crib sheet provided to ECB President Christine Lagarde.

Gross fixed capital formation in construction, which was 1.4% higher than in the 2nd quarter of 2019, also had a supporting effect year on year.

Looking at the annual comparison it has not been a good year for net exporters.

Foreign trade fell dramatically also compared with a year earlier. Exports of goods and services fell by 22.2% (price-adjusted) in the 2nd quarter of 2020 year on year. Imports did not drop as strongly (-17.3%) over that period.

Something else which you might reasonably consider to be not very Germanic has been in play.

Only final consumption expenditure of general government had a stabilising effect; it was 1.5% higher than in the previous quarter and prevented an even larger GDP decrease………( and the annual data)  In contrast, an additional 3.8% in government final consumption expenditure prevented the economy from crashing even more.

We know that the unemployment numbers have been actively misleading in the pandemic but I note that the hours worked data gives a similar picture to GDP.

The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 10.0% over the same period.

This had an inevitable consequence for productivity.

Labour productivity per person in employment slumped by as much as 10.2% compared with the 2nd quarter of 2019.

Savings

I thought I would pick this out as it is a clear development in the Covid era.

The relatively stable incomes, on the one hand, and consumer reticence, on the other, resulted in a substantial rise in household saving. According to provisional calculations, the savings ratio nearly doubled to 20.1% in the 2nd quarter of 2020 year on year (2nd quarter 2019: 10.2%).

Looking Ahead

This morning’s IFO release tells us this.

Sentiment among German business leaders is continuing to improve. The ifo Business Climate Index rose from 90.4 points (seasonally adjusted)  in July  to 92.6 points in August. Companies assessed their current business situation markedly more positively than last month. Their expectations were also slightly more optimistic. The German economy is on the road to recovery.

Although a somewhat different context was provided by this.

In manufacturing, the business climate improved considerably. Companies’ assessments of their current situation jumped higher. Nevertheless, many industrial companies still consider their current business to be poor. The outlook for the coming months was again more optimistic. Order books are filling once more.

That showed a welcome improvement but only to a level considered to be poor so it is hardly surprising they are optimistic relative to that. Indeed trade seems to have engaged reverse gear.

In trade, the upward trend in the business climate flattened noticeably. Companies were somewhat more satisfied with their current situation. However, their pessimism regarding the coming months was almost unchanged. In wholesale, the business climate in fact fell back.

Perhaps they are getting a little more like us in the UK as the services sector seems to be on the road to recovery.

In the service sector, the Business Climate Index rose strongly. Service providers were decidedly happier with their current business situation. Their outlook for the coming six months also improved further.

Considering the GDP numbers you might think that construction would be more upbeat.

In construction, the business climate continues to improve. Construction companies were again happier with their current situation. However, their expectations are still pessimistic, albeit less so than last month.

Comment

If we take the example below where would that leave Germany?

Germany IFO expects GDP growth of around 7% in Q3 ( DailyFX.com )

If we take the unadjusted figure of 93.46 for the second quarter then we will rise to 100 or if you prefer we will have stepped back in time to 2015. So the “Euro boom” and all the ECB backslapping will have been wiped out. The 7% economic growth recorded over the period will be ground that will have to be re-taken. That will be not so easy as we see renewed but hopefully more minor Covid-19 outbreaks in other parts of the Euro area.

I am a little unclear how @Economist_Kat gets to this.

#Germany: #ifo survey results for August are consistent with the economy moving into Boom territory.

Perhaps too much kool-aid. According to a @LiveSquawk the official view is that things can only get better.

German FinMin Scholz: Economy Developing Better Than Expected

Meanwhile official policy has the pedal to the metal with an official interest-rate for banks at -1% and two QE bond buying schemes running at once. We also have fiscal policy being deployed on a grand scale, especially for Germany. There is little scope for it to do more.

 

 

 

 

 

The UK finds itself with a trade surplus

In many ways that is quite a chocking headline. It has been quite some time since the UK has been in a surplus situation as regarding trade. On a personal level I have got used to pointing out that not only has it been years since we sustained one it has in fact been decades. It was around 1997/98 that we did so as the effect of what turned out to be White Wednesday or the UK’s exit from the ERM ( Exchange-Rate Mechanism). I suppose that raises an initial point as it seems we need quite a economic shock to ever be in surplus. Also as people dip into my blogs over years I would point out that the 1997/98 has been revised in and out over time, less likely now for obvious reasons but you never know. In a way that provides its own critique of trade statistics.

You may be wondering why this was not on the news yesterday? I suppose like the extraordinary inflation numbers it was either not read or dismissed. One area where I do have sympathy though is that the concept of “theme days” that the Office for National Statistics does flood the system with too much data at once. Fans of Yes Prime Minister will know that this is a deliberate tactic to hide bad news, so somewhere Sir Humphrey Appleby and Jim Hacker are having a quiet chuckle.

The UK Surplus

The headline is this.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £8.6 billion to £8.6 billion in Quarter 2 (Apr to June) 2020, as imports fell by £35.2 billion and exports fell by a lesser £26.7 billion; the largest underlying total trade surplus on a three-month basis since records began in 1998.

As Shalamar are wont to put it.

There it is, there it is
What took us so long, ooh, to find each other, baby?
There it is, there it is
This time I’m not wrong

Actually the last line is more than risky as trade numbers at a time like this will see revisions.

Returning to the numbers it is immediately clear that we have not come to the surplus in the best of ways. This is because unless we have suddenly kicked out addiction to imports the fall in imports represents a consequence of the depressionary level fall in economic output we looked at yesterday. Also exports fell as well meaning out own domestic output was lower. One request I would make to the ONS is that they stop implying that ( in this instance) records began in 1998. After all if there were no records in the mid-1960s we would not have devalued in 1967 would we?! Ironically the records were wrong but the ONS statement should add recorded in this manner or something similar.

It is no great surprise to learn that the falls were everywhere.

Falling imports and exports in Quarter 2 2020 were largely seen in trade in goods, excluding non-monetary gold and other precious metals, where imports and exports fell by £21.4 billion and £14.0 billion respectively, while for trade in services they fell by £13.9 billion and £12.7 billion respectively.

A Goods Deficit

One familiar feature persisted in spite of the changes elsewhere.

The trade in goods deficit, excluding precious metals, narrowed by £7.4 billion to £20.7 billion in Quarter 2 2020 (Figure 2). Goods imports fell by £21.4 billion to £87.0 billion, while goods exports fell by £14.0 billion to £66.4 billion. Falling imports and exports were largely seen in machinery and transport equipment, and fuels, with larger falls of each in imports than exports.

So whilst it shrank we still had one and I doubt anyone fell off their chairs whilst noting the areas which were affected the most. Interestingly one major part of this saw a switch in which side of the ledger was worst affected.

The falls in exports and imports of machinery and transport equipment in Quarter 2 2020 were largely seen in road vehicles, where exports and imports fell by £7.8 billion and £4.2 billion respectively.

Switching to fuel and oil I am not sure I have seen numbers like this before.

Demand down by a record 31 per cent as a result of the COVID-19 lockdown. Demand in the three months to May 2020 was just 11.3 million tonnes, a record low in the series and 2.7 million tonnes under the previous low seen in the three months to April 2020.

Aviation fuel demand fell by 75% in the three months to May.

Services

Here is all we get.

The trade in services surplus widened by £1.2 billion to £29.3 billion in Quarter 2 2020. Services imports fell by £13.9 billion to £35.3 billion, while services exports fell by £12.7 billion to £64.6 billion.

Good job it is not around 80% of our economy…..Oh wait.

Allowing for Inflation

After the extraordinary GDP Deflator number of yesterday it is perhaps for best that in fact this does not seem that large a player here.

In volume terms, the total trade surplus (goods and services), excluding unspecified goods (which includes non-monetary gold), widened £7.2 billion to £7.8 billion in Quarter 2 (Apr to June) 2020, as imports fell by £31.1 billion and exports fell by £23.8 billion.

Although this deserves an investigation as which prices rose?

Total trade import prices fell 0.8% in Quarter 2 2020, while export prices fell 0.4%. Fuels were the largest drivers of the fall in both import and export prices, by 35.7% and 36.7% respectively.

We should at least be told.

An Annual Surplus

The party continues here.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £37.6 billion to a surplus of £3.7 billion in the 12 months to June 2020, as imports fell by £67.6 billion and exports fell by a lesser £29.9 billion.

The detailed breakdown is below.

The increase of the underlying total trade balance in the 12 months to June 2020 was largely because of a £39.5 billion narrowing of the trade in goods deficit to £104.6 billion. Imports decreased by £61.7 billion, while exports decreased by £22.1 billion. The fall in both imports and exports of goods was largely seen with machinery and transport equipment, and fuels.

As usual we get no detail on the services position.

The trade in services surplus narrowed by £1.9 billion to £108.3 billion in the 12 months to June 2020, as exports fell by £7.8 billion and imports fell by a lesser £5.9 billion.

Comment

The warm glow provided by a UK trade surplus soon starts to fade. Whilst there may well have been a shift towards producing more domestically it will hardly have been at play on this scale. In reality it is the fall in demand affecting the demand for imports which has somewhat artificially created a trade surplus. One area where this is clearly in play is fuel and energy as production of oil and gas in the North Sea only fell by 2.6% in the three months to June as opposed to the much larger demand falls noted earlier.

What we are also reminded of is how little detail is provided on the sector which provides around four-fifths of out economy. Even the annual figures which allow for some actual surveys to be done – for newer readers the main services trade survey is quarterly leading to the reverse of Meatloaf’s two out of three aint bad – tell us nothing more than the bare numbers which hardly inspires confidence. I have long suspected the numbers for services are better than those recorded but doubt they fully offset the trade deficit. Of course trying to track this down is a complex business, but then it is also true that the gains in information technology have been exytaordinary.

 

Oh France! Oh Spain! Oh Italy!

After yesterday’s update from Germany we move onto the second, third and fourth largest economies in the Euro area, who rather curiously have produced their figures in that order this morning. So as we mull the fact that Germany accelerated the release of its GDP ( Gross Domestic Product) numbers at exactly the wrong time we also need to be ready for bad news.

In Q2 2020, GDP in volume terms declined: –13.8%, after –5.9% in Q1 2020. It is 19% lower than in Q2 2019.  ( Insee of France)

That is like two explosions going off with the 5.9% being credit crunch like but then it being followed by a much louder bang. The total of -19% is somewhat chilling.

We know the cause.

 GDP’s negative developments in first half of 2020 is linked to the shut-down of “non-essential” activities in the context of the implementation of the lockdown between mid-March and the beginning of May

But the beginning of the recovery seems understated.

The gradual ending of restrictions led to a gradual recovery of economic activity in May and June, after the low point reached in April.

In terms of the detail well everything in the domestic economy fell with one of the components being rather curious.

Household consumption expenditures dropped (–11.0% after –5.8%), as did total gross fixed capital formation in a more pronounced manner (GFCF: –17.8% after –10.3%). General government expenditure also stepped back (–8.0% after –3.5%).

I wonder how they managed to find a category of government spending that fell?! Maybe it was stuff they could not buy as it was out of stock. But it rather sticks out as does this.

 Food expenditure slightly decreased (–0.5% after +2.8%).

In the UK we still seem to be spending more on food whereas France seems to have stocked up and then begun to de-stock.

Although the numbers are larger trade turns out to be a much smaller factor which reminds us that trade numbers are unreliable at the best of times and maybe nearly hopeless right now.

In Q2 2020, imports declined strongly (–17.3% after –10.3%), notably in manufactured goods. Exports fell in a more pronounced manner (–25.5% after –6.1%), in particular in transport equipment. All in all, foreign trade contributed negatively to GDP growth this quarter (–2.3 points after –0.1points).

Make of that what you will.

Spain

This starts especially grimly as the opening page tells us there has been a 22.1% fall in GDP. So let us look more deeply at the state of play.

The Spanish GDP registers a variation of -18.5% in the second quarter of 2020 compared to the previous quarter in terms of volume. This rate is 13.3 points lower than that registered in the first quarter.

which brings us to this.

The year-on-year change in the GDP stood at −22.1%, compared to −4.1% for the quarter
preceding.

That is a bit of a “Boom! Boom! Boom!” moment although notin an economic sense and the breakdown is as follows.

The contribution of domestic demand to year-on-year GDP growth is −19.2 points, 15.5 points lower than that of the first quarter. For its part, external demand represents a contribution of −2.9 points, 2.5 points lower than that of the previous quarter.

We get a sort of confirmation from all of this from the hours worked numbers which at the same time provide a critique of the unemployment data.

In year-on-year terms, hours worked decreased by 24.8%, rate 20.6 points lower than in the first quarter of 2020, and full-time equivalent positions down 18.5%, 17.9 points less than in the first quarter, which represents decrease of 3,394 thousand full-time equivalent jobs in one year.

Some areas saw not far off a collapse in demand, because of past issues the construction numbers stood out to me.

Household final consumption expenditure experiences a year-on-year decrease of 25.7%, 19.9 points less than in the last quarter. For its part, the final consumption expenditure of the Public Administrations presented an inter annual variation of 3.5%, one tenth less than that of the preceding quarter.
Gross capital formation registered a decrease of 25.8%, 20.5 points higher than that of previous quarter. The investment in tangible fixed assets decreases at a year-on-year rate of 30.8%, which it represents 22.4 points more than in the previous quarter. By components, the investment in homes and other buildings and constructions decreased 22.6 points, going from −8.3% to -30.9%, while investment in machinery, capital goods and weapons systems it decreases 23 points when presenting a rate of −32.3%, compared to −9.3% in the previous quarter.

The reason why that sector stands out is the way it affected the economy and the banks as the credit crunch rolled into the Euro area crisis.

Italy

We advance on Italy nervously because of its past record but the fall was in fact the smallest of these three.

 In the second quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 12.4 per cent with respect to the previous quarter and by 17.3 per
cent over the same quarter of previous year.

As to the breakdown well it was everything if we skip over a slightly bizarre focus on farming.

The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and
fishing, in that of industry as well as in services. From the demand side, there is a negative contribution
both by the domestic component (gross of change in inventories) and the net export component.

Farming is of course very important but it hardly the main player in this context.

Comment

There are a lot of contexts to this so let us start with the national ones. Spain was the main “Euro Boom” beneficiary with annual economic growth reaching 4.2% in early 2015 but now we are reminded that it can be the leader of the pack in down as well as upswings. Italy has lost less but it is hard not to think that is because it has less to lose and this from  @fwred is rather chilling.

As the morning has developed we can now look at the overall picture for the Euro area.

In the second quarter 2020, still marked by COVID-19 containment measures in most Member States, seasonally
adjusted GDP decreased by 12.1% in the euro area and by 11.9% in the EU, compared with the previous quarter,
according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union.
These were by far the sharpest declines observed since time series started in 1995. In the first quarter of 2020,
GDP had decreased by 3.6% in the euro area and by 3.2% in the EU.

We can use the numbers to compare with the United States as the annual decline of 15% of the Euro area is larger than the 9.5% there. I think this is outside the margin of error but potential errors right now will be large.

There is a collective assumption that these things will bounce back and I am sure that some areas will. But there are others where it will not and if we think of the “girlfriend in a coma” it never seems to do that. Quarterly economic output in Italy was 417 billion Euros at the beginning of 2017 rising to 431 billion and now falling to 356 billion.

In the end this is the problem with all the can kicking. We have arrived at the next storm without fixing the damage caused by the last one. Where do you go when the official interest-rate is -0.6% and of course -1% for the banks?

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.