Trade Wars what are they good for?

This week trade is in the news mostly because of the Donald and his policy of America First. This has involved looking to take jobs back to America which is interesting when apparently the jobs situation is so good.

Our economy is perhaps BETTER than it has ever been. Companies doing really well, and moving back to America, and jobs numbers are the best in 44 years. ( @realDonaldTrump )

This has involved various threats over trade such as the NAFTA agreement primarily with Canada and Mexico and of course who can think of Mexico without mulling the plan to put a bit more than another brick in the wall? Back in March there was the Trans Pacific Partnership or TPP. From Politico.

While President Donald Trump announced steel and aluminum tariffs Thursday, officials from several of the United States’ closest allies were 5,000 miles away in Santiago, Chile, signing a major free-trade deal that the U.S. had negotiated — and then walked away from.

The steel and aluminium tariffs were an attempt to deal with China a subject to which President Trump has returned only recently. From the Financial Times.

Equities sold off and havens firmed on Tuesday after Donald Trump ordered officials to draft plans for tariffs on a further $200bn in Chinese imports should Beijing not abandon plans to retaliate against $50bn in US duties on imports announced last week.

According to the Peterson Institute there has been a shift in the composition of the original US tariff plan for China.

 Overall, 95 percent of the products are intermediate inputs or capital equipment. Relative to the initial list proposed by the Office of the US Trade Representative on April 3, 2018, coverage of intermediate inputs has been expanded considerably ……….Top added products are semiconductors ($3.6 billion) and plastics ($2.2 billion), as well as other intermediate inputs and capital equipment. Semiconductors are found in consumer products used in everyday life such as televisions, personal computers, smartphones, and automobiles.

The reason this is significant is that the world has moved on from even the “just in time” manufacturing model with so many parts be in sourced abroad even in what you might think are domestic products. This means that supply chains are often complex and what seems minor can turn out to be a big deal. After all what use are brakes without brake pads?

Thinking ahead

Whilst currently China is in the sights of President Trump this mornings news from the ECB seems likely to eventually get his attention.

In April 2018 the euro area current account recorded a surplus of €28.4 billion.

Which means this.

The 12-month cumulated current account for the period ending in April 2018 recorded a surplus of €413.7 billion (3.7% of euro area GDP), compared with €361.3 billion (3.3% of euro area GDP) in the 12 months to April 2017.

 

 

So the Euro area has a big current account surplus and it is growing.

This development was due to increases in the surpluses for services (from €46.1 billion to €106.1 billion) and goods (from €347.2 billion to €353.9 billion

There is plenty for the Donald to get his teeth into there and let’s face it the main player here is Germany with its trade surpluses.

Trade what is it good for?

International trade brings a variety of gains. At the simplest level it is access to goods and resources that are unavailable in a particular country. Perhaps the clearest example of that is Japan which has few natural resources and would be able to have little economic activity if it could not import them. That leads to the next part which is the ability to buy better goods and services which if we stick with the Japanese theme was illustrated by the way the UK bought so many of their cars. Of course this has moved on with Japanese manufacturers now making cars in the UK which shows how complex these issues can be.

Also the provision of larger markets will allow some producers to exist at all and will put pressure on them in terms of price and quality. Thus in a nutshell we end up with more and better goods and services. It is on these roads that trade boosts world economic activity and it is generally true that world trade growth exceeds world economic activity of GDP (Gross Domestic Product) growth.

Since the Second World War, the
volume of world merchandise trade
has tended to grow about 1.5 times
faster than world GDP, although in the
1990s it grew more than twice as fast. ( World Trade Organisation)

Although like in so many other areas things are not what they were.

However, in the aftermath of the global
financial crisis the ratio of trade growth
to GDP growth has fallen to around 1:1.

Although last year was a good year for trade according to the WTO.

World merchandise trade
volume grew by 4.7 per
cent in 2017 after just
1.8 per cent growth
in 2016.

How Much?

Trying to specify the gains above is far from easy. In March there was a paper from the NBER which had a go.

About 8 cents out of every dollar spent in the United States is spent on imports………..The estimates of gains from trade for the US economy that we review range from 2 to 8 percent of GDP.

Actually there were further gains too.

When the researchers adjust by the fact that domestic production also uses imported intermediate goods — say, German-made transmissions incorporated into U.S.-made cars — based on data in the World Input-Output Database, they conclude that the U.S. import share is 11.4 percent.

So we move on not enormously the wiser as we note that we know much less than we might wish or like. Along the way we are reminded that whilst the US is an enormous factor in world trade in percentage terms it is a relatively insular economy although that is to some extent driven by how large its economy is in the first place.

Any mention of numbers needs to come with a warning as trade statistics are unreliable and pretty universally wrong. Countries disagree with each other regularly about bilateral trade and the numbers for the growing services sector are woeful.

Comment

This is one of the few economic sectors where theory is on a sound footing when it meets reality. We all benefit in myriad ways from trade as so much in modern life is dependent on it. It has enriched us all. But the story is also nuanced as we do not live in a few trade nirvana, For example countries intervene as highlighted by the World Trade Organisation in its annual report.

Other issues raised by members
included China’s lack of timely and
complete notifications on subsidies
and state-trading enterprises,

That is pretty neutral if we consider the way China has driven prices down in some areas to wipe out much competition leading to control of such markets and higher prices down the road. There were plenty of tariffs and trade barriers long before the Donald became US President. Also Germany locked in a comparative trade advantage for itself when it joined the Euro especially if we use the Swiss Franc as a proxy for how a Deutschmark would have traded ( soared) post credit crunch.

Also there is the issue of where the trade benefits go? As this from NBC highlights there were questions all along about the Trans Pacific Partnership.

These included labor rights rules unions said were toothless, rules that could have delayed generics and lead to higher drug prices, and expanded international copyright protection.

This leads us back to the issue of labour struggling (wages) but capital doing rather well in the QE era. Or in another form how Ireland has had economic success but also grotesquely distorted some forms of economic activity via its membership of the European Union and low and in some cases no corporate taxes. Who would have thought a country would not want to levy taxes on Apple? After all with cash reserves of US $285.1 billion and rising it can pay.

So the rhetoric and actions of the Donald does raise fears of trade wars and if it goes further the competitive devaluations of the 1920s. But it is also true that there are genuine issues at play which get hidden in the melee a bit like Harry Kane after his first goal last night.

 

 

 

 

 

 

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The UK joins France and Germany with falling production in April

Today brings us a raft of new detail on the UK economy and as it is for April we get the beginnings of some insight as to whether the UK economy picked up after the malaise of only 0.1% GDP ( Gross Domestic Product) growth in the first quarter of this year. According to Markit PMI business survey we have in the first two months of this quarter but of course surveys are one thing and official data is another.

So far, the three PMI surveys indicate that GDP looks set to rise by 0.3-0.4% in the second quarter.

As for the manufacturing sector the same set of surveys has told us this.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®
) rose to 54.4, up slightly from April’s
17-month low of 53.9, to signal growth for the
twenty-second straight month.

So we see that April can be looked at almost any way you like. Manufacturing has been in a better phase for a while now partly in response to the post EU leave vote fall in the UK Pound £. According to the survey we are still growing but April was the weakest month in this phase although some caution is required as I doubt whether a survey that can be in the wrong direction is accurate to anything like 0.5.

Of course the attention of Mark Carney and the Bank of England will be on a sector that it considers as and maybe more vital. From the Local Government Association.

Councils’ ability to replace homes sold under Right to Buy (RTB) will be all but eliminated within five years without major reform of the scheme, new analysis from the Local Government association reveals today.

The detail of the numbers is below.

The LGA said that, in the last six years, more than 60,000 homes have been sold off under the scheme at a price which is, on average, half the market rate, leaving councils with enough funding to build or buy just 14,000 new homes to replace them.

We sometimes discuss on here that the ultimate end of the house price friendly policies of the UK establishment will be to give people money to buy houses. Well in many ways Right To Buy does just that as those who have qualified buy on average at half-price. Also we see that one of the other supposed aims of the scheme which was to replace the property sold with new builds is failing. I guess we should not be surprised as pretty much every government plan for new builds fails.

Production and Manufacturing

These were poor numbers as you can see below.

In April 2018, total production was estimated to have decreased by 0.8% compared with March 2018, led by a fall of 1.4% in manufacturing and supported by falls in energy supply (2.0%), and water and waste (1.8%).

The fall in energy supply is predictable after the cold weather of March but the manufacturing drop much less so. If we review the Markit survey it was right about a decline but in predicting growth had the direction wrong. On a monthly basis the manufacturing fall was highest in metal products and machinery which both fell by more than 3% but the falls were widespread.

with 9 of the 13 sub-sectors falling;

If we step back to the quarterly data we see that it has seen better times as well.

In the three months to April 2018, the Index of Production increased by 0.3% compared with the three months to January 2018, due primarily to a rise of 3.2% in energy supply; this was supported by a rise in mining and quarrying of 4.3%………..The three-monthly fall to April 2018 in manufacturing of 0.5% is the largest fall since May 2017, due mainly to decreases in electrical equipment (9.4%), and basic metals and metal products (1.8%).

So on a quarterly basis we have some production growth but not much whereas manufacturing which was recently a star of our economy has lost its shine and declined. There has been a drop in trade which has impacted here.

The fall in manufacturing is supported by widespread weakness throughout the sector due to a reduction in the growth rate of both export and domestic turnover.

Actually for once the production and trade figures seem to be in concert.

Goods exports fell £3.1 billion, due mainly to falls in exports of machinery, pharmaceuticals and aircraft, while services exports also fell £2.5 billion in the three months to April 2018…….Falling volumes was the main reason for the declines in exports of machinery, pharmaceuticals and aircraft in the three months to April 2018 as price movements were relatively small.

That is welcome although the cause is not! But we see a signs of a slowing from the better trend which still looks good on an annual comparison.

In the three months to April 2018, the Index of Production increased by 2.3% compared with the same three months to April 2017, due mainly to a rise of 2.3% in manufacturing.

If we compare ourselves to France we see that it’s manufacturing production rose by 1.9% over the same period. However whilst we are ahead it is clear that our trajectory is worsening and we look set to be behind unless there is quite a swing in May. As to the Markit manufacturing PMI then its performance in the latest quarter has been so poor it has been in the wrong direction.

As we move on let me leave you with this as a possible factor at play in April.

 It should also be noted that survey response was comparatively high this month and notable weakness was due mainly to the cumulative impact of large businesses reporting decreased turnover.

Trade

We have already looked at the decline in good exports but in a way this was even more troubling.

 services exports also fell £2.5 billion in the three months to April 2018.

Regular readers will be aware that I have a theme that considering how important the services sector is to the UK economy we have very little detail about its impact on trade. As an example a 28 page statistical bulletin I read had only one page on services. I am reminded of this as this latest fall comes after our statisticians had upgraded the numbers as you see the numbers are mostly estimates.

So not a good April but the annual picture remains better.

The UK total trade deficit (goods and services) narrowed £6.7 billion to £30.8 billion in the 12 months to April 2018. An improvement to the trade in services balance was the main factor, as the trade surplus the UK has in services widened £9.9 billion to £108.7 billion. The trade in goods deficit worsened, widening £3.2 billion to £139.5 billion over the same period.

Construction

This was yet again a wild card if consistency can be that.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

The consistency comes from yet another fall whereas the wild card element is that it got worse on this measure in spite of a small increase in April

Comment

There is a lot to consider here today but let us start with manufacturing where there are three factors at play. The money supply numbers have suggested a slow down and it would seem that they have been accurate. Next we have the issue that exports are weak and of course this is into a Euro area economy which is also slowing as for example industrial production fell by 0.5% in France and 1% in Germany in April on a monthly basis. Some are suggesting it is an early example of the UK being dropped out of European supply chains but I suspect it is a bit early for that.

Moving to construction we see that it is locked in the grip of an icy recession even in the spring. It seems hard to square with the 32 cranes between Battersea Dogs Home and Vauxhall but there you have it. I guess the failure of Carillion has had quite an effect and linking today’s stories we could of course build more social housing.

Looking forwards the UK seems as so often is the case heavily reliant on its services sector to do the economic heavy lifting, so fingers crossed.

 

 

Trade what is it good for?

Yesterday brought news which financial markets have received warmly this morning. From the Financial Times.

The US has stepped back from the brink of a trade war with China after Washington halted plans to impose tariffs on up to $150bn of imports, according to the US Treasury secretary.  “We’re putting the trade war on hold,” Steven Mnuchin said in a television interview on Sunday.

My first thought is one of simple relativity which is how important numbers for the world economy get dwarfed these days when we look at central bank balance sheets. Moving back to the trade issue we have been facing this situation.

 Chinese negotiators resisted a Trump administration push to make a commitment to increase purchases by $200bn annually.

Such numbers fascinate me as in the nice round number mostly seems to ignore what will be bought and what would be done with them as the detail falls rather short.

Mr Mnuchin said. But he said the US side had very specific “industry by industry” targets in mind, raising the possibility of a 35-40 per cent increase in agricultural imports this year and an additional $50bn-$60bn in annual US energy exports over the next three to five years.

For example the agricultural numbers are a “possibility” even in the rhetoric. Whilst we could see more shale oil production how much more food can the US grow and produce? This seems much more a nod to the support base for President Trump that a real plan. If we move on the real issue is driven by this though.

Critics in the US are also concerned that its main emphasis appears to be on meeting Mr Trump’s goal of reducing the US’s annual $337bn trade deficit with China rather than tackling more difficult structural issues in the Chinese economy, such as Beijing’s subsidisation of key industries and systemic theft of US intellectual property.

Yes the trade deficit as we get a reminder that one of the global imbalances which the so-called great and the good told us needed fixing has not been fixed. Or as the Bureau for Economic Analysis puts it for the first three months of 2018.

Year-to-date, the goods and services deficit increased $25.5 billion, or 18.5 percent, from the same period in 2017. Exports increased $39.2 billion or 6.8 percent. Imports increased $64.7 billion or 9.1 percent.

Trade is good

It is not often put this way but let me point out that there are good elements here. For example the United States is boosting economic output in the rest of the world both with its purchases and its larger deficit. Most countries are of course poorer than the US but some more so and thereby benefit. The numbers below are the deficits for March

China ($35.4),Mexico ($7.0),India ($1.4)

Trade is very badly measured

Numbers are bandied about in this area implying far more accuracy than in fact exists. As I looked at the numbers I noted for example that the US had a small deficit with Canada in March whereas I recall a while back both thought they were in surplus. From Bloomberg.

Canadian officials tend to use U.S. data to make their case and the Bureau of Economic Analysis has calculated the U.S. had a $7.7 billion surplus in 2016. But Statistics Canada data show it’s Canada with the surplus in goods and services, totaling C$18.8 billion ($14.6 billion) last year.

As Hot Chocolate put it “Everyone’s a Winner” except of course they cannot be in a zero-sum game. Actually you might think it would make everyone happy in the mirage but of course we do not seem to be. An example of the problems and issues here was provided by the UK statistical office on the 8th of this month.

The £9.8 billion upward revision to the total trade deficit in 2016 means the deficit has been revised from £40.7 billion to £30.9 billion (Table 2). The main driver of the revision in 2016 came from improvements made to methods used to estimate net spread earnings, which feed into exports of services. The net spread earnings improvement revised trade in services exports back to 2004.

The good part is that they are working on the data and there is specific good news for the UK. But the catch is that it opens a window onto matters which are missed or badly measured. I have long argued on here that this is a serious issue for the UK as we have little detail on our services exports which is an important factor in our economy and seems likely to be something which would reduce our trade deficit it it was measured properly. These are difficult areas for statisticians as numbers from financial markets are unreliable as for example if you had a “good thing” you would want to keep it quiet in the way that the Prudential rather famously wrong-footed the rest of the UK Gilt market back in the early days of my career. Also this is true.

This collection of NSE has proved challenging as it is not something the reporting units are required to report under financial regulations.

World Trade Growth

Last year was a good year. From the World Trade Organisation.

Trade volume growth in 2017, the strongest since 2011, was driven mainly by cyclical factors, particularly increased investment and consumption expenditure. Looking at the situation in value terms, growth rates in current US dollars in 2017 (10.7% for merchandise exports, 7.4% for commercial services exports) were even stronger, reflecting both increasing quantities and rising prices.

In general world trade growth is around 1.4/1.5 times world GDP growth although of course even here we hit trouble. From Luis Martinez of the University of Chicago

The results indicate that yearly GDP growth rates are inflated by a factor of between 1.15 and 1.3 in the most authoritarian regimes. Correcting for manipulation substantially changes our understanding of comparative economic performance at the turn of the XXI century.

The catch is that we in the west have been getting more authoritarian and of course there is the possibility that they do not leave their lights on all night as some do in the west.

I show that the elasticity of official GDP figures to nighttime lights is systematically larger in more authoritarian regimes.

Comment

There is a lot to consider here and the headline comes from Trump Town with a protectionist agenda based on America First. Of course before that came other moves such as the way China subsidises industries to crowd out competition and the way that Germany got a lower exchange-rate via membership of the Euro.

Next comes the issue of whether it will provide yet another signal of an economic slow down? So far the outlook seems good as the Harpex shipping index has been rising and is now at 657.

As to trade itself the issue is complex as the issue of US energy production reminds us. This is because whilst the US Energy Information Agency reports the quote below the issue is not that simple.

The United States has been a net energy importer since 1953, but AEO2018 projects the United States will become a net energy exporter by 2022 in the Reference case.

You see that is different from self-sufficiency as the US will export more than it imports but due for example to the different types of crude oil will still be importing. In a way that is a reminder of the intricate links in trade these days as few products are now entirely from one country as so many have lots of links in their chain.

Chains keep us together (run into the shadows)
Chains keep us together (run into the shadows)
Chains keep us together (run into the shadows)
Chains keep us together (run into the shadows)
Chains keep us together (run into the shadows) ( Fleetwood Mac)

The Italian economic job has led us to the current mess

After looking at the potential plans of the new Italian coalition government, assuming it gets that far yesterday let us move onto the economic situation. Let us open with some news from this morning which reminds us of a strength of the Italian economy. From Istat.

The trade balance in March 2018 amounted to +4.5 billion Euros (+3.8 billion Euros for non EU area and +0.7
billion Euros for EU countries).

There is an immediate irony in having joined a single currency ( Euro ) to boost trade and find that your main surplus is elsewhere. However some 55.6% of trade is with the European Union and 44.4% outside so there is a sort of balance if we note we are not being told the numbers for the Euro area itself. If we do an annual comparison then it is not a good day for economics 101 either as the relatively strong Euro has not had much of an effect at all as the declines are mostly within the European Union.

Outgoing flows fell by 2.2% for non EU countries and by 1.5% for EU countries. Incoming flows increased by 0.4% for EU area and decreased by 0.5% for non EU area.

Actually both economic theory and Euro supporters will get some more cheer if we look at the year so far for perspective as exports with the EU ( 5.5%) have grown more quickly than those outside it (0,5%). The underlying picture though is of strength as in the first quarter of 2018 a trade surplus of 7.5 billion Euros has been achieved. If we look back and use 2015 as a benchmark we see that exports are at 114.1 and imports at 115.9 so Italy is in some sense being a good citizen as well by importing.

The main downside is that Italy is an energy consumer ( net 9.4 billion Euros in 2018 so far) which is not going to be helped by the current elevated oil price.

Inflation

This is an intriguing number as you might think with all the expansionary monetary policy that it was a racing certainty. But reality as so often is different. If we look at the trading sector we see this.

In March 2018 the total import price index decreased by 0.1 % compared to the previous month ; the total twelvemonth
rate of change increased by 1.0%.

So quite low and this is repeated in the consumer inflation data series.

In April 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.5% compared with March and by 0.6% with respect to April 2017 (it was +0.9% in the previous month).

Just for clarity that is what we call CPI in the UK and is not called that in Italy because it has its own measure already called that. Apologies for the alphabetti spaghetti. Such a low number was in spite of a familiar influence in March.

The increase on monthly basis of All items index was mainly due to the rises of prices of Non-regulated energy products (+1.1%) ( from the CPI breakdown).

Although there was also a reduction in regulated energy prices. But in essence the theme here is not much and personally I welcome this as I think that driving inflation up to 2% per annum would be likely to make things worse if we note the sticky nature of wage growth these days.

If we move to an area where we often see inflation after expansionary monetary policy which is asset prices we again see an example of Italy being somewhat different.

According to preliminary estimates, in the fourth quarter of 2017: the House Price Index (IPAB) increased by 0.1% compared with the previous quarter and decreased by 0.3% in comparison to the same quarter of the previous year (it was -0.8% in the third quarter of 2017);

The numbers are behind the others we have examined today but the message is loud and clear I think. Putting it another way Mario Draghi is I would imagine rather disappointed in the state of play here as it would help the struggling Italian banks by improving their asset base especially as such struggles draw attention to the legal basis for them known as the Draghi Laws which have been creaking.

Growth

The good news is that there is some as you see there is a case to be made that the trend rate of growth for Italy is zero which is not auspicious to say the least.

In the first quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2017 and by 1.4 per
cent in comparison with the first quarter of 2017.

If we stick with what Chic might call “Good Times” then Italy beat the UK and drew with Germany and France in the quarter just gone. However it was more their woes than Italian strength sadly as I note that even with this economic growth over the past four years has been 4.3%. This is back to my theme that Italy grows at around 1% per annum in the good times that regular readers will be familiar with and the phrase girlfriend in a coma. Less optimistic is how quarterly GDP growth has gone 0.5% (twice), 0.4% (twice) and now 0.3% (twice).

Labour Market

Here is where we get signs of real “trouble,trouble,trouble” as Taylor Swift  would say.

unemployment rate was 11.0%, steady over February 2018…..Unemployed were 2.865 million, +0.7% over the previous month.

The number has fallen by not by a lot and is still a long way above the 6-7% of the pre credit crunch era. So whilst it is good news that 190,000 more Italians gained jobs over the preceding 12 months that is very slow progress. Also wage growth seems nothing to write home about either.

At the end of March 2018 the coverage rate (share of national collective agreements in force for the wage setting aspects) was 65.1 per cent in terms of employees and 62.1 per cent in terms of the total amount of wages.

In March 2018 the hourly index and the per employee index increased by 0.2 per cent from last month.

Compared with March 2017 both indices increased by 1.0 per cent.

So a very marginal increase in real wages.

Comment

One thing that has struck me as I have typed this is the many similarities with Japan. Let me throw in another.

According to the median scenario, the resident population for Italy is estimated to be 59 million in 2045 and 54.1 million in 2065. The decrease compared to 2017 (60.6 million) would be 1.6 million of residents in 2045 and 6.5 million in 2065.

A clear difference can be seen in the unemployment rate and of course even Italy’s national debt is relatively much smaller although not as the Japanese measure such things.

The bond yield is somewhat higher especially after yesterday’s price falls and the ten-year yield is now 2.12% but here is another similarity from a new version of the proposed coalition agreement.

I imagine this would mean asking banks to hold less capital for the loans they give to SMEs. This would make banks more fragile and – in the 5 Star/League world – could lead to more “public gifts” to private banks. ( @FerdiGuigliano )

The Bank of Japan had loads of such plans and of course the Bank of England modified its Funding for Lending Scheme in this way too. Neither worked though.

Meanwhile we cannot finish without an apparent eternal  bugbear which is the banks.

League and 5 Star also have plans for Monte dei Paschi, which has been recently bailed out by the Italian government. They want to turn it into a utility, where the State (as opposed to an independent management) decides the bank’s objectives.

Me on Core Finance TV

 

 

UK production and manufacturing have seen a lost decade

Today brings us what is called a theme day by the UK Office for National Statistics as we get data on production, manufacturing and trade. This comes at a time when the data will be especially prodded and poked at. This is mainly driven by the fact that there have been hints of an economic slow down both in the UK and in the Euro area. Added to that we have seen rising tensions around Syria and the Middle East which have pushed the price of a barrel of Brent Crude Oil above US $70 which if sustained will give us another nudge higher in terms of cost push or if you prefer commodity price inflation. If we return to yesterday’s topic of Bank of England policy we see the potential for it to find itself between a rock and a hard place as a slowing economy could be combined with some oil price driven inflation.

Production

This opened with a worrying note although of course the issue is familiar to us.

In the three months to February 2018, the Index of Production decreased by 0.1% compared with the three months to November 2017, due to a fall of 8.6% in mining and quarrying, caused mainly by the shutdown of the Forties oil pipeline within December 2017.

If we move to the February data we see that it rose but essentially only because of the cold weather that caused trouble for services and construction.

In February 2018, total production was estimated to have increased by 0.1% compared with January 2018; energy supply provided the largest upward contribution, increasing by 3.7%.

If we look into the detail we see that the colder weather raised production by 0.43% meaning that there were weaknesses elsewhere. Some of it came from the oil and gas sector where in addition to some planned maintenance there was a one-day shut down for the rather accident prone seeming Forties field. But there was also something which will attract attention.

Manufacturing output decreased by 0.2%, the first fall in this sector since March 2017, when it fell by 0.4%. Within this sector 7 of the 13 sub-sectors decreased on the month; led by machinery and equipment not elsewhere classified, which fell by 3.9%, the first fall since June 2017, when it decreased by 4.9%.

This has been a strength of the UK economy in recent times and concerns about a possible slow down were only added to by this.

 It should be noted that the growth in this sector of 0.1% during January 2018 and published last month, has been revised this month to 0.0%, further supporting evidence provided in the January 2018 bulletin of a slow-down in manufacturing output.

Although our statisticians found no supporting evidence for this there remains the possibility that the bad weather played a role in this. Otherwise we are left with an impression of a manufacturing slow down which does fit with the purchasing managers indices we have seen. The annual comparison however remains good just not as good as it was.

 in February 2018 compared with February 2017, manufacturing increased by 2.5%.

Also there were hopes that we might regain the previous peak for manufacturing output which was 106.8 in February 2008 where 2015 = 100 but we scaled to 105.4 in January and have now dipped back to 105.2. The situation in production is somewhat worse as we are still quite some distance from the previous peak which on the same basis was at 111.1 in February 2008 and this February was at 104.8. The issue is complicated by the decline of North Sea Oil and Gas but overall those are numbers which look like a depression to me especially after all this time which one might now call a lost decade.

Trade

We traditionally advance on these numbers with some trepidation after years and indeed decades of deficits on this particular front. So let us gather some cheer with some better news.

Comparing the 12 months to February 2018 with the same period in 2017, the total trade deficit narrowed by £12.9 billion to £27.5 billion; the services surplus widened by £11.1 billion to £108.3 billion and the goods deficit narrowed by £1.8 billion to £135.8 billion.

Tucked away in this was some good news and for once a triumph for economics 101.

Total exports rose by 10.4% (£59.4 billion) to £627.6 billion compared with total imports, which increased by 7.6% (£46.5 billion) to £655.1 billion.

In true Alice In Wonderland terms our exports have to do this to make any dent in our deficit because the volume of imports is larger.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

Both goods and services imports have responded well to the lower value of the UK Pound £ as well as being influenced by the favourable world economic environment.

 Goods exports rose by 11.3% (£34.9 billion) to £345.0 billion ……..Services exports rose by 9.5% (£24.5 billion) to £282.6 billion

We rarely give ourselves the credit for being a strong exporting nation because it gets submerged in our apparent lust for imports.

As to the more recent pattern I will let you decide if the change below means something as it is well within the likely errors for such data.

The total UK trade deficit (goods and services) widened by £0.4 billion to £6.4 billion in the three months to February 2018

A little wry humour is provided by the fact that in terms of good exports our annual improvement was due to exports to the European Union. However the humour fades a little as I note our official statisticians have no real detail at all on our services exports which is a great shame as they are a strength of our economy.

Construction

After the cold spell in February this was always going to be a difficult month.

Construction output continued its recent decline in the three-month on three-month series, falling by 0.8% in February 2018………Construction output also decreased in the month-on-month series, contracting by 1.6% in February 2018, stemming from a 9.4% decrease in infrastructure new work.

In the circumstances I thought this was not too bad although this may have left me in a class of two.

You see the past is better than we thought it was which also confirms some of the doubts I have expressed about the reliability of this data.

The annual growth in 2017 of 5.7% is revised upwards from the 5.1% growth reported.

So it is not in a depression but has entered a recession.

Comment

There is a fair bit to consider as we note that any continuation of the recent falls will see manufacturing continue its own lost decade as we note that overall production seems trapped in one with little hope of  what might be called “escape velocity”. That means that the Bank of England faces a scenario where the picture for this particular 14% of the economy has seen the grey clouds darken. By contrast construction went from a really good phase into a recession which  the bad weather has made worse. I would expect the weather effect to unwind fairly quickly but that returns us to a situation which looked weak,

This leaves the expressed policy of the “unreliable boyfriend” in something of a mess as his forward guidance radar seems to have looked backwards again. Perhaps his new private secretary James Benford will help although I note his profile has been so low Bloomberg had to look him up on LinkedIn, I hope they got the right person. Also life can be complex as for example Russians in the UK might be thinking as they go from threats of financial punishment to seeing the UK Pound £ rally by 2% today and by over 10% in the past week to around 91 versus the R(o)uble .

Let me remain in the sphere of the serially uncorrelated error term by congratulating Roma on a stunning win last night.

 

 

How quickly is the economy of Germany slowing?

Until last week the consensus about the German economy was that is was the main engine of what had become called the Euro boom. Some were thinking that it might even pick up the pace on this.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

This was driven by the PMI or Purchasing Managers Index business surveys from Markit which as I pointed out on the 3rd of January were extremely upbeat.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

This was followed by the overall or Composite PMI rising to 59 in January which suggested this.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

Actually that was for the overall Euro area which had a reading of 58,8. The catch has been that even this series has been dipping since as we now see this being reported.

The pace of growth in Germany’s private sector cooled at the end of the first quarter, with the services PMI retreating further from January’s recent peak to signal a loss of momentum in line with that seen in manufacturing.

This led to this being suggested.

it still promises to be a strong 2018 for the German economy – with IHS Markit forecasting GDP growth to pick up to 2.8%

Still upbeat but considerably more sanguine than the heady days of January. Then there was this to add into the mix.

However, unusually cold weather in March combined with continuing payback from January’s jump in activity has led to the construction PMI falling into contraction territory for the first time in over three years

Official Data on Production and Trade

The official data posted something of a warning last week.

In February 2018, production in industry was down by 1.6% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)…….In February 2018, production in industry excluding energy and construction was down by 2.0%. Within industry, the production of capital goods decreased by 3.1% and the production of consumer goods by 1.5%. The production of intermediate goods showed a decrease by 0.7%. Energy production was up by 4.0% in February 2018 and the production in construction decreased by 2.2%.

As you can see the monthly fall was pretty widespread and only offset by a colder winter. Whilst this did show an annual increase of 2.6% that was a long way below the 6.3% that had been reported for January and December. So on this occasion the PMI surveys decline seems to have been backed by the official numbers as we await for the March numbers which if the relationship holds will show a further slowing on an annual basis.

Thrown into this mix is concern that the decline is related to fear over the rise in protectionism and possible trade wars.

If we move to this morning’s trade data it starts well but then hits trouble.

Germany exported goods to the value of 104.7 billion euros and imported goods to the value of 86.3 billion euros in February 2018. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 2.4% and imports by 4.7% in February 2018 year on year. After calendar and seasonal adjustment, exports fell by 3.2% and imports by 1.3% compared with January 2018.

This may well be an issue going forwards if it is repeated as last year net exports boosted the German economy and added 0.8% to GDP ( Gross Domestic Product) growth.

On a monthly basis we saw this.

Exports-3.2% on the previous month (calendar and seasonally adjusted). Imports –1.3% on the previous month (calendar and seasonally adjusted).

Of course monthly trade figures are unreliable but this time around they do fit with the production data. The export figures look like they peaked at the end of 2017 from an adjusted ( seasonally and calendar) 111.5 billion Euros to 107.5 billion on that basis in February.

What are the monetary trends?

If we look at the Euro area in general then there are signs of a reduced rate of growth.

The annual growth rate of the narrower aggregate M1, which includes currency in circulation
and overnight deposits, decreased to 8.4% in February, from 8.8% in January.

The accompanying chart shows that this series peaked at just under 10% per annum last autumn. So that surge may have brought the recorded peaks in economic activity around the turn of the year but is not heading south. If we move to the broader measure we see this.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.2% in February 2018, from
4.5% in January, averaging 4.4% in the three months up to February.

This had been over 5% last autumn and like its narrower counterpart has drifted lower. If you apply a broad money rule then one would expect a combination of lower inflation and growth which is awkward for a central bank trying to push inflation higher.  If we move to credit then the impulse is fading for households and businesses.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation
and notional cash pooling) decreased to 3.0% in February, compared with 3.3% in January.

This is more of a lagging than leading indicator of circumstances.

These are of course Euro area statistics rather than Germany but they do give us an idea of the overall state of play. A possible signal of issues closer to home are the ongoing travails of Deutsche Bank. There has been a bounce in the share price today in response to the new Chief Executive Officer or CEO as Sewing replaces Cryan but 11.8 Euros compares to over 17 Euros last May. Yet in the meantime the economy has been seeing a boom and added to that as I looked at late last month house price growth will have been boosting the asset book of the bank yet the underlying theme seems to come from Coldplay.

Oh no, what’s this?
A spider web and I’m caught in the middle
So I turned to run
And thought of all the stupid things I’d done

Comment

The heady days of the opening of 2018 have gone and in truth the business surveys did seem rather over excited as I pointed out on January 3rd.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth.

We can bring that more up to date.

 In February 2018, roughly 44.3 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with February 2017, the number of persons in employment increased by 1.4% (+621,000 people).

Thus we see that it continues to suggest steady if not spectacular growth and bypasses the excitement at the turn of the year. Looking forwards we see that the monetary impulse is slowing which is consistent with the reduction in monthly QE to 30 billion Euros a month from the ECB. We then face the issue of how Germany will follow a good first quarter? At the moment a growth slow down seems likely just in time for the ECB to end QE! So it may well be a case of watch this space…..

 

 

 

 

If UK growth has a “speed limit” of 1.5% how is manufacturing growing at 3.4%?

Yesterday saw the Quarterly Inflation Report of the Bank of England where its takes the opportunity to explain its views on the UK economy. There was a subject which Governor Mark Carney returned to several times and it was also in the opening statement.

It is useful to step back to assess how the economy has performed relative to the MPC’s expectations in order to understand the forces at work on it.

You are always in trouble when you have to keep telling your audience you got things right. I don’t see Pep Guardiola having to explain things like that or Eddie Jones and that is because things have gone well for them. Increasingly the Governor is finding himself having to field questions essentially based upon my theme that the Bank of England has a poor forecasting record. Actually tucked away in his statement was yet another confession.

GDP growth is expected to average around 1¾%
over the forecast period, a little stronger than projected in November.

I would like to present his main point in another way as we were told that policy is “transparent” and being done “transparently”. Okay so apply that test to this?

The MPC judges that, were the economy to evolve broadly in line with its February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than it anticipated at the time of the
November Report, in order to return inflation sustainably to the target.

So if they get things right which they usually do not then interest-rates will rise by more than the previous unspecified hint? That is opaque rather than transparent especially when you have a habit of saying things like this.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced…………..It could happen sooner than markets currently expect. (Mansion House June 2014).

What actually happened? The next move was a Bank Rate cut! Also I noted this in the Financial Times from back then.

This speech marks an important change of tone from the governor……..with rates rising earlier, further and faster than markets currently price in.

I noted this because it was from Michael Saunders who was of course giving bad advice to Citibank customers as we wonder if his enthusiasm for the Governor’s thoughts and words got him appointed to the Monetary Policy Committee?

Also I note that the 0.25% Bank Rate cut and Sledgehammer QE is claimed to have had an enormous impact.

this strategy has worked with
employment rising and slack steadily being absorbed

Yet this morning Ben Broadbent has contradicted this on BBC 5 Live’s Wake Up To Money.

dep gov Ben Broadbent said that was “true to some extent”, adding he didn’t think a couple of 25 basis point [0.25%] rises in a year would be a great shock

So if two rises are no big deal how was one cut a big deal? I guess if you send out your absent-minded professor out at the crack of dawn he is more likely to go off-piste.

Our intrepid Governor was also keen to expound on the Bank of England’s improvement in the area of diversity which he did as part of a panel composed of four middle-aged white men. As to policy independence regular readers will be well aware of my theme that the establishment took the Bank back under its control some time ago.

Today’s data

This was always going to be affected by the shutdown of the oil and gas pipeline for the Forties area in the North Sea as we already knew it has reduced GDP by around 0.05%.

In December 2017, total production was estimated to have decreased by 1.3% compared with November 2017; mining and quarrying provided the only downward contribution, falling by 19.1% as a result of the shut-down of the Forties oil pipeline for a large part of December.

Ouch indeed! However if we look deeper we see that production has been on an upwards sweep.

Total production output increased by 2.3% for the three months to December 2017 compared with the same three months to December 2016……….For the calendar year 2017, total production output increased by 2.1% compared with 2016,

Now that the Forties pipeline is back to normal there will be an additional push to the numbers.

Manufacturing

This sector has been on a good run which has been welcome to see after years and indeed decades of relative decline.

In the three months to December 2017……..due to a rise of 1.3% in manufacturing;

As to the driving force well we have heavy metal football at Liverpool courtesy of Jurgen Klopp and maybe we have some heavy metal economics too.

Within manufacturing, 9 of the 13 manufacturing sub-sectors experienced growth; the largest contribution to quarterly growth came from basic metals and metal products, which increased by 5.7%.

If we look deeper we see this which compares the latest quarter with a year ago..

The largest upward contribution came from manufacturing, which increased by 3.4%, due to broad-based strength, with 9 of the 13 sub-sectors increasing. Transport equipment provided the largest upward contribution, increasing by 6.6%, with three of its four industries increasing. The largest upward contribution came from the manufacture of aircraft, spacecraft and related machinery, while motor vehicles, trailers and semi-trailers fell by 0.3%.

There is something of an irony for those who found it amusing to jest that the UK would have to export to space in future as we indeed seem to be doing so. Of course space has been in the news this week with the successful, launch of the Falcon Heavy rocket with the successful landing of two of the three boosters which according to the Meatloaf critique “aint bad” and was also awe-inspiring. As you can imagine I heartily approve of it playing Space Oddity on repeat and the way Don’t Panic flashes on the car dashboard in big friendly letters.

Returning to manufacturing we have nearly made our way back to the place we were once before as the Eagles might put it.

 both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 5.2% and 0.5% respectively in the three months to December 2017.

Trade

The familiar theme is as ever of yet another deficit but the December numbers were even more difficult to interpret than usual due to the impact of the Forties pipeline closure. This was its impact on the latest quarter.

The 21.6% decrease in export volumes of fuels (mainly oil) had a large impact on the fall in export volumes. When excluding oil export volumes increased by 1.3%……The value increase in fuels imports was due largely to price movements, as fuels import prices increased by 14.2% while fuels import volumes increased by 0.3%.

If we look back 2017 was a better year for UK trade.

UK export volumes up 7.4% between 2016 & 2017, import volumes were up 4.1%

This meant that the trade deficit fell by £7 billion ( not by £70 billion as was initially reported) so the cautionary note is that we still have a long way to go.

Comment

Today’s numbers provide their own critique to the rhetoric of Mark Carney and the Bank of England. Let me show you the two. Firstly the data.

The largest upward contribution came from manufacturing, which increased by 3.4%

Yet according to the Bank of England this is the “speed limit”.

the MPC judges that very little spare capacity remains and that supply capacity will grow only modestly over the
forecast, averaging around 1½% a year.

If you think it through logically it is an area where you would expect physical constraints and yet it does not seem to be bothered. Indeed the other area where there are physical constraints has done even better on an annual comparison.

 construction output in Great Britain grew by 5.1% in 2017

So as ever the Bank of England prefers its models to reality and if you listened carefully to the press conference Ben Broadbent confirmed this. What he did not say was that he is persisting with this in spite of a shocking track record.

Just for clarity the construction numbers are correct but had really strong growth followed by the more recent weakness. However as I have pointed out many times care is needed as we regularly get significant revisions..