Japan and Korea have chosen a bad time to fire up their own trade war

This is a story influenced by a brewing trade war but not the one that you might think. It is between Japan and Korea and the latest phase started in July when Japan imposed restrictions on trade with Korea for 3 chemicals. This gets more significant when you realise that they are crucial for smartphones ( displays on particular) and that according to CNBC Japan is responsible for 90% of the world’s supply of them. This affects quite of bit of Korean industry with Samsung being the headliner. Them Japan dropped Korea from its whitelist of trusted trading partners making trade more difficult before Korea did the same.

According to Bloomberg Citigroup have tried to downplay this today but I note these bits of it.

Meanwhile, boycotts in South Korea have led to a plunge in sales of Japanese consumer goods and a decrease in tourists to Japan, who may have decided to travel domestically instead, according to Citi………Last month, South Korean exports to Japan fell 14 percent, while imports from Japan slid 23 percent. South Korea’s trade ministry attributed the declines to industrial factors rather than trade actions.

Ah an official denial! We know what that means.

The issue has deep roots in the past and the Japanese occupation of the Korean peninsula a century ago as well as its later use of Korean “comfort women.” That explains the Korean issue with Japan and on the other side the Japanese consider themselves superior to Koreans and in my time there were quite open about it. Whilst he initially made moves to calm the situation there was always going to be an issue with a nationalistic politician like  Shinzo Abe running Japan.But let us move on noting that both countries will be experiencing an economic brake.

Japan Economic Growth

Let me hand you over to The Japan Times which gives us the position and some perspective.

In the third quarter the world’s third-largest economy grew an annualized 0.2 percent, slowing sharply from a revised 1.8 percent expansion in April to June, according to preliminary gross domestic product data released by the government Thursday.

It fell well short of a median market forecast for a 0.8 percent gain, and marked the weakest growth since a 2.0 percent contraction in the July-September period last year.

So over the past six months Japan has grown by 0.5% and we also get an idea of the erratic nature of economic growth there.This is partly due to the way that Japan does not conform to stereotype as it has struggled more than elsewhere to measure GDP. Partly due to last year’s third quarter drop. annual growth has picked up to 1.3% but that looks like being the peak.

Why? Well the 0.2% growth was driven by a 0.9% rise in domestic demand ( both numbers are annualised) just in time for the consumption tax to be raised. Actually private consumption was up 1.4% in the quarter suggesting that purchases were being made ahead of the rise.

At the end of last month this was reinforced by this.

The Consumer Confidence Index (seasonally adjusted series) in October 2019 was 36.2, up 0.6 points from the previous month.

Yes it was up but you see the number had fallen from around 44 at the opening of 2018 and these are the lowest readings since 2011.

Korea Economic Growth

Real gross domestic product (chained volume measure of GDP) grew by 0.4 percent in the third quarter of 2019 compared to the previous quarter……Real GDP (chained volume measure of GDP) increased by 2.0 percent year on
year in the third quarter of 2019.

In a broad sweep this means that economic growth has been slowing as it was 3.2% in 2017 and 2.7% in 2018. Rather unusually Korea saw strong export growth especially of we look at what was exported.

Exports increased by 4.1 percent, as exports of goods such as motor vehicles and semiconductors expanded. Imports were up by 0.9 percent, owing to increased imports of transportation equipment.

Also manufacturing grew.

Manufacturing rose by 2.1 percent, mainly due to an increase in computer, electronic and optical products.

However the economy has been slowing and if either of those reverse will slow even more quickly. Back on the 18th of October we noted this response.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

This was more of an external rather than an internal move as last week we learnt this.

During September 2019 Narrow Money (M1, seasonally adjusted, period-average) increased by 0.6% compared to the previous month.

So whilst it had been weak as annual growth was 3.3% in June it has risen since to 5% which is slightly above the average for 2018.

However they could cut on inflation grounds as this from Korea Statistics shows.

The Consumer Price Index was 105.46(2015=100) in October 2019. The index increased 0.2 percent from the preceding  month and was unchanged from the same month of the previous year.

According to the Bank of Korea the outlook is for more of the same.

 The Producer Price Index increased by 0.1% month-on-month in September 2019 – in year-on-year terms it decreased by 0.7%.

Exchange Rate

This is at 10.68 Won to the Yen as I type this and is up over 7% over the past year. So an additional factor in the situation will be that the Korean’s have been winning the currency war. This of course, will be annoying for Shinzo Abe who’s Abenomics programme set out to weaker the Japanese Yen. As we stand Korea has an official interest-rate some 1.35% higher so there is not a lot the Bank of Japan can do about this.

Comment

As we stand it initially looks as if Korea will be the relative winner here.

“Domestic demand had made up for some of the weakness in external demand, but we can’t count on this to continue,” said Taro Saito, executive research fellow at NLI Research Institute.

“A contraction in October-December GDP is a done deal. The economy may rebound early next year, but will lack momentum.” ( Japan Times)

But the argument it is in a stronger position weakens somewhat if we switch to its Gross National Income.

Real gross domestic income (GDI) increased by 0.1 percent compared to the previous quarter.

Over the past year it has gone on a quarterly basis -0.3%,0.2%,-0.7% and now 0.1%.

Korea is looking to use fiscal policy to stimulate its economy which sets it in the opposite direction to the consumption tax rise in Japan. But as they use a time of trouble to posture and scrap let us look at something that they share.

Korea’s potential output growth is expected to fall further in the long term, as the productive population declines in line with population aging and the low fertility rate……In addition, it is necessary to slow down the decline in labor supply resulting from population aging and the low birth rate, through policy efforts including encouraging women and young people to participate in economic activities and coping actively with the low birth rate. ( Bank of Korea Working Paper )

I wonder what the latter bit really means?

Meanwhile this is the last thing Japan needs right now.

(Reuters) – Japan’s Nissan Motor Co Ltd (7201.T) has said it is recalling 394,025 cars in the United States over a braking system defect, causing concerns that a brake fluid leak could potentially lead to a fire.

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Sadly a strong UK trade performance (for once) gets overlooked by the GDP release

Late on Friday the credit ratings agency Moodys offered its latest opinion on the state of play on the UK.

Leading ratings agency Moody’s has signalled it is poised to downgrade the credit rating on Britain’s government debt, warning that Brexit has triggered an “erosion in institutional strength” that threatens the UK’s financial credibility.

The ratings agency, which scores debt on the basis of how likely they are to default, changed the outlook on its Aa2 rating on the debt issued by the UK government from “stable” to “negative”.

That implies a cut to the actual rating could be coming imminently. ( Sky News)

Unfortunately for Sky News they went wrong with the first word in two respects. These days there is no such thing as a leading ratings agency and of course their operations are lagging and not leading. Also if it was going to be imminent they would have actually done it.

Indeed the crux of the matter was rather curious.

Moody’s said: “In the current political climate, Moody’s sees no meaningful pressure for debt-reducing fiscal policies.”

That was an odd statement because as I pointed out on social media the falls in bond yields have changed matters on this subject. The UK fifty-year Gilt yield closed the week at 1.23% whereas the Moodys report and some of the reporting seemed to be from an era where it was say 4% or 5% so if you like in one of the forecasts by the Office for Budget Responsibility or OBR.

Moody’s said Britain’s £1.8trn of public debt – more than 80% of annual economic output – risked rising again and the economy could be “more susceptible to shocks than previously assumed”.

Indeed Moodys seemed to be playing politics.

Moody’s said that “Brexit has been the catalyst for [an] erosion in institutional strength” which helped explain the change in outlook.

It said the main rationale for the change of view was firstly that “UK institutions have weakened as they have struggled to cope with the magnitude of policy challenges that they currently face, including those that relate to fiscal policy”.

What we do know is that fiscal policy is set to be looser like er France and well.

At Aa2, Britain is on the same level as France but below Germany’s AAA rating.

GDP Growth

The X-Factor in all of this is how the economy grows which is where today’s news comes in. It was hard not to have a wry smile at the Moodys report arriving just a say after the Bank of England had raised its growth estimate.

Bank staff’s estimate for GDP growth in 2019 Q3 as a whole had been revised up to 0.4%, from 0.2%
at the time of the Committee’s previous meeting. This was largely the result of an upward revision to estimates
of service sector output for June and July.

If we move to the actual numbers released this morning we were told this.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.3% in Quarter 3 (July to Sept) 2019. When compared with the same quarter a year ago, UK GDP increased by 1.0% in Quarter 3 2019; this is the slowest rate of quarter-on-year growth since Quarter 1 (Jan to Mar) 2010.

So some growth but the annual number has been pulled lower by the contraction in the second quarter. Overall we are very similar to the Euro area where annual growth is 1.1% and quarterly 0.2%. The breakdown was familiar for the UK as well.

The service and construction sectors provided positive contributions to GDP growth, while output in the production sector was flat in Quarter 3 2019.

We got more detail here.

Manufacturing was flat in Quarter 3 2019, as was production. Services output increased by 0.4% in Quarter 3 2019, following the weakest quarterly figure in three years in the previous quarter. Construction output experienced a pickup following a weak Quarter 2, increasing by 0.6%.

Regular readers will know that I have long argued that we have in fact had a “march of the services” rather than a “march of the makers” and that the services sector is probably above 80% of the economy now. On a quarterly basis we saw this.

Information and communication was the largest contributing sector to growth in the latest quarter. It increased by 0.8% and contributed 0.08 percentage points.

On an annual basis we saw this.

In the three months to September 2019, services output increased by 1.4% compared with the three months ending September 2018; public sector dominated industries accounted for one-third of this growth.

Maybe a flicker of Brexit preparations there in the annual numbers. Also if you see a Luvvie today please be nice to them/

Long-term strength within the computer programming and the motion pictures industries are the main reasons for the sectors strong performance from Quarter 1 2015.

On the other side of the coin it was always going to be a difficult spell for manufacturing.

The 0.4% monthly decrease in manufacturing output was widespread with falls in 8 of the 13 subsectors; the largest downward contribution came from a 5.1% fall in basic pharmaceutical products.

The September numbers above do at least have the caveat that pharmaceutical products do not run to a monthly cycle and have wide swings. In fact if you will indulge me for a hundredth of s decimal point the UK fall in industrial production in September was the pharmaceutical industry.

I am afraid that there is no other way of describing this than calling it a depression.

Manufacturing output in the UK remained 3.2% lower in Quarter 3 (July to Sept) 2019 than the pre-downturn peak for Quarter 1 (Jan to Mar) 2008.

Comment

In terms of the Goldilocks the UK GDP story is of lukewarm porridge. We have some growth but not much as we edge forwards. The pattern is erratic on a quarterly basis ( 0.6%,-0.2%,0.3%) providing yet more evidence that the introduction of monthly GDP numbers was a mistake. If we switch to Moodys well we continue to be able to inflate our debt away.

Nominal GDP increased by 0.5% in Quarter 3 2019, down from 0.7% in Quarter 2 (Apr to June) 2019.

But as ever there are caveats and here is one from an area that did really rather well.

In Quarter 3 2019, the UK trade deficit narrowed to 1.2% of nominal GDP……..The narrowing of the trade deficit largely reflects strong export volume growth of 5.2% in Quarter 3 2019. Trade in goods exports grew 5.0%, reflecting increases in machinery and transport equipment and chemicals, while trade in services exports grew 5.3%; this was a result of “other business services”.

But this does not count as it goes in the expenditure and not the output version of GDP so we need to cross our fingers that it will be picked up there. When the numbers are tallied the income and expenditure versions are usually aligned with the output one which kind of begs the question of why have them?

Also there is this.

education, 68.9% public sector and 31.1% market sector

human health activities, 85.4% public sector and 14.6% market sector

residential care activities, 51.1% public sector and 48.9% market sector

social work activities without accommodation, 49.6% public sector and 50.4% market sector

Best of luck with really knowing what has gone on in those areas as government collides with the private-sector. There are plenty of issues here.

Finally there was this highlighted by the Bank of England.

The Committee discussed the recent Blue Book revisions to estimates of the household saving ratio. The
level of the saving ratio since the start of 2017 had been revised up by 1.4 percentage points on average to
reach just under 7% in 2019 Q2, primarily reflecting new HMRC data on self-employment income.

The truth is that we need a touch of humility as we know a fair bit less than we often think we do.

Podcast

 

 

 

 

 

 

 

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

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

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

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

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

What about now?

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

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

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

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

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

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

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

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

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

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

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

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

Problems?

According to the ESM the banks remain a major issue.

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

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

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

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

However not all ECB policies are welcomed by the banks.

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

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

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

Comment

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

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

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

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

 

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

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

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

What could go wrong?

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

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

 

Is Hong Kong in a recession or a depression now?

Some days an item of news just reaches out and grabs you and this morning it has come from the increasingly troubled Hong Kong. We knew that there would be economic consequences from the political protests there but maybe not this much.

The Census and Statistics Department (C&SD) released today (October 31) the advance estimates on Gross Domestic Product (GDP) for the third quarter of 2019.     According to the advance estimates, GDP decreased by 2.9% in real terms in the third quarter of 2019 from a year earlier, compared with the increase of 0.4% in the second quarter of 2019.

The commentary from a government spokesman confirmed various details.

marking the first year-on-year contraction for an individual quarter since the Great Recession of 2009, and also much weaker than the mild growth of 0.6% and 0.4% in the first and second quarters respectively. For the first three quarters as a whole, the economy contracted by 0.7% over a year earlier. On a seasonally adjusted quarter-to-quarter comparison, the fall in real GDP widened to 3.2% in the third quarter from 0.5% in the preceding quarter, indicating that the Hong Kong economy has entered a technical recession.

The concept of recession first switched to technical recession meaning a minor one ( say -0.1% or -0.2% GDP growth) but now seems to encompass what is a large fall. Time for Kylie again I guess.

I’m spinning around
Move outta my way

A clue to the change is the way that the year so far has fallen by 0.7% in GDP terms. If we look back we see that annual GDP growth of 3.8% slowed a little to 3% from 2017 to 18. But the quarterly numbers have been falling for a while. In annual terms GDP growth was 2.8% in the third quarter of 2018 but then only 1.2% in the last quarter and then going 0.6%, 0.4% and now -2.9% this year.

The Details

If we take the advice of Kylie and start breaking it down we see this.

Gross domestic fixed capital formation decreased significantly by 16.3% in real terms in the third quarter of 2019 from a year earlier, compared with the decrease of 10.8% in the second quarter.

Investment has taken quite a dive as this time last year it was increasing at an annual rate of 8.6%. Indeed the private-sector full stop took a fair hammering.

private consumption expenditure decreased by 3.5% in real terms in the third quarter of 2019 from a year earlier, as against the 1.3% growth in the second quarter.

The one bright spot was government expenditure.

     Government consumption expenditure measured in national accounts terms grew by 5.3% in real terms in the third quarter of 2019 over a year earlier, after the increase of 4.0% in the second quarter.

Is it too cheeky to suggest that at least some of this will be police overtime? So far it is not increased unemployment payouts

     The number of unemployed persons (not seasonally adjusted) in July – September 2019 was 120 300, about the same as that in June – August 2019 (120 600). The number of underemployed persons in July – September 2019 was 41 500, also about the same as that in June – August 2019 (41 000).

The flickers of acknowledgement of the present troubles were in the employment not the unemployment numbers.

 Total employment decreased by around 8 200 from 3 863 600 in June – August 2019 to 3 855 400 in July – September 2019. Over the same period, the labour force also decreased by around 8 500 from 3 984 200 to 3 975 700.

Also does the labour force fall suggest some emigration?

However you spin it the commentary is grim.

As the weakening economic conditions dampened consumer sentiment, and large-scale demonstrations caused severe disruptions to the retail, catering and other consumption-related sectors, private consumption expenditure recorded its first year-on-year decline in more than ten years. The fall in overall investment expenditure steepened amid sagging economic confidence.

Trade

This added to the woes as you can see below.

Over the same period, total exports of goods measured in national accounts terms recorded a decrease of 7.0% in real terms from a year earlier, compared with the decrease of 5.4% in the second quarter. Imports of goods measured in national accounts terms fell by 11.1% in real terms in the third quarter of 2019, compared with the decline of 6.7% in the second quarter.

Ironically this looks like a boost to GDP from a tale of woe. This is because the fall in imports ( a boost to GDP) is larger than the fall in exports. This situation reverses somewhat in the services sector presumably mostly due to lower tourism revenue.

Exports of services dropped by 13.7% in real terms in the third quarter of 2019 from a year earlier, following the decline of 1.1% in the second quarter. Imports of services decreased by 3.8% in real terms in the third quarter of 2019, as against the increase of 1.3% in the second quarter.

Looking Ahead

That was then and this is now so what can we expect?

Looking ahead, with global economic growth expected to remain soft in the near term, Hong Kong’s exports are unlikely to show any visible improvement. Moreover, as the adverse impacts of the local social incidents have yet to show signs of abating, private consumption and investment sentiment will continue to be affected. The Hong Kong economy will still face notable downward pressures in the rest of the year.

If we look at the results from the latest official quarterly business survey and note what happened in the third quarter then we get a proper Halloween style chill down the spine.

 For all surveyed sectors taken together, the proportion of respondents expecting their business situation to be worse (32%) in Q4 2019 over Q3 2019 is significantly higher than that expecting it to be better (7%).  When compared with the results of the Q3 2019 survey round, the proportion of respondents expecting a worse business situation in Q4 2019 as compared with the preceding quarter has increased to 32%, against the corresponding proportion of 17% in Q3 2019.

According to the South China Morning Post then prospects for China continue to weaken.

The manufacturing purchasing managers’ index (PMI), released by the National Bureau of Statistics (NBS) on Thursday, stood at 49.3 in October, down from 49.8  in September.  The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – came in at 52.8 in October, below analysts’ expectations for a 53.6 reading. The figure was also down from September’s 53.7, dropping to its lowest level since February 2016.

As to Japan there seems to be little hope as the Bank of Japan just seems lost at sea now.

As for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

Comment

As you can see the situation in Hing Kong is clearly recessionary and the size of it combined with the fact that it looks set to continue means it is looks depressionary as well. There has been a monetary respone but this of course only represents maintenance of the US Dollar peg.

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) that the Base Rate was adjusted downward by 25 basis points to 2% with immediate effect according to a pre-set formula.  The decrease in the Base Rate follows the 25-basis point downward shift in the target range for the US federal funds rate on 30 October (US time).

As to the guide provided by the narrow money supply there is this.

The seasonally-adjusted Hong Kong dollar M1 decreased by 0.5% in September and by 3.4% from a year earlier, reflecting in part investment-related activities.

However you spin it people are switching from Hong Kong Dollars to other currencies.

The Investing Channel

 

Portugal has house price growth of 10% but apparently negative inflation!

It is time to turn our telescope towards Portugal as we have not looked at it for a while and signals abound that the times they are a-changing. Let me give you an example of that from this morning.

“The eurozone economy ground to a halt in
September, the PMI surveys painting the darkest
picture since the current period of expansion began
in mid-2013. GDP looks set to rise by 0.1% at best
in the third quarter, with signs of further momentum
being lost as we head into the fourth quarter,
meaning the risk of recession is now very real.” ( IHS Markit )

Actually those surveys were already projecting growth at 0.1% so I am not sure how it stays there with the reading falling from 51.9 to 50.1. Perhaps it is a refreshing acknowledgement that the survey is much blunter than using decimal points. Also ther are some grim portents looking ahead.

Export trade remained a key source of new
business weakness as highlighted by another
monthly decline in overall new export orders.
According to the PMI figures, exports have been
falling throughout the past year and September’s
deterioration was the sharpest since composite
export data were first available just over five years
ago.

There is a nuance here in that the Euro area PMI survey is for the larger economies so not Portugal. But it does provide a background as well as likely trend. Also I have looked at the export trend in particular as this is an issue for Portugal on several fronts. If we look back in time we see that its regular visits to the International Monetary Fund or IMF for help and aid have been driven by trade deficits. Next if we move forwards to the Euro area crisis from around 2011/12 one of the policies applied was called “internal devaluation” which was to make the economy more competitive in trade terms. Oh and as an aside “internal devaluation”  essentially means lower real wages, it just sounds better.

This feeds into a current feature of the Portuguese economy which has been the growth of the motor sector which accounts for around 4% of economic output or GDP. This has been a trend in that against the stereotype car production in the Euro area has headed south into the Iberian peninsular. Portugal has benefited from this with the flagship being the large Volkswagen operation there. In January Caixa Bank did some research on the sector showing its significance.

 in the latter part of 2018, exports of the automotive industry reached 13.0% of the total exports of goods (the highest figure since the end of 2004) and 3.7% of GDP (an all-time high). In addition, as can be seen in the second chart, in October 2018 the sector’s exports registered a growth of 39.4% year-on-year (reaching 7.5 billion euros for the 12-month cumulative total).

This has been a good news story but we now look at it with not a little trepidation as it was only yesterday we looked at manufacturing problems which have been driven by the motor sector. The reputation of Volkswagen is not what it was either.

Trade Figures

If we look at the official data we see this.

In July 2019, exports and imports of goods recorded nominal year-on-year growth rates of +1.3% and +7.9%
respectively (-8.3% and -3.7% in the same order, in June 2019). The emphasis was on the increase of 27.9% in
imports of Transport equipment, mainly Other transport equipment (mostly Airplanes), contributing by +4.2 p.p. to the total year-on-year rate of change.

If we take out what was presumably an aircraft purchase by TAP we see that import growth was at 3.7% well above export growth and not only was there a deficit but it is growing.

The trade balance deficit amounted to EUR 1,751 million in July 2019, increasing by EUR 452 million when compared
to the same month of 2018.

So we see a troubling picture. But we can add to this as monthly figures are unreliable in this area and we are not allowing for a strength of Portugal which is tourism so let us widen our search.

The goods account deficit increased by €2,028 million and the services account surplus declined by €137 million year on year.

In the first seven months of the year, exports of goods and services grew by 3% (2.2% in goods and 4.6% in services) and imports rose by 7.4% (6.7% in goods and 10.8% in services). ( Bank of Portugal )

As you can see the general picture remains the same of a rising deficit although the nuance changes as the export picture gets better. It looks as though tourism has helped but has been swamped by imports of unspecified services.

Before I move on the motor industry has more than a few similarities with the UK.

Lastly, despite the buoyancy of exports in the automotive sector as a whole, in net terms the sector’s trade balance remains negative. However, this situation has improved considerably in the last year: in October 2018, the balance of the automotive sector stood at –1.3 billion euros, compared to –2.7 billion euros in October 2017.  ( Caixa Bank)

Production

On Monday we were updated but as you can see there is little detail.

Industrial Production year-on-year change rate was -4.8% in August (-2.4% in the previous month). Manufacturing
Industry year-on-year change rate was -1.7% (-0.4% in July).

According to Trading Economics we do have some car production data for the month before.

Car production in Portugal decreased 4.2 percent year-on-year to 20,969 units in July 2019.

We do have the official view on September though for manufacturing overall.

In Manufacturing Industry, the confidence indicator decreased in September, reversing the increase observed in
August. The evolution of the indicator reflected the negative contribution of the balances of the opinions on global
demand and on the evolution of stocks of finished products, while the opinions on the production perspectives
stabilized.

Comment

Before this new phase there was much to like about the economic performance of Portugal. The cold recessionary and indeed depressionary winds of the Euro area crisis had been replaced by some badly needed economic growth. This meant that the unemployment situation has improved considerably from the crisis highs.

The provisional unemployment rate estimate for August 2019 was 6.2% and decreased by 0.2 pp from the previous month.

Indeed the past was revised higher still last month.

Gross Domestic Product (GDP) grew 3.5% in real terms in 2017, where the high growth of Investment stands out
(11.9%). In 2018, GDP presented a growth rate of 2.4% in real terms, where Investment remained as the most
dynamic component (growth rate of 6.2%).

So the number I looked at back on the 9th of May will be better than this now.

In 2018 real GDP was 1.2% higher than in 2008…

So far the official data still looks good.

In comparison with the first quarter of 2019, GDP increased by 0.5% in real terms, maintaining the growth rate
recorded in the previous quarter.

The fear though is that the growth phase was driven higher by the Euro boom and ECB policy and to add to the trade fears above there is this.

The House Price Index (HPI) increased 10.1% in the 2nd quarter of 2019, when compared to the same period of 2018, 0.9 percentage point (pp) more than in the previous quarter………On a quarter-to-quarter basis, the HPI grew 3.2%.

This leaves me with two thoughts for you. Firstly Portuguese first time buyers must wonder how there can be no inflation?

The estimate of the Portuguese Harmonised Index of Consumer Prices (HICP) annual rate of change was -0.3% (-0.1% in August).

Next that it was overheating issues that have led to my long-running theme for Portugal that economic growth does not average more than 1% for long. Can anybody spot any signs of that?

The Investing Channel

Are the UK trade numbers right or UK GDP?

As we look around us in the UK we see that the international environment has seen better days. One way of representing that has been the six central banks which have cut interest-rates this week as Serbia and the Phillipines yesterday joined the three we looked at on Tuesday. Those of you who have spotted I have mentioned only five, well as I do not think I have mentioned Peru before I thought it merited a proper mention.

The Board of Directors of the Central Reserve Bank of Peru (BCRP) decided to cut the reference
rate from 2.75 to 2.50 percent, thereby loosening the monetary policy stance.

Meanwhile it would appear that beds are burning in a land down under as look at this from Dr.Lowe of the Reserve Bank of Australia.

Things are going well.

He believes the economy may be at a positive “turning point”, as RBA rate cuts, tax cuts, a lower currency and infrastructure spending boost demand

So well in fact that he is considering cutting interest-rates to zero and started some QE bond purchases.

It is “possible” the RBA is forced to cut rates to near zero if other central banks do and the world economy has a serious downturn

The RBA is exploring other unconventional stimulus measures such as buying government bonds to drive down long-term interest rates if it does run out of cash rate cutting power. ( Australian Financial Review)

I have reported on this type of central banking Newspeak many times before where we get deflection ( optimism) but then the reality of what they really intend to do. Also if we note that the ten-year yield in Australia is already a mere 0.96% QE looks even more of a paper tiger than usual.

Also rather ominously bad production figures from Germany earlier this week were followed  this morning by this from France.

In June 2019, output slipped back sharply in the manufacturing industry (−2.2%, after +1.6%), as well as in the whole industry (−2.3%, after +2.0%)…….Over the second quarter of 2019, manufacturing output declined (−0.3%). Output increased slightly in the whole industry (+0.3%).

The UK

This meant that the mood music was right to be downbeat as we waited for the economic growth data.

UK gross domestic product (GDP) in volume terms was estimated to have fallen by 0.2% in Quarter 2 (Apr to June) 2019, having grown by 0.5% in the first quarter of the year.

This contrasts with what the Bank of England told us a week ago.

After growing by 0.5% in 2019 Q1, GDP is expected to have been flat in Q2, slightly weaker than anticipated in May.

That in itself was a reduction on its initial forecast of 0.2% growth so as you can see it turned out that net we ended up some 0.4% lower.

What happened?

As we have observed in France and Germany the action has been in production.

The production sector contracted by 1.4% in Quarter 2 2019, providing the largest downward contribution to GDP growth; the fall was driven by a sharp decline in manufacturing output, reflective of increased volatility in the first half of 2019.

Ouch! As we look for more detail there is this.

The quarterly fall in manufacturing of 1.4% is the strongest fall since Quarter 1 2009, due mainly to widespread weakness with 10 of the 13 subsectors decreasing; led by strong decreases from transport equipment (5.2%), chemicals and chemical products (6.2%) and basic metals (2.4%).

The transport numbers are no surprise in this environment but the chemical sector is more so. In terms of perspective this gives some food for thought.

To add further context to the volatility in growth during Quarter 1 2019 and Quarter 2 2019, the six months to June 2019 compared to the six months to December 2018 results in 0.0% growth in both the Index of Production and Index of Manufacturing.

So whilst we have had a Grand Old Duke of York half-year due to some Brexit stockpiling and unwinding the reality is that growth has disappeared. The credit crunch era pattern is now this.

Production and manufacturing output have risen since then but remain 7.1% and 3.4% lower respectively for June 2019 than the pre-downturn peak in February 2008.

Whilst we should not let a bad patch get us too down we should also wonder how and maybe if we will ever get back to that previous peak.

What did grow then?

Such growth as we got came from the services sector.

Services output increased by 0.1% in Quarter 2 (Apr to June) 2019 compared with Quarter 1 (Jan to Mar) 2019, following growth of 0.4% for Quarter 1 2019.

Not much although it looked better in annual terms.

In the three months to June 2019, services output increased by 1.6% compared with the three months ending June 2018.

Thus my theme that we are shifting ever more towards the services sector continues and they must be 80% of our economy by now.

Are we headed for recession?

Probably not if the monthly GDP figures are any guide. There is a danger because we have just seen a quarterly contraction but the monthly numbers suggest not. This is because the decline was in April when it fell by 0.5% on a monthly basis, followed by a 0.2% rise in May and then this.

Monthly GDP growth was flat in June 2019,

So we do not have much growth but we have a little and this is after downward revisions for April and May.

Trade

You may be surprised to read that this did really well.

The total trade deficit (goods and services) narrowed £16.0 billion to £4.3 billion in Quarter 2 (Apr to June) 2019, due largely to falling imports of goods.

Should this not lead to GDP rising? Well it is more complicated than that on two main counts. But let us try to get a better handle on the numbers actually going into the GDP numbers.

Excluding unspecified goods (including non-monetary gold), the trade deficit narrowed £6.2 billion to £4.0 billion in Quarter 2 2019, as imports from EU countries fell following sharp rises in Quarter 1 2019.

Even so we did better and on a monthly basis got near to balance or god forbid even a surplus.

Excluding unspecified goods (including non-monetary gold), the total trade balance remained in deficit at £0.6 billion in June 2019;

Now please forget what you were taught at school or maybe university as these are not in the output version of GDP they are in the expenditure version. So for now they get ignored! Time for me to remind you of one of Elton John’s albums.

Don’t shoot me I am only the piano player.

Okay let’s continue. The expenditure version has a problem which is this is an up and we know consumption is rising and to some extent government expenditure. So where’s the down?

GCF – which includes gross fixed capital formation (GFCF), changes in inventories and acquisitions less disposal of valuables – made a negative contribution of 4.01 percentage points to overall GDP growth in Quarter 2 2019. …………In Quarter 2 2019, changes in inventories (excluding both balancing and alignment adjustments) subtracted 2.24 percentage points from GDP growth.

 

Comment

As the above section was heavy going let me offer you some light relief courtesy of the Bank of England.

 the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

As Newt in the film Aliens points out “It wont make any difference” but central bankers are pack animals.

If we return to the GDP data then these numbers are a disappointment but far from a shock in the current environment. Also as I have shown there are more than a few reasons for doubt because of the current situation with trade and inventories, The water is even muddier than usual.

Or to put it another way I have already seen a barrage of tweets and the like about this being Brexit and so on. Us being better or worse than our peers. So let me help out by comparing annual growth rates.

When compared with the same quarter a year ago, UK GDP increased by 1.2% in Quarter 2 2019……..Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area and
by 1.3% in the EU28 in the second quarter of 2019.

All within the margin of error…..

 

 

 

 

UK GDP continues to grow albeit not by much

Today brings us to what is called a theme day for the UK economy as we receive a raft of data. Too much data in fact for one day as we mull whether a latter day Sir Humphrey Appleby took the decision, especially as it is the usually poor trade data which tends to get ignored. Speaking of being ignored then one set of eyes at least seem to be elsewhere at the moment. From Euronews.

Germany and France agreed some time ago to support Bank of England Governor Mark Carney to be the new head of the International Monetary Fund, the Frankfurter Allgemeine Zeitung reported on Tuesday.

 

Without citing a source, the daily said Berlin and Paris had originally agreed to support Carney with a view to him taking over at the IMF in 2021, but this had been moved forward due to incumbent IMF chief Christine Lagarde’s forthcoming move to the European Central Bank and Carney was available from January.

 

A French official said at the weekend that, while France was aware support was growing for the Canadian-British-Irish citizen, there was concern that appointing “basically a Canadian” would set a precedent for a job that has traditionally been held by a European.

Regular readers will be aware that I have long argued that this has been Governor Carney’s plan all along. The Bank of England job was a mere stepping stone on the way to greater things, from his point of view. I also note that he is now being described as a Canadian-British-Irish which makes me think that either he could find no French ancestry or that it has gone out of fashion at the IMF. Oh and the story has been officially denied this morning which pretty much nails it as true.

Meanwhile fans of the science fiction series The Outer Limits will enjoy the new economics version that Nomura seem to be running.

Nomura pushes back next BoE rate hike forecast to May 2020 from Nov 2019… ( @BruceReuters )

The UK Pound £

This has been depreciating since the 3rd of May when the effective or trade-weighted index was 79.8 as opposed to the latest 75.9. So the UK economy has been seeing something of a boost which is equivalent according to the old Bank of England rule of thumb to just under a 0.75% cut in Bank Rate.

So if Governor Carney believed his own Forward Guidance he could raise interest-rates in response to 1% and still have an economic boost from the currency decline.

UK GDP

The news was good if we allow for the fact that we are in troubled times.

Monthly gross domestic product (GDP) growth was 0.3% in May 2019, following negative growth in April 2019……UK GDP grew by 0.3% in the three months to May 2019.

Actually the 0.3% theme continued as both UK Production and Services grew by that in the three months to May. Construction was the odd one out as it did not grow at all which does coincide to some extent with my Battersea Dogs Home to Vauxhall crane count which after peaking at 49 from a start of 25 has dipped back to 47.

There were a couple of points of detail in the numbers so let me start with the month of May.

Within manufacturing over half of the subsectors fell, so overall growth is due to transport equipment, which rose by 12.4%; this is the strongest rise since April 2005 and is a partial bounceback from the fall of 13.8% during April 2019.

Thus on a monthly basis we are boosted by the sector which is in recession as we mull the shambles of the Brexit deadline which came at the end of May in more ways than one. Also it is a sector which has seen some good news since those figures. From the BBC yesterday.

BMW has given a boost to the UK car industry by confirming that the production of its new electric Mini will start in Cowley in November.

Deliveries of the brand’s first fully electric car will start in March 2020.

This adds to the boost provided by Jaguar Land Rover last week.

Jaguar Land Rover (JLR) is investing hundreds of millions of pounds to build a range of electric vehicles at its Castle Bromwich plant in Birmingham.

Initially the plant will produce an electric version of the Jaguar XJ.

So it is an ever-changing picture which perhaps some hopes looking ahead after what has been a rough run. Oh and we sometimes discuss robots as we find out where more than a few are.

The state-of-the art automated Cowley plant has more than 1,000 robots on the assembly line

Moving to the latest three monthly data there was this in the report on the services sector.

The financial and insurance activities sector fell again in the latest three months; it decreased by 0.7% and contributed negative 0.06 percentage points. This sector has not seen positive growth since the three months to April 2017, the longest period on record without a rise.

This is something that may attract the attention of the Bank of England where the concept of “The Precious” shrinking for two years in a row will set off an alarm or two. Of course that is before this week’s news of job losses at Deutsche Bank London which will further depress the numbers which already reduced GDP by 0.05%.

Oh and it would appear that the film industry continues to be on something of a tear in the UK.

The information and communication sector also saw a large rise in the latest three months. The sector increased by 1.1% and contributed 0.09 percentage points. There was widespread growth within the sector, with the motion pictures, information services activities and computer programming industries all contributing to the rise.

If we look at the specific category which includes TV and music we see that the index which was set at 100 in 2016 is at 139.4 and it grew by 6.4% in the year to May. So please be nice to any luvvies you may meet!

Trade

There was some better news here.

The total trade deficit (goods and services) narrowed £4.6 billion to £12.6 billion in the three months to May 2019, due mainly to the trade in goods deficit narrowing £4.6 billion to £39.7 billion.

I mean better news in relative terms because switching to an absolute theme we saw another deficit in what is an extremely long-running series. Part of it was due to likely stockpiling to cover the March Brexit deadline.

Falling imports of machinery and transport equipment, and chemicals were the main drivers in the narrowing of the trade in goods deficit in the three months to May 2019.

It is time for my regular reminder that we get lots of detail on trade in good including sectoral and geographical detail but for services we get this.

The trade in services surplus remained flat at £27.1 billion in the three months to May 2019. Exports of services increased £0.4 billion to £74.0 billion, while imports also increased £0.4 billion to £46.9 billion.

Er that’s it…..

Comment

So it turns out that May was not too bad which is a bit awkward for the Markit PMI which at 50.7 suggested no growth. We wait to see of they were right about this.

The June reading rounds off a second quarter for which the
surveys point to a 0.1% contraction of GDP.

Today’s March revision from -0.1% to 0.1% reminds us that the numbers are however not as accurate as many try to have us believe.

So the picture is complex and going forwards we will be receiving a boost from two factors. The first is the lower value of the UK Pound £ and the second is the impact of lower Gilt yields. They have rebounded from the lows but even so the ten-year Gilt yield is the same as the 0.75% Bank Rate. I do expect this to filter into mortgages although the effect so far has been disappointing. From Mortgage Introducer about Barclays.

For residential purchases and remortgages a 2-year fix at 60% loan-to-value (LTV) with a £299 fee will see its rate cut from 1.59% to 1.55%

At 75% LTV two mortgages, both with a £999 fee, will have their rates reduced, a 1.52% 2-year fix will decrease to 1.48% and a 1.88% 5-year fix will be cut to 1.83%.

Along the way I spotted a what could go wrong moment?

Danny Belton, head of lender relationships, Legal & General Mortgage Club, said: “The Kensington of today has a refreshing approach when it comes to understanding customers.

“Through this new lens, and with the use of data, they are able to offer great products that really meet the needs of those customers who want to borrow larger amounts and higher LTVs.