UK GDP had a relatively good second half of 2018 but a weak December

Today brings a raft of UK economic data as we look at economic growth ( GDP), trade, production (including manufacturing) and construction data. The good news is that we now take an extra fortnight or so to produce the numbers which are therefore more soundly based on actual rather than estimated numbers especially for the last month in the quarter. The not so good news is that I think that adding monthly GDP numbers adds as much confusion as it helps. Also we get too much on this day meaning that important points can be missed, which of course may be the point Yes Prime Minister style.

The scene has been set to some extent this morning by a speech from Luis de Guindos of the ECB.

Euro area data have been weaker than expected in recent months. In fact, industrial production growth fell in the second half of 2018 and the decline was widespread across sectors and most major economies. Business investment weakened. On the external side, euro area trade disappointed, with noticeable declines in net exports.

Whilst that is of course for the Euro area the UK has been affected as well by a change in direction for production. This is especially troubling as in January we were told this.

Production and manufacturing output have risen since then but remain 6.5% and 2.0% lower, respectively, in the three months to November 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

It had looked like we might get back to the previous peak for manufacturing but like a Northern rail train things at best are delayed. Production has got nowhere near. There have been positive shifts in it as efficiencies mean we need less electricity production but even so it is not a happy picture.

Gilt Yields

Readers will be aware that I have been pointing out for a while how cheap it is for the UK government and taxpayers to borrow and a ten-year Gilt yield of 1.17% backs that up. A factor in this is the weak economic outlook and another is expectations of more bond buying from the Bank of England. The possibility of the later got more likely at the end of last week as rumours began to circulate of a U-Turn from the US Federal Reserve in this area. Or a possible firing up of what would be called QE4 and perhaps QE to infinity.

The Financial Times has caught up with this to some extent.

Investors’ waning expectations of future rises in interest rates are giving a lift to the UK government bond market.

They note that foreign buyers seem to have returned which is awkward for the FT’s cote view to say the least. Also as we look back to the retirement of Bill Gross his idea that UK Gilts were on a “bed of nitroglycerine” was about as successful as Chelsea’s defence yesterday.Anyway I think it steals the thunder from today’s Institute of Fiscal Studies report.

If the coming spending review is to end austerity Chancellor will need to find extra billions.

I am not saying we should borrow more simply that we could and that we seem keener on borrowing when it is more expensive. The IFS do refer to borrowing costs half way through their report but that relies on people reading that far. They also offered a little insight between economic growth and borrowing.

A downgrade of GDP of 0.5% would reduce annual GDP by around £10 billion and a rule-of-thumb suggests it would add between around £5 billion and £7 billion to the deficit.

Economic growth

The headline was not too bad but it did come with a worrying kicker.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018; the quarterly path of GDP through 2018 remains unrevised.

There were concerns about the third quarter being affected by a downwards revision to trade data but apparently not via the magic of the annual accounts. Bur even so it was far from a stellar year.

GDP growth was estimated to have slowed to 1.4% between 2017 and 2018, the weakest it has been since 2009…….Compared with the same quarter in the previous year, the UK economy is estimated to have grown by 1.3%.

We shifted even more to being a services economy as it on its own provided some 0.35% of GDP growth meaning that production and construction declined bring us back to 0.2%.

The worrying kicker was this.

Month-on-month gross domestic product (GDP) growth was 0.2% in October and November 2018. However, monthly growth contracted by 0.4% in December 2018 . The last time that services, production and construction all fell on the month was September 2012.

I have little faith in the specific accuracy of the monthly data but it does seem clear that there was a weakening in December and it was widespread. Even the services sector saw a decline ( -0.2%) and the production decline accelerated to -0.5%. Construction fell by 2.8% but that has been a series in which we have least faith of all.

Production

We learn from the monthly GDP data that steel and car production had weak December’s which helped lead to this.

Production output fell by 0.5% between November 2018 and December 2018; the manufacturing sector provided the largest downward contribution with a fall of 0.7%.

Although the detail in this section gives a different emphasis.

There is widespread weakness this month, with 9 of the 13 sub-sectors falling. Of these, pharmaceuticals, which can be highly volatile, provided the largest negative contribution, with a decrease of 4.2%. There was also a notable fall of 2.8% from the other manufacturing and repair sub-sector, where four of the five sub-industries fell due to the impact of weakness from large businesses (with employment greater than 150 persons on average).

We have learnt over time that the pharmaceutical sector swings around quite wildly ( although not as much as seemingly in Ireland last month) so that may swing back. Also production was pulled lower by the warmer weather but continuing that theme there is a chill wind blowing for this sector none the less.

If we switch to a wider perspective it seems that the worldwide economic slowing is leading to a few crutches being used.

 underpinned by strong nominal export growth of 18.9% within alcoholic beverages and tobacco products.

Comment

The theme here is of the good, the bad and the ugly. Where the good is the way that the UK outperformed its European peers in the second half of 2018 after underperforming in the first half. The bad is the decline in the quarterly economic growth rate from 0.6% to 0.2%. Lastly the ugly is the plunge in December assuming that the data is reliable. We were never likely to escape the chill economic winds blowing in the production sector and need to cross our fingers about the impact on services. My theme that we are ever more rebalancing towards services continues in spite of the rhetoric of former Bank of England Governor Baron King of Lothbury.

Meanwhile we continue to have a balance of payment deficit.

The total trade deficit widened £8.4 billion to £32.3 billion between 2017 and 2018, due mainly to a £7.2 billion increase in services imports.

Exactly how much is hard to say as I have little faith in the services estimates. But with economic growth as it is let me leave you with some presumably unintentional humour from the Bank of England.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Weekly Podcast

 

 

 

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Oh Italia!

Sometimes events just seem to gather their own momentum in the way that a rolling stone gathers moss so let me take you straight to the Italian Prime Minister this morning.

Italy Dep PM Di Maio: Low Growth Views `Theater Of The Absurd’: Messaggero ( @LiveSquawk )

I have to confess that after the way that the Italian economy has struggled for the last couple of decades this brought the Doobie Brothers to mind.

What a fool believes he sees
No wise man has the power to reason away
What seems to be
Is always better than nothing
And nothing at all

Then the Italian statistics office produced something of a tour de force.

In December 2018 the seasonally adjusted industrial production index decreased by 0.8% compared with
the previous month. The percentage change of the average of the last three months with respect to the
previous three months was -1.1.

As you can see these numbers are in fact worse than being just weak as they show a monthly and a quarterly fall. But they are in fact much better than the next one which is really rather shocking.

The calendar adjusted industrial production index decreased by 5.5% compared with December 2017
(calendar working days being 19 versus 18 days in December 2017); for the whole year 2018 the
percentage change was +0.8 compared with 2017.
The unadjusted industrial production index decreased by 2.5% compared with December 2017.

Just for clarity output was 2.5% lower but as there was an extra working day this year then on a like for like basis it was some 5.5% lower. I would say that was a depressionary type number except of course Italy has been in a long-standing depression.

Digging deeper into the numbers we see that on a seasonally adjusted basis there was a rally in industrial production as the 100 of 2015 nearly made 110 in November 2017, but now it has fallen back to 103.9. But even that pales compared to the calendar adjusted index which is now at 93.3. So whilst the different indices can cause some confusion the overall picture is clear. We do not get a lot of detail on manufacturing except that on a seasonally adjusted basis output was 5.5% lower in December than a year ago.

The drop is such that we could see a downwards revision to the Italian GDP data for the fourth quarter of last year which was -0.2% as it is. Actually the annual number at 0.1% looks vulnerable and might make more impact if the annual rate of growth falls back to 0%. Production in a modern economy does not have the impact it once did and Italy’s statisticians were expecting a fall but not one on this scale.

Monthly Economic Report

After the above we advance on this with trepidation.

World economic deceleration has spilled over into Q4, particularly in the industrial sector, which has
experienced a broad-based loss of momentum in many economies and a further slowing in global trade growth.
In November, according to CPB data the merchandise World trade in volume decreased 1.6%.

So it is everyone else’s fault in a familiar refrain, what is Italian for Johnny Foreigner? This is rather amusingly immediately contradicted by the data.

In Italy, real GDP fell by 0.2% in Q4 2018, following a 0.1% drop in the previous quarter. The negative result is
mainly attributable to domestic demand while the contribution of net export was positive.

So in fact it was the domestic economy causing the slow down. This thought is added to by the trade data where the fall in exports is dwarfed by the fall in imports at least in November as we only have partial data for December.

As for foreign trade, in November 2018 seasonally-adjusted data, compared to October 2018, decreased both
for exports (-0.4%) and for imports (-2.2%). Exports drop for EU countries (-1.3%) and rose for non EU
countries (+0.6%). However, according to preliminary estimates in December also exports to non-EU
countries decreased by 5.0%.

Now let me give an example of how economics can be the dismal science. Because whilst in isolation the numbers below are welcome with falling output they suggest falling productivity.

In the same month, the labour market, employment stabilized and the unemployment rate decreased only
marginally.

The future looks none too bright either,

In January 2019, the consumer confidence improved while the composite business climate
indicator decreased further. The leading indicator experienced a sharp fall suggesting a
worsening of the Italian cyclical position in the coming months.

Indeed and thank you for @liukzilla for pointing this out the Italian version does hint at some possible downgrades, Via Google Translate.

The data of industrial production amplify the tendency to reduce the rhythms of
activity started in the first few months of 2018 (-1.1% the economic variation in T4).

Also a none too bright future.

Data on industry orders also showed a negative trend, with a decrease for both markets in the September-November quarter (-1.3% and -1.0% respectively on the market).
internal and foreign).

The Consumer

Yesterday’s data provided no cheer either.

In December 2018, both value and volume of retail trade contracted by 0.7% when compared with the previous month. Year-on-year growth rate fell by 0.6% in value terms, while the quantity sold decreased by 0.5%.

Although on a quarterly basis there was a little bit assuming you think the numbers are that accurate,

In the three months to December (Quarter 4), the value of retail trade rose by 0.1%, showing a slowdown
to growth in comparison with the previous quarter (+0.4%), while the volume remained unchanged at
+0.3%.

Actually there was never much of a recovery here as the index only briefing rose to 102 if we take 2015 as 100 and now is at 101.5 according to the chart provided. Odd because you might reasonably have expected all the monetary stimulus to have impacted on consumer spending.

Population

This is now declining in spite of a fair bit of immigration.

On 1 st January 2019, the population was estimated to be 60,391,000 and the decrease on the previous year was
around 90,000 units (-1.5 per thousand)………The net international migration amounted to +190 thousand, recording a slight increase on the previous year (+188
thousand). Both immigration (349 thousand) and emigration (160 thousand) increased (+1.7% and +3.1%
respecitvely).

Bond Markets

I have pointed out many times that Italian bond yields have risen for Italy in both absolute and relative terms. Let me present another perspective on this from the thirty-year bond it issued earlier this week.

Today Italy issued 8bln 30yr BTPs. Had it issued the same bond last April, it would have received around 1.3 bilion more cash from the market. ( @gusbaratta ).

Comment

This is quite a mess in a lovely country. Also the ironies abound as for example expanding fiscal policy into an economic decline was only recently rejected by the Euro area authorities. They also have just ended some of the monetary stimulus by ending monthly QE at what appears to be exactly the wrong time. So whilst the Italian government deserves some criticism so do the Euro area authorities. For example if the ECB has the powers it claims why is it not using them?

Of course I don’t want to speculate about what contingency would call for a specific instrument but if you look at the number of instruments we have in place now, we can conclude that it’s not true that the ECB has run out of fuel or has run out of instruments. We have all our toolbox still available. ( Mario Draghi )

But just when you might have thought it cannot get any worse it has.

Me on The Investing Channel

China may have landed on the moon but its economy is slowing

This morning has brought more news on the economic theme of late 2018 and early 2019 which is of a slowing. As ever at the beginning of the week it comes from the Far East as eyes turn to China. From the South China Morning Post.

Total exports fell to US$221.25 billion in December, down 1.4 per cent from November, and 4.4 per cent from the same month in 2017, according to data from China’s General Administration of Customs.

This is at least party driven by the ongoing trade war.

The December figures give the first indication of the full impact of the US-China trade war.

Exports in previous months were supported by “front loading” of orders by Chinese producers to beat the planned rise in US tariffs to 25 per cent, scheduled to go into effect on January 1 before Chinese President Xi Jinping and his US counterpart Donald Trump agreed to a 90-day tariff ceasefire in their meeting on December 1.

So we move on noting that external demand for the Chinese economy is showing a sign of weakening and as usual the experts were whistling in the wind.

The December drop – the biggest since December 2016, when China grew at its slowest pace since 1990 – was unexpected, with analysts forecasting a 2 per cent rise, according to a Bloomberg survey.

However in my opinion there was something even more significant which was this.

Total imports fell to US$164.19 billion, a fall of 10 per cent from last month and down 7.6 per cent a year earlier.

This is because falls in import volumes are usually a sign of a weakening economy as lower consumption leads to lower import demand.  But to see this fully we need to remind ourselves that the Chinese consume in Yuan and that in it the numbers were down 9.7% on a monthly basis but 3.1% on an annual basis with the difference reflecting a fall in the Yuan. This is quite a change as the numbers for 2018 as a whole showed imports to be 12.9% higher. There is of course an irony in this as we note that imports are a subtraction from GDP ( Gross Domestic Product) numbers so this change will boost it as highlighted below.

Those trade flows still resulted in a trade surplus of $57bn in December, the highest in three years. ( Financial Times)

Although of course contrary to the way the media has reported all this it will be reported in the Chinese GDP data in Yuan as 395 billion.

If we switch to the Financial Times I suspect Donald Trump will be focusing on this bit.

China’s annual trade surplus with the US rose to $323bn for 2018, a jump of more than 17 per cent to the highest level on record, according to Reuters data reaching back to 2006.

Meanwhile there was plenty of food for thought for those in the South China Territories ( Australia) from this bit.

Data also showed that China’s imports of iron ore fell for the first time since 2010, a development that will have impacted commodity exporters.

Xinhua News

It is always interesting to see how things are being reported in China itself so here we go.

 China’s foreign trade rose 9.7 percent year on year to a historic high of 30.51 trillion yuan (about 4.5 trillion U.S. dollars) in 2018, the General Administration of Customs (GAC) said Monday……..Exports rose 7.1 percent year on year to 16.42 trillion yuan last year, while imports grew 12.9 percent to 14.09 trillion yuan, resulting in a trade surplus of 2.33 trillion yuan, which narrowed by 18.3 percent.

No mention of any declines but there was space and indeed time to mention something else favourable to China.

Trade with countries along the Belt and Road registered faster-than-average growth, with the trade volume standing at 8.37 trillion yuan, up 13.3 percent year on year.

If we stay with Chinese reporting then we can take a look at the value of the Yuan as well.

The central parity rate of the Chinese currency renminbi, or the yuan, strengthened 349 basis points to 6.7560 against the U.S. dollar Monday, according to the China Foreign Exchange Trade System.

The new rate was the strongest since July 19, 2018, according to data from the system.

Since the beginning of this year, the yuan’s central parity rate has strengthened more than 1.5 percent against the dollar.

Presumably driven by the stronger trade figures… ( sorry couldn’t resist it). But the Bank of China New York branch plays along with the official drumbeat.

China’s economy has been undergoing structural reform with the introduction of various macro-economic policies. The bank believed that the yuan’s strong buying momentum showed world financial markets have restored confidence in the Chinese currency.

“With the deepening of China’s reform and opening-up, steady expansion of the domestic financial market, and the higher status of CNY in the international monetary system, it is expected that investors’ willingness to hold CNY will increase further,” said the bank’s foreign exchange desk.

I must say they do have rather eloquent foreign exchange traders as most of the ones I have met communicate mostly in words with only four letters in them.

Indeed things are even going rather well in space.

To better understand the lunar environment and prepare for a human return to the moon, the Chang’e-4 probe, which has just made the first-ever soft landing on the far side of the moon, carries payloads jointly developed by Chinese, German and Swedish scientists to conduct research.

This of course contrasts with the efforts of the evil capitalist Imperialists.

U.S. space technology firm SpaceX, led by Elon Musk, will lay off about 10 percent of its more than 6,000 employees, according to media reports.

Also there is something which reminds us of the Belt and Road plan.

Passengers waiting to board a train from Nigeria’s capital Abuja on Saturday were wowed when they were informed that the train service had been safely operating for 900 days.

A male voice announced from a public address system that the train service had been in commercial operation for 900 days and without any major accident recorded since its inception.

This Chinese built railway is apparently a modern wonder.

Many looked in amazement, expressing satisfaction at the safe operation of the Abuja-Kaduna train service, the first standard gauge railway in Nigeria and West Africa…..Many looked in amazement, expressing satisfaction at the safe operation of the Abuja-Kaduna train service, the first standard gauge railway in Nigeria and West Africa.

One should not be too churlish as there are plenty of issues both security and otherwise in Nigeria but “many looked in amazement” is the sort of thing written about the first journey’s of George Stephenson and his Rocket back in the day.

Football

Another example of a combination of economics combining with foreign policy is the way Chinese football clubs have been offering very high wages to marquee players. West Ham fans will currently be fearing that Marko Anautovic will leave especially if the rumours of a new £45 million bid plus £300,000 a wage wages are true. But it is hard not to raise a wry smile at this perspective from Barney Ronay of the Guardian.

Marco Arnautović latest: am hearing he will move to a club whose wealth is built on a state-subsidised stadium, owned by “colourful” businessmen and with a manager brought in from Hebei China Fortune… Hang on. No sorry, that’s his current club. My mistake

Comment

It is always difficult to measure an economic slow down because of the way that vested interests and the establishment move to delay and block such efforts. This is how they invariably end up being presented as a surprise. China is of course particularly opaque with much of its data leading people to use alternative measures such as electricity consumption before it too got gamed and manipulated. But we are getting more and more signs of a slowing trend. If we look for other signs then we maybe saw one from Europe earlier as well.

In November 2018 compared with October 2018, seasonally adjusted industrial production fell by 1.7% in the euro
area (EA19) and by 1.3% in the EU28, according to estimates from Eurostat,

Which no doubt reflects this from Reuters.

China car sales fell 13 percent in December, the sixth straight month of declines, bringing annual sales to 28.1 million, down 2.8 percent from a year earlier, China’s Association of Automobile Manufacturers (CAAM) said.

This was against a 3-percent annual growth forecast set at the start of 2018 and is the first time China’s auto market has contracted since the 1990s.

Beneath all this though the move into Africa via the Belt and Road policy continues as seemingly does the football combination of economics and diplomacy. They also seem to have been listening to Pink Floyd.

And if the cloud bursts, thunder in your ear
You shout and no one seems to hear.
And if the band you’re in starts playing different tunes
I’ll see you on the dark side of the moon.

 

 

UK production falls but GDP is doing relatively well

Today brings us the latest official data on the UK economy as the monthly GDP number for November is announced. It comes from a weak international backdrop as we have been observing as Germany and France have already released weak numbers for that time period.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis ( Germany). In November 2018, output slipped back sharply in the manufacturing industry (−1.4% after +1.4% in October) as well as in the
whole industry (−1.3% after +1.3%)….Manufacturing output went down over the last three months (−1.0%), as well as in the whole industry (−0.9%).  ( France )

Just to add to the party this has just been released.

Italian Industrial Production (M/M) Nov: -1.60% (est -0.30% ; prev -0.10%) Italian Industrial Production WDA (Y/Y) Nov: -2.60% (est 0.40% ; prev 1.00%) (@LiveSquawk )

So the background is rather grim as the pattern for 2018 had been for a nudge higher in industrial production which is now replaced by a 2.6% year on year fall. Even a country which has been doing well like Spain has also reported a 1.5% monthly fall.

UK Production

In the circumstances described above the first response to the UK data was one of relief.

In November 2018, total production output fell by 0.4%, compared with October 2018, due to a fall of 0.3% in manufacturing, supported by falls of 1.1% electricity and gas and 1.3% in mining and quarrying. The monthly decrease in manufacturing output of 0.3% was due to 8 of the 13 sub-sectors falling; the largest downward contribution came from basic metals and metal products, falling by 3.6%.

Obviously one does not welcome falls but in relative terms those were good numbers. I have no idea how the consensus forecast was for a rise as you would need to be locked in a dark internet free cellar to think that in my opinion. However if we look for some perspective we have not escaped the global trend in this area.

In the three months to November 2018, total production output decreased by 0.9% compared with the same three months to November 2017; this is the weakest growth in total production output since November 2012 and the first time since October 2012 there has been widespread weakness across all four sectors.

If we go back to yesterday these numbers take us back to a period when the UK establishment changed tack in terms of economic policy. For example the Bank of England produced some credit easing via the Term Funding Scheme which reduced mortgage rates quite quickly by 1% and the government loosened the fiscal purse strings. Yet we are supposed to believe that the Bank of England currently plans to increase interest-rates.

If we look for causes one has become rather familiar and seems set to stay for a bit.

Providing the largest downward contribution was transport equipment, which fell by 1.1% due to a fall of 2.4% in motor vehicles, trailers and semi-trailers. The weakness was driven by the impact of shutdowns within this industry in October 2018 in addition to reduced production in November 2018.

Another factor has been the mild winter which has reduced electricity and gas output. In many ways this is a good thing as lower demand means that restrictions are unlikely but it reduces the output numbers. This also is something which has continued up until now.

There remains a chilling kicker to all of this, however. If this is another cyclical downturn then it will be from a level well below the previous peak or we are in the lost decade zone.

Production and manufacturing output have risen since then but remain 6.5% and 2.0% lower, respectively, in the three months to November 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

UK GDP

The headline was good.

Monthly gross domestic product (GDP) growth was 0.2% in November 2018, following flat growth in September 2018 and growth of 0.1% in October 2018.

Actually I doubt anyone really believes that UK economic growth has been picking up over this period as we get a real life demonstration of why the numbers are a bad idea. They are simply too erratic. If we look deeper we get a better idea of the trajectory from this.

UK gross domestic product (GDP) grew by 0.3% in the three months to November 2018.

This gives us two themes of which the first is that in international terms with many of the main European economies flirting with recession that is a good performance. It is also true that we have not escaped the chill winds as growth has slowed since the summer. I spotted an interesting perspective the other day which suggested that the boom in areas like cars had the UK at a relative disadvantage to places like Germany and we may now be in a phase where the UK is stronger but that remains to be seen.

As so often the growth mostly came from the services sector.

The services sector rolling three-month growth to November 2018 was 0.3%. Professional and scientific activities was the largest contributor, with a contribution of 0.14 percentage points to gross domestic product (GDP) growth. Other notable contributors were information and communication, and human health activities.

Tucked away in there may be another good effort by the UK film industry so whilst “luvvies” may be annoying please be nice to them as they have been playing a blinder in economic terms recently.

Construction

There was also some good news from this sector.

Construction output recorded an all-time level high in November 2018 in the chained volume measure seasonally adjusted series; the month-on-month series grew by 0.6%, resulting in the total value of construction output exceeding £14 billion for the first time since monthly records began in 2010.

So it is now in line with my Nine Elms crane count which is now 40. But this series has been unreliable after problems with the deflator and the switching of companies between it and services. So make of it what you will.

Trade

The problem with these so-called theme days for UK statistics is that we get too much information and some bits like the trade figures get ignored. Of course that may be the plan as they continue to be in deficit!

The total trade deficit (goods and services) narrowed £0.2 billion to £7.9 billion in the three months to November 2018 as both goods and services exports each increased £0.1 billion more than their respective imports.

There is something else troubling about the data which emphasises my theme that we know much less than we should about services trade.

The total UK trade deficit (goods and services) widened £4.1 billion to £28.6 billion in the 12 months to November 2018. The widening of the trade deficit was due mainly to a £4.4 billion narrowing in the trade in services surplus; the goods deficit narrowed by a lesser £0.3 billion.

We were told that our trade position in services had improved but that has then been more quietly revised away. For newer readers I made the point to the Sir Charlie Bean review of economic statistics that our data in this area was woeful. But nothing seems to have changed.

Comment

We find ourselves at something off a turning point but not the one that the media and chattering classes have obsessed about. In terms of today’s data Brexit is still in the distance but the world economic slow down is happening and seems set to impact more over the winter and into the spring. We should be grateful I think that we have retained at least some economic growth momentum as others look like they have lost it but these sort of slow downs tend to sing along with Muse.

Into the supermassive
Supermassive black hole
Supermassive black hole
Supermassive black hole
Supermassive black hole

So let us cross our fingers.

Andy Murray

Sad news about his injuries today so let me wish him well for the future as he has been a great champion and it may be a very long time before we see his like again.

Podcast

This week provides some answers to questions I have been asked.

The outlook for the economy of Germany has plenty of dark clouds

Sometimes it is hard not to have a wry smile at the way events are reported. Especially as in this instance it has been a success for my style of analysis. If we take a look at the fastFT service we were told this yesterday.

German industrial production unexpectedly drops in November.

My immediate thought was as the German economy contracted by 0.2% in the third quarter we should not be surprised by declines. Fascinatingly the Financial Times went to the people who have not been expecting this for an analysis of the issue.

German data released over the past two days have painted a glum picture for how Europe’s biggest economy performed during the latter part of 2018. fastFT rounds up what economists and analysts have said about what is happening. Anxieties over global trade wars and political uncertainty in the eurozone have taken their toll, and Europe’s powerhouse is showing signs of fatigue. Questions of whether a recession is looming have also been raised, while many economists remain cautiously optimistic in their prognosis.

If we now switch to what we have been looking at I wrote this on December 7th about the situation.

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area.

So not only had there been an expected weakening of the economy but there had been at that point no clear sign of the promised bounce back. What we know in addition now is this which was released on January 3rd.

  • Annual growth rate of broad monetary aggregate M3 decreased to 3.7% in November 2018 from 3.9% in October
  • Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.7% in November, compared with 6.8% in October

So another decline and if we look for a trend we would expect Euro area growth to continue to be weak and this time around that is being led by Germany. The link between monetary data and the economy is not precise enough for us to say Germany is in a recession but we can expect weak growth at best heading into the early months of 2019. The FT does to be fair give us a brief mention of the monetary data from Oxford Economics.

lending growth remaining robust

The problem with that which as it happens repeats the argument of Mario Draghi of the ECB is that it is a lagging indicator in my opinion as banks respond to the better economic news from 2017.

As these matters can be heated let me make it quite clear that I wish Germany no ill in fact quite the reverse but the money supply data has been clear and has worked so far. Frankly the way it is still being widely ignored suggests it is likely to continue to work.

This week’s data

Trade

This morning’s release started in conventional fashion as we got the opportunity to observe yet another trade surplus for Germany.

 Germany exported goods to the value of 116.3 billion euros and imported goods to the value of 95.7 billion euros in November 2018………The foreign trade balance showed a surplus of 20.5 billion euros in November 2018. In November 2017, the surplus amounted to 23.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.0 billion euros in November 2018.

In world terms an annual decline in Germany’s surplus is a good thing as it was one of the imbalances which set the ground for the credit crunch. But if we switch to looking at this on a monthly basis this leapt off the page at me about imports.

-1.6% on the previous month (calendar and seasonally adjusted)

A fall in imports is a sign of a weak economy as for example we saw substantial falls in Greece back in the day. There are caveats to this of which the biggest is that monthly trade data is inaccurate and erratic but such as the numbers are they post another warning. The other side of the balance sheet was more conventional in that with current trade issues one might expect this.

also reports that German exports in November 2018 remained nearly unchanged on November 2017.

Let us move on by noting that due to the way that Gross Domestic Product or GDP is calculated lower imports in isolation provide a boost before a “surprise” fall later as it filters through other parts.

Production

If we step back to Monday there was some troubling news on this front.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2018 a seasonally and calendar adjusted 1.0% on the previous month.

So not much sign of an improvement and it was hardly reassuring that geographically the issue was concentrated in the Euro area.

Domestic orders increased by 2.4% and foreign orders decreased by 3.2% in November 2018 on the previous month. New orders from the euro area were down 11.6%, new orders from other countries increased 2.3% compared to October 2018.

Then on Tuesday we got disappointing actual production numbers.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). The revised figure shows a decrease of 0.8% (primary -0.5%) from October 2018.

So November has quite a fall and this was compared to an October number which had been revised lower. This meant that the annual picture looked really poor.

-4.7% on the same month a year earlier (price and calendar adjusted)

Business surveys

At then end of last week we were told this by the Markit PMI ( Purchasing Manager’s Index) at the end of last week.

December saw the Composite Output Index fall for the fourth month running to 51.6, down from 52.3 in
November and its lowest reading since June 2013.
The latest slowdown was led by the service sector, as the rate of manufacturing output growth strengthened for the first time in five months, albeit picking up only slightly and staying below that of services business activity.

The problem for Markit is that rather than leading events they are lagging them as they are recording declines after the economic contraction in the third quarter. If we took them literally then the economy would shrink by even more this quarter! Anyway they no seem to be on the case of the motor industry. From yesterday.

Latest data indicated a worsening downturn in the European autos sector at the end of 2018. Production of automobiles & parts fell for the third month running, and at the fastest rate since March 2013. New orders fell sharply, with new export business (including intra-European trade) declining at the fastest rate in six years.

Comment

The German economy found itself surrounded by dark clouds as 2018 developed and as I am typing this we have seen more worrying signs. From @YuanTalks.

It’s the FIRST YEARLY DROP in at least 20 years. Passenger car sales slumped 19% y/y in Dec 2018 to 2.26 mln vehicles.

Over 2018 as a whole car sales fell by 6% so we can see the issue is accelerating and there are obvious implications for German manufacturers. It has been accompanied by another generic sign of possible world economic weakness from @LiveSquawk.

Exclusive: Apple Cuts iPhone Production Plan By 10% – Nikkei

Suddenly there is a lot of concern over a German recession or as it is being described a technical recession. In case you were wondering that means a recession that is within the error range of the data which actually covers most of them! Because of these errors it is hard to say whether the German economy grew or contracted at the end of last year, as for example wage growth should support consumption. But what we can say is that the broad sweep from it to the like;y trend for the early part of 2019 is weak. Perhaps some growth but not much after all even 0.2% growth in the final quarter would mean flat growth for the second half of the year.

For those who think ECB policy is set for Germany this poses quite a problem as it has ended its monthly QE purchases just as things have deteriorated in a shocking sense of timing. But to my mind just as bad is the issue that my “junkie culture” theme that growth was dependent on the stimulus also gets a tick including something of a slap on the back from Mario Draghi who seems to have come round to at least part of my point of view.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

According to Handelsblatt every little helps.

Germany has saved €368 billion in interest costs on its debt thanks to record low interest rates since the financial crisis in 2008, according to Bundesbank calculations. That’s more than 10% of annual GDP.

 

 

 

UK GDP and Public Finances look good but the detail is worrying

Today as is often the case the last full trading day before Christmas brings the latest official data for the UK Public Finances which have had a good year. My main theme today will be to look at the many varieties of statistical manipulation that have been happening or as Marvin Gaye so famously put it.

Oh, what’s going on
What’s going on
Yeah, what’s going on
Ah, what’s going on

We also get as is the new wont a further update on UK GDP which also has a statistical swerve as we note the day has begun badly for France on this front.

In Q3 2018, GDP in volume terms* accelerated slightly: +0.3% after +0.2%.

That is a downwards revision of 0.1% and with the current debate over future public finances there was also this.

In Q3 2018, general government net borrowing increased by 0.4 points: the public deficit stood at 3.1% of the GDP after 2.7%.

The national debt is edging towards 100% of GDP ( 99.3%).

UK Public Finances

On Monday the Office for National Statistics gave us an update on a regular theme on here which is the issue of student loans. This is what the position was.

The UK’s student loan system is based on the government giving loans to most students for their tuition fees and maintenance. Students then repay these loans from their pay packets once they have graduated. Currently, in the National Accounts, these loans are treated as government lending.

That matters because in terms of the deficit lending does not appear. But as I have often argued reality is rather different.

However, the design of the system means much of this student loan debt will never be repaid, and is therefore written off by the government. Because of this, many people, including Parliamentary committees, have asked whether this means some, or all, of the money should be treated as government spending rather than government lending.

So this is what they will do in future.

To ensure our treatment of student loans reflects the way the system works in practice we have decided to split the government’s student loan payments into a portion that is genuine government lending and a portion that is government spending. The lending element will be calculated based on expected future repayments. The remainder, which is not expected to be repaid, will be treated as government spending. This will be treated as capital spending

Fair enough in many ways and as to how much here are the initial estimates.

The Office for Budget Responsibility (OBR) has published some initial estimates for the impact on government deficit. According to these estimates, our new approach will lead to the deficit being increased by approximately 0.6 percentage points of GDP a year, which equates to around £12 billion in the current year.

Of course it is hard not to think of the first rule of OBR Club as we note the numbers ( for newer readers it is that the OBR is always wrong). But as a general direction of travel it looks sound and I welcome it/ The changes should begin in the autumn of next year. In a way it should not matter as reality is unchanged but we do know that changes in measurement do have an impact.

So if we look to the positive we may now see some reform of the failing UK student loan system.

Today’s Data

The news here was good yet again.

Borrowing (public sector net borrowing excluding public sector banks) in November 2018 was £7.2 billion, £0.9 billion less than in November 2017; this was the lowest November borrowing for 14 years (since 2004). Borrowing in the current financial year-to-date (YTD) was £32.8 billion, £13.6 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

If we take the broad sweep then revenue growth has been what has made the difference as well as some control over total spending.

In the current financial YTD, central government received £471.1 billion in income, including £353.5 billion in taxes. This was around 4% more than in the same period in 2017.

Over the same period, central government spent £491.9 billion, around 2% more than in the same period in 2017.

Some of this is a reflection of other factors in play as for example the cost of servicing the UK national debt is some £3 billion lower than last year. This is mostly driven by the fall in the annual rate of rise of the Retail Price Index or RPI which defines the UK index-linked Gilt sector.

One area which was a former milch cow is no longer helping as Stamp Duty revenue is £8.8 billion in the financial year so far as opposed to £9.4 billion in 2017.

Moving to the national debt I notice that something we have been looking at has been missed/ignored by financial social media. So here it is and some of you will spot it immediately.

Debt (public sector net debt excluding public sector banks) at the end of November 2018 was £1,795.1 billion (or 83.9% of gross domestic product (GDP)); an increase of £59.3 billion (unchanged at 83.9% of GDP) on November 2017.

Last month the annual increase was only £1.6 billion! The swerve is that the classification change for the UK Housing Associations which was worth circa £65 billion has exited the annual comparison. The numbers do not add up because there have been some genuine changes too.

UK GDP

On the surface nothing has changed and at a time of downwards revisions elsewhere that is good news.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.6% between Quarter 2 (Apr to June) 2018 and Quarter 3 (July to Sept) 2018.

Indeed the past was better than we thought at the time.

GDP was estimated to have increased by 1.8% between 2016 and 2017, revised upwards by 0.1 percentage points from the previous estimate.

However the devil is in the detail as when the first estimate of UK GDP for the third quarter of 2018 was released we were told this.

Net trade contributed 0.8 percentage points to GDP growth in Quarter 3 2018, with a 2.7% rise in exports and flat growth in imports.

Whereas now we are told this.

various revisions to net trade estimates led to a widening of the trade balance,

And Boom!

The cumulative effect over this period has been for net trade to have contributed less than previously estimated, most notably in the latest quarter in which net trade is now estimated to have contributed 0.1 percentage points to GDP growth in Quarter 3 2018. This is revised down from 0.8 percentage points and mainly reflects updated estimates of unspecified goods (which contains NMG). ( NMG is Non Monetary Gold)

So there you have it we have a reduction in a component of GDP by 0.7% but  the final answer remains the same. Rather like we have seen at times for Imputed Rent ( when the deflator was changed on a grand scale) and the Diane Coyle critique of the measurement of the telecommunications sector which suggested the numbers were much too low. In each instance we get an acknowledgement and assurances of changes before the Four Tops fire up.

Now it’s the same old song
But with a different meaning
Since you been gone
It’s the same old song.

Comment

Today’s data releases are positive for the UK as headline GDP growth was relatively strong in the third quarter of this year and the public finances continue to improve. There is both a theme and an irony in my next point which it is very cheap for the UK government to borrow right now with the ten-year Gilt yield being a mere 1.29%. The theme is that there is a certain logic with that following better numbers although the major factor is the expected enthusiasm for the Bank of England Whale making further purchases. The irony is that we borrowed a lot when it was much more expensive and borrow much less when it is cheaper.

Meanwhile as I have illustrated today the numbers need to be taken not just with a pinch of salt but the whole cellar.

Let me finish by wishing you all a Merry Christmas although I have not quite finished as I will publish my weekly podcast later. I will be back in the New Year which looks like yet another one of ch-ch-changes before it has even got out of the starting blocks.

Podcast

 

 

 

Greece GDP growth is accompanied by weakening trade and falling investment

Let us take the opportunity to be able to look at some better news from Greece which came from its statistics office yesterday.

The available seasonally adjusted data indicate that in the 3
rd quarter of 2018 the Gross Domestic Product (GDP) in volume terms increased by 1.0% in comparison with the 2
nd quarter of 2018, while in comparison with the 3 rd quarter of 2017, it increased by 2.2%.

So Greece has achieved the economic growth level promised for 2012 in the original “shock and awe” plan of the spring of 2010. Or to be more specific regained it as the 1.3% growth of the second quarter of 2017 saw the annual growth rate rise to 2.5% at the opening of this year before falling to 1.7%. So far in 2018 Greece has bucked the Euro trend but in a good way as quarterly economic growth has gone 0.5%,0.4% and now 1%.

If we continue with the upbeat view there was this on Monday from the Markit PMI business survey of the manufacturing sector.

Greek manufacturing firms signalled renewed growth
momentum in November, with the PMI rising to a six month high. The solid overall improvement in operating
conditions was driven by stronger expansions in output and
new orders. That said, foreign demand was not as robust,
with new export order growth easing to a 14-month low.
Manufacturers increased their staffing numbers further
in November, buoyed by stronger production growth and
domestic client demand.

So starting from a basic level there is growth and it is better than the average for the Euro area with a reading of 54 compared to 51.8. Also there is hopeful news for an especially troubled area.

In line with stronger client demand, manufacturing firms
expanded their workforce numbers at the fastest pace for
three months. Moreover, the rate of job creation was one of
the quickest since data collection began in 1999

Concerns

If we move to the detail of the national accounts we see that even this level of growth comes with concerns.

Exports of goods and services increased by 2.8% in comparison with the 2nd quarter of 2018. Exports of goods increased by 1.0% while exports of services increased by 3.8%.

This looks good at this point for what was called the “internal devaluation” method where the Greek economy would become more price competitive via lower real wages. But it got swamped by this.

Imports of goods and services increased by 7.5% in comparison with the 2nd quarter of 2018. Imports of goods increased by 8.3% while imports of services increased by 2.2%.

If we look deeper we see that the picture over the past year is the same. We start with a story of increasing export growth looking good but it then gets swamped by import growth.

Exports of goods and services increased by 7.6% in comparison with the 3rd quarter of 2017. Exports of goods increased by 7.9%, and exports of services increased by 8.0%…… Imports of goods and services increased by 15.0% in comparison with the 3 rd quarter of 2017. Imports of goods increased by 15.0%, and imports of services increased by 16.0%.

This is problematic on two counts and the first one is the simple fact that a fair bit of the Greek problem was a trade issue and now I fear that for all the rhetoric the same problem is back. Perhaps that is why we are hearing calls for reform again. Are those the same reforms we have been told have been happening. Also I note a lot of places saying Greek economic growth has been driven by exports which is misleading. This is because it is the trade figures which go in and they are a drag on GDP due to higher import growth. We can say that Greece has been both a good Euro area and world member as trade growth has been strong over the past year but it has weakened itself in so doing.

Investment

An economy that is turning around and striding forwards should have investment growth yet we see this.

Gross fixed capital formation (GFCF) decreased by 14.5% in comparison with the 2nd quarter of 2018.

Ouch! Time for the annual comparison.

Gross fixed capital formation (GFCF) decreased by 23.2% in comparison with the 3rd quarter of 2017.

Whilst those numbers are recessionary as a stand-alone they would be signals of a potential depression but for the fact Greece is still stuck in the middle of the current one. For comparison Bank of England Governor Mark Carney asserted that UK investment is 16% lower than it would have otherwise have been after the EU Leave vote so Greece is much worse than even that.

There are issues here around the level of public investment and the squeeze applied to it to hit the fiscal surplus targets. If this from National Bank of Greece in September is to turn out to be correct then it had better get a move on.

A back-loading of the public investment programme, along with positive confidence effects, should provide an additional boost to GDP growth in the H2:2018,

What did grow then?

Rather oddly the other sectoral breakdown we are provided with shows another fall.

Total final consumption expenditure decreased by 0.2% in comparison with the 2nd quarter of 2018.

But the gang banger in all of this is the inventories category which grew by 1321 million Euros or if you prefer accounts for 2.4% quarterly GDP growth on its own. This is not exactly auspicious looking forwards as you can imagine unless there is about to be a surge in demand. The only caveat is that we do not get a chain-linked seasonally adjusted number.

Comment

As you can see there is plenty of food for thought in the latest GDP numbers for Greece.On the surface they look good but the detail is weaker and in some cases looks simply dreadful. That is before we get to the impact of the wider Euro area slow down. The problem with all of this is that of we look back rather than the 2.1% economic growth promised for 2012 Greece saw economic growth plunge into minus territory peaking twice at an annual rate of 10.2%. Or the previous GDP peak of 60.4 billlion Euros of the spring of 2009 has been replaced by 48 billion in the autumn of 2018.

Meanwhile after the claimed triumphs and reform and of course extra cash the banks look woeful. So of course out comes the magic wand. From the Bank of Greece.

The proposed scheme envisages the transfer
of a significant part of non-performing exposures
(NPEs) along with part of the deferred
tax credits (DTCs), which are booked on bank
balance sheets, to a Special Purpose Vehicle
(SPV). value (net of loan loss provisions). The
amount of the deferred tax asset to be transferred
will match additional loss, so that the
valuations of these loans will approach market
prices. Subsequently, legislation will be
introduced enabling to transform the transferred
deferred tax credit into an irrevocable
claim of the SPV on the Greek State with a
predetermined repayment schedule (according
to the maturity of the transaction).

More socialisation of losses?