Abenomics does not address the economic problems facing Japan

At the moment Japan must be looking at the UK with some bemusement. That is because it has been a country with political instability with a merry-go-round of Prime Ministers and yet an axis has shifted. We are now in a type of flux whereas Prime Minister Shinzo Abe has been in power since November 2012. This means that his economics policy of Abenomics has had a decent run in terms of time and yet again we see someone who has taken the Matrix style blue pill and declared it a success. Let me hand you over to Matt O’Brien of the Washington Post.

Its unemployment rate has fallen to a 22-year low of 2.8 percent — yes, you read that right — due in large part to all the yen it has created the past four years.

The former which we have looked at before is a success and it is the flip side of this.

Maybe the best way to tell isn’t its super-low unemployment rate, but rather its super-high employment rate. That, as you can see below, has shot up since the start of Abenomics to an all-time high of 83.5 percent, making our own 78.3  ( He means the US ) percent rate look downright measly in comparison.

Again a success in itself as the quantity measures in the labour market are as strong as anywhere. But then we get an enormous leap of what I can only call faith.

It can’t be the fiscal or structural parts of Abenomics, because they’ve barely been tried……..All their money-printing seems to have given businesses the confidence — and the cheaper currency — they needed to expand a little more.

Thus we see a conclusion that the money printing has led to higher employment. Some would argue that with a fiscal deficit of 4.8% of GDP in 2015 and 4.5% last year with a debt to GDP ratio that fiscal stimulus had been tried rather a lot. Also there seems to be any lack of a causal relationship as the phrase “seems to have” suggests. Let us finish with some hyperbole.

And all it would have taken was printing a few trillion yen, which actually isn’t that high a price to pay.

Numbers may not be a strength for Matt as we remind ourselves of this from the 6th of this month.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets,

Taking the red pill

Dissent in Japan is mostly considered to be non-Japanese so this from the Nikkei Asian Review ( NAR ) is interesting. First the ground is described.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013,

Okay so what has happened since then?

But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.

If we return to the case made by Matt O’Brien above the fact that estimates of the potential growth rate have fallen seems to be missing doesn’t it? That is awkward for business supposedly being more confident in response to a promise to print money to infinity and maybe beyond. The tectonic plates on which supporters of QE stand would be on their own Ring of Fire if there are further suggestions that it reduces potential economic growth. I have been a critic of QE style policies and note that this below suggests yet another problem with the claimed transmission mechanism.

But while tax cuts helped boost businesses, many are merely hoarding their cash. Total internal reserves held by Japanese corporations have grown some 40% under Abe to 390 trillion yen. No solutions are in sight.

The NAR seems to agree with me about the trajectory of fiscal policy as well.

In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas.

Also the NAR fires a lot of criticism at the so-called third arrow of Abenomics which is reform in Japan.

The debate on compensation for unfairly dismissed employees has stalled. While Tokyo opened the door for foreign workers with exceptional skills or those in certain sectors such as cleaning, it has shied away from a comprehensive discussion on immigration. Momentum to tackle regulatory barriers is fading.

It points out that if Abe wished to reform the labour market politically he is in what might be called a “strong and stable” position due to the way his party the LDP controls both the upper and lower houses in parliament.

The economy

There was some disappointment last week as the economic growth figures for the first quarter took a downwards revision.

The expansion in real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, was revised to an annualized 1.0 percent growth from the previously estimated 2.2 percent expansion, the Cabinet Office said. ( The Japan Times ).

The good part of that was that it meant that Japan had grown for five quarters in a row which it had not done for over a decade. There were two bad parts though in that as well as being in the economic growth dog kennel with the UK there was an implication for the Abenomics plan of boosting inflation to 2% per annum.

In  nominal terms, or unadjusted for price changes, the economy shrank an annualized 1.2 percent, the biggest contraction since 2.2 percent registered in the July-September period of 2012.

Also the period of Abenomics was supposed to see a rise in inflation and more particularly a rise in wages. As the Japan Times reminds us the labour market is tight.

Moreover, there were 148 job positions open for every 100 people looking for work, the highest ratio in 43 years.

But wage growth is at best anemic.

But the labor ministry reported that in 2016, wages across the board — regardless of whether we’re talking full-time or part-time employment, regular or nonregular employees — only rose by 0.4 percent

Why? Well as we observe in some many countries official definitions of being in a job miss changes in the real world.

a larger portion of the workforce is in part-time and non regular jobs, which traditionally pay less.

Comment

There have been some extraordinary claims made for the success of monetary easing and QE. In my opinion we see a clear divorce between the financial and real economy. If we look at the financial economy in the era of Abenomics we see booming equity markets ( the Nikkei 225 has risen from 9000 or so to ~20,000), a lower currency ( versus the US Dollar it has gone from 80 to 110) and booming bond markets with a ten-year yield of 0%. But the real economy has not seen the boom in wages promised nor any great turn in the rate of GDP growth. Ironically it has been the recent fall in inflation that seems to have given GDP an upwards push rather than the claimed surge to 2% per annum.

Meanwhile the real challenge is adapting to this.

The annual number of babies born in Japan slipped below 1 million in 2016 for the first time since records began, with the estimated figure for the year coming in at 981,000, according to government figures. ( Japan Times)

The reminds us of the demographic changes underway highlighted by the fact that the figures for the 6 months to May showed the population falling by another 245,000. Exactly how will QE fix those?

 

 

 

 

Spain continues to see a strong economic recovery

At the moment we could do with some good news. Saturday night’s dreadful terror attack was at a place I know well beginning from childhood as one set of grandparents lived near to Borough Market. A place that has found some economic good news in the past couple of years or so has been Spain. This followed something of a double whammy as the initial impact of the credit crunch was then followed by the Euro area crisis. As I look back it feels a little strange to see its ten-year bond yield above 7% as it was in July of 2012 when the latter crisis was raging. Of course those with the courage and foresight to buy Spanish government bonds back then were well rewarded if they held onto the position.

Today’s business survey

From Markit:

The recent strong growth rates generated by the
Spanish service sector continued in May. Further
sharp increases were recorded in business activity
and new orders. With workloads rising, and the
prospect of new projects in future, companies took
on extra staff again. Meanwhile, inflationary
pressures moderated during the month.

As you can see there are several points to not here. For example the situation looking ahead is strong.

Moreover, sentiment picked up to the highest in 26
months. More than 55% of respondents predict
output to be higher in 12 months’ time than current
levels.

Also we see that employment is on the rise which is welcome considering the still troubled unemployment picture.

Spanish service providers increased their staffing
levels during May, with new hires needed to work
on current and future projects. The rate of job
creation was solid and only slightly weaker than
April’s nine-month high.

Added to this is a decline in inflationary pressure which starts to make this look rather like a situation where Goldilocks porridge is at exactly the right temperature.

Inflationary pressures showed signs of easing in the
sector during May, with both input costs and output
charges rising at weaker rates than recorded in April.

At the end Markit are very bullish on GDP growth this quarter.

with nearly 1% being signalled for Spain

Should that prove to be true then the forecasts of the Bank of Spain will start to look a little pessimistic.

Based on our estimates, GDP could rise by 2.8% this year, before slipping to more moderate growth rates of 2.3% and 2.1%, respectively, in 2018 and 2019.

Although to be fair it was expecting a growth spurt based on something you do not often hear or read associated with the Euro area.

the expansionary fiscal policy

Official GDP growth

The first quarter of this year was a good one for economic activity in Spain according to its statistics office.

The Spanish economy registers a quarterly growth of 0.8% in the first quarter of 2017. This rate was one tenth higher than that registered in the fourth quarter of 2016.  The growth compared to the same quarter last year stands at 3.0%, the same rate as that recorded the previous quarter.

A phrase so beloved of economists can be deployed which is, export-led growth.

The contribution of net foreign demand of the Spanish economy to annual growth of the quarterly GDP was 0.8 points………Goods and services exports accelerated its rate of growth, increasing from 4.4% to 8.4%

This morning has brought more good news on this front. From Spanish statistics via Google Translate.

The total expenditure of international tourists who visit Spain in April increases by 19.7% compared to the same month of 2016. Average daily spending stands at 137 euros, 5.5% more than in April 2016……..During the first four months of 2017 the total expenditure of international tourists increased by 15.3% compared to the same period of the previous year, reaching 20,394 millions of euros.

Actually Spain was also a good global citizen in that it shared some of the benefits around too.

Imports of goods and services experienced an increase of 4.1 points, from 2.3% to 6.4%

As well as export-led growth there was also investment led growth.

Gross fixed capital formation registered a growth rate of 3.8%, indicating an increase of 1.6 points as compared with the previous quarter.

Unemployment

This is the achilles heel of the Spanish economy as the latest official quarterly survey informs us. Via Google Translate.

The unemployment rate stands at 18.75%, which is 12 cents higher than in the Previous quarter. In the last year this rate has fallen by 2.25 points.

The problem is shown by the fact that even after 3 good years for economic growth unemployment is still at a rate of 18.75% meaning that 4,255,000 Spaniards are recorded as unemployed. The good news is that until this quarter the rate has been falling and with the rate of economic growth the increase seems strange. As does the quarterly fall in employment of 69.800 which tells a different story to the GDP report.

Employment of the economy in terms of jobs equivalent to full-time employment registered a quarterly variation of 0.7%, three tenths higher than that registered in the previous quarter.

Over the past year we see that the two roads give similar answers ( 408k versus 435k) so if pressed one would say that the fall in employment from the labour market survey seems most suspect here. Maybe the 65,000 households surveyed had seen a particularly poor phase.

Monetary policy

This is a little awkward for Spain as the very expansionary policy does not go well with the economic strength we have looked at above. If we look for any sign of the “punch bowl” being taken away as the party gets started we see only a reduction in monthly ECB bond purchases to 60 billion Euros a month from 80 billion. The deposit rate at the ECB remains at -0.4% and helped by some 182.5 billion Euros of buying by the ECB the Spanish government can borrow at negative interest-rates on short-dated bonds and only 0.06% for five year ones. A little bit of a brake will have been applied by the rise in the Euro to around 1.12 versus the US Dollar.

Accordingly policy could not be much looser and it is hard to think of an economy in the past that has tried this sort of experiment in terms of expansionary monetary policy in such a boom.

House prices

So far we are not getting much of a clue from the various indices which tell us that they may be going up or down! This was interesting via Spanish property insight.

The outlier is the 7.74% increase reported by the registrars, using their repeat sales methodology that only looks at the price of property that has sold twice in the period of study.

The catch is that it must be a rather small sample size. Spanish statistics has the annual increase at 4.5%. So is this a case of once bitten twice shy? The index provided by Spanish notaries was set at 100 in 2007 and  was 70.7 at the end of 2016. Mind you for PropertyEU up seems to be the new down or something like that.

Looking at property performance returns in Europe in the last 10 years, Spain is second on the list after Sweden with a 13% return, followed by Ireland and then Portugal with 12 per cent.

Some of the gap can perhaps be provided by rents where as I reported on the 27th of January there has been a boom. From RTN online.

THE AVERAGE price of rental housing in Spain rose 8.8 per cent in the first quarter of 2017 due to increasing demand, according to the rental price evolution report published on Wednesday by Idealista.

Comment

The good news theme coming out of Spain was reinforced by Real Madrid retaining the football Champions League trophy on Saturday evening. The dangers for now seem to be a combination of monetary policy which if we allow for the fact that policy changes take 18 months or so to operate seems way too lax and the way that if a housing boom is underway it is in the rental sector this time around.

Also there is still some ground to be gained as even the really good growth of the last few years has only just got Spain back to its previous peak. With 2010 set as 100 that was the 104.4 of the second quarter of 2008 which if the releases above are accurate should now have been regained. Whichever way you look at that it remains odd that Banco Popular has hit trouble now I think.

Economists letters

In spite of the track record of such events it would appear that some are not deterred.

https://www.theguardian.com/news/2017/jun/03/the-big-issue-labour-manifesto-what-economy-needs

Will 2017 see an economic rennaisance for France?

This morning has opened with some better economic news for France as GDP ( Gross Domestic Product) growth was revised higher.

In Q1 2017, GDP in volume terms* rose barely less fast (+0.4%) than in Q4 2016 (+0.5%).

The French statistical service have put in it downbeat fashion and you have to read to the end to spot it as it is right at the bottom.

The GDP growth for Q1 2017 is raised from +0.3% to +0.4%.

There was also a good sign in the fact that investment was strong.

In Q1 2017, total GFCF accelerated sharply (+1.2% after +0.5%), especially that of enterprises (+1.9% after +0.9%)……Investment in manufactured goods was more dynamic (+1.6% after +0.4%), notably in equipment goods. Similarly, GFCF in market services accelerated sharply (+1.9% after +0.7%), notably in information-communication and business services.

However it was not a perfect report as there were signs of what you might call the British problem as trade problems subtracted from the growth.

Exports fell back in Q1 2017 (−0.8% after +1.0%), especially in transport equipment and “other manufactured goods”. Imports accelerated (+1.4% after +0.6%)………..All in all, foreign trade balance weighed down on GDP growth by −0.7 points, after a contribution of +0.1 points in the previous quarter.

If we look back there may be an issue building here as import growth was 4.2% in 2016 which considerably exceeded export growth at 2.1%. So it may well be true that the French are getting more like the British which is something of an irony in these times.

You may be wondering how there was any economic growth after the net trade deficit and that is because inventories swung the other way and offset it.

In Q1 2017, the contribution of changes in inventories to GDP growth amounted to +0.7 points (after −0.2 points at the end of 2016). They increased especially in transport equipment and “other industrial goods” (pharmaceuticals, metallurgy and chemicals).

The optimistic view on this is that French businesses are stocking up for a good 2017 with the danger being that any disappointment would subtract for growth later this year.

Also as feels so common in what we consider to be the first world the manufacturing industry continues to struggle.

Manufacturing output fell back (−0.2% after +0.7%), mainly due to a sharp decline in the coke and refined petroleum branch and a slowdown in transport equipment.

Looking ahead

The good news is that the private-sector business surveys are very optimistic at the moment.

The latest PMI data points to further strong growth momentum in the French private sector, with the expansion quickening to a six-year peak.

Of course France has been in a rough patch so that may not be as good as it reads or sounds so let us look further.

The service sector saw activity increase for the eleventh time in as many months. Moreover, the rate of expansion accelerated to a six-year high and was sharp overall. Manufacturing output also continued to rise markedly, albeit to a fractionally weaker extent than in April.

As you can see the service sector is pulling the economy forwards and manufacturing is growing as well according to the survey. Unusually Markit do not make a GDP prediction from this but we can if we note they think this for the Euro area which has a lower reading than France.

consistent with 0.6- 0.7% GDP growth.

So let us say 0.7% then and also remind ourselves that it has not been common in recent years for there to be an expectation that France will outperform its Euro area peers.

However this morning’s official survey on households did come with a worrying finale to the good news stream.

In May 2017, households’ confidence in the economic situation has improved anew after a four-month stability: the synthetic index has gained 2 points, reaching 102, above its long-term average and at its highest level since August 2007.

What could go wrong?

Unemployment

This has been the Achilles heel for France in the credit crunch era but this too has seen some better news.

In Q1 2017, the average ILO unemployment rate in metropolitan France and the overseas departments (excluding Mayotte) stood at 9.6% of active population, after 10.0% in Q4 2016.

The good news is that we see the unemployment rate finally fall into single digits. The bad news is that it mostly seems to be people who have given up looking for work.

The activity rate of people aged 15-64 stood at 71.4% in Q1 2017. It decreased by 0.3 percentage points compared to the previous quarter and a year earlier.

The business surveys are optimistic that employment is now improving as we see here.

Bolstered by strong client demand, French private sector firms raised their staffing numbers in May, thereby continuing a trend that has been evident since November last year. Furthermore, the rate of job creation quickened to a 69-month high.

Monetary policy

Yesterday we heard from ECB ( European Central Bank ) President Mario Draghi and he opened with some bombast.

Real GDP in the euro area has expanded for 16 consecutive quarters, growing by 1.7% year-on-year during the first quarter of 2017. Unemployment has fallen to its lowest level since 2009. Consumer and business sentiment has risen to a six-year high,

You might be wondering about monetary policy after such views being expressed but in fact we got this.

For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monetary accommodation.

Is that a Tom Petty style full speed ahead and “Damn The Torpedoes”? For now perhaps but there are two other influences. In terms of a tactical influence Mario Draghi will have noted the rise of the Euro since it bottomed versus the US Dollar in December last year and would prefer it to be lower than the 1.12 it has risen to. Also more strategically as we have discussed on here before he will be waiting for the Euro area elections to pass before making any real change of course in my opinion. That leaves us mulling once again the concept of an independent central banker as we note that economic growth is on the upswing in election year.

Thus France finds itself benefiting from 293.7 billion Euros of sovereign bond purchases meaning it can issue and be paid for it out to around the 6 years maturity and only pay 0.74% on ten-year bonds. This is a considerable help to the fiscal situation and the government. In addition there are the corporate bond purchases and the covered bond purchases to help the banks. The latter gets so little publicity for the 232 billion Euros on the ECB’s books. Plus we have negative interest-rates and a Euro exchange rate pushed lower.

Has monetary policy ever been so expansionary at this stage of the economic cycle?

House prices

There was some further news to warm the cockles of Mario Draghi’s heart this morning.

In Q1 2017, the prices of second-hand dwellings kept increasing: +1.9% compared to the previous quarter (provisional seasonally adjusted results). The increase is virtually similar for flats (+1.9%) and for houses (+1.8%).

Over a year, the increase in prices was confirmed and strengthened: +3.0% compared to Q1 2016 after +1.5% the quarter before.

Up until now we have seen very little house price inflation in France and whilst the rate is relatively low it does look to be on the rise which represents a clear change. If you add this to the house price rises in Germany that I analysed on the 8th of this month then the ECB will be pleased if first-time buyers will not be.

Comment

It looks as though France is in a better phase of economic growth. This is certainly needed as we look at the unemployment rate issue but there is also another factor as this from French statistics indicates.

 2016 (GDP growth unchanged, at +1.1% WDA), 2015 (−0.2 points at +1.0%) and 2014 (+0.3 points at +1.0%)

As you can see the annual rate of economic growth has been essentially 1% as we note something of a reshuffle in the timing. Indeed in spite of a better couple of quarters the current annual rate of economic growth in France is you guessed it 1%! Somehow 1% became the new normal as we wait and hope for better news as 2017 develops. Should we get that then at this stage of the cycle I fear we may then be shifting to how long can it last?!

 

 

Brazil has its very own currency war

This week has been one where the political topic of impeachment has affected financial markets. Like so many things these days it started with the Donald but then as the week developed headed south to the sound of samba music. From the BBC.

Brazilian President Michel Temer says he will not quit, amid allegations he authorised paying bribes to silence a witness in a huge corruption scandal……….Opposition parties have been demanding snap elections and his impeachment.

This would add to the impeachment of the previous President Dilma Rousseff in what must now seem something of a conveyor belt to ordinary Brazilians.

The Real

As events unfolded I was reminded of the famous statement from Brazil’s Finance Minister from September 2010.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies. ( Financial Times)

Back then he was complaining mostly about the US Dollar which had fallen by around 25% against the Brazilian Real as the US Federal Reserve expanded its balance sheet after large interest-rate cuts. Well presumably he would have been happier with what happened yesterday although probably not the cause.

The real tumbled 8 per cent to 3.38 against the US dollar, wiping out all of this year’s gains and taking the currency back to its level of last December. The real had been trading below 3.10 to the dollar as recently as Wednesday.

If we look back we see that Finance Minister Mantega has in more recent years much to cheer if he was a fan of a lower currency. Back in September 2010 when he made his speech some 1.7 Reals purchased a single US Dollar so approximately half the current rate. In fact the Real had been even lower as it had fallen to more than 4 versus the US Dollar in late 2015 and early 2016. In more recent times it has rallied as foreign investors purchased Brazilian assets in the hope that the reforms of the current President would improve the economy.

You may like to note that the currency fall took place in spite of the fact that Brazil has interest rates that seem rather extraordinary from our continent of near zero and indeed negative official ones.

the Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 percent per year, without bias.

Although as you can see they have been easing policy in 2017.

Equity markets and leverage

These plunged as well and led to a moment which will have Snoopy from the Peanuts cartoons back on the roof of his kennel wailing “When,when,when will I ever learn……?”

The 3x Brazil ETF ends the day down 48.2%, the largest single day decline for an ETF in history. Maravilhoso.  ( @charliebilello ).

Ouch! Although someone did suggest there has been a worse decline.

Not quite. There was a certain Europe listed 5x Swiss Franc ETF that did worse on a certain Jan day in 2015. ( @garobhai)

What was that about sorrows coming in battalions rather than single spies?

An economic depression

I have looked at the economic woes of Brazil before and note the central banker euphemisms of the Central Bank of Brazil.

The economy continues to operate with a high level of economic slack, reflected in the low industrial capacity utilization indices and, mainly, in the unemployment rate.

Yesterday the Brazilian statistics office released its latest unemployment data.

In the 1st quarter of 2017, the compound labor underutilization rate (which aggregates the unemployed persons, time-related underemployed persons and potential workforce) stood at 24.1%, which represents 26.5 million persons. In the 4th quarter 2016, for , this rate was of 22.2% and, in the 1st quarter of 2016, it was 19.3%.

Well played to them in having an underemployment rate rather than an unemployment one. Unfortunately it is not only high it is rising quite sharply and as an aside it reminds us that Brazil has a large population. It is not quite so easy to find the unemployment rate itself but I did finally spot it.

The unemployment rate ( 13.7%) advanced in all Major Regions in the 1st quarter of 2017 in relation to 4th quarter of 2016.

If the double-digit rate of unemployment is to fall then Brazil will need some economic growth but last Friday’s service data showed the reverse.

In March, the services sector recorded decrease of 2.3% in the volume of sales over the previous month (seasonally-adjusted series), after having recorded a growth of 0.4% in February (reviewed) and 0.0% in January (reviewed). This is the highest decrease of the series initiated in 2012….

Compared to a year ago there has in fact been a sharp decline.

In the non-adjusted series, in the comparison with March 2016, the sector posted decrease of 5.0%, following the downward trend of 5.3% in February (reviewed) and 3.5% in January. With such results, the cumulative rate in the year stood at -4.6% and, in 12 months, at -5.0%.

The retail sales sector is not helping either.

In the seasonally-adjusted series, the extended retail trade – which includes retail plus the activities of vehicles, motorcycles, parts and pieces and of construction material – once again registered a negative change in volume of sales over the immediately previous month (-2.0%)…….Compared with March 2016, the extended retail trade retreated 2.7% in volume of sales (34th consecutive negative rate) and -1.2% in nominal revenue.

34 months of declining retail sales is yet another depressionary signal is it not?

What about inflation?

The picture had been improving although the level is high for these times.

The Extended National Consumer Price Index (IPCA) of April recorded a change of 0.14%……..In the last twelve months, the index was down to 4.08%, below the 4.57% result of the previous month, becoming the lower rate in 12 months since July 2007, when it was at 3.74%

The fall was mostly due to something of a shambles on the electricity front although of course Brazil is far from alone in that.

The 6.39% drop in the item electricity represented discounts over bills, as a result of the decision of the Brazilian Electricity Regulatory Agency (Aneel), so as to make up for the overcharge, in 2016, of the so-called Reserve Energy Charge (EER) destined to pay the Angra III power plant.

The price of chocolate went up by 10.23% on an annual basis which is yet another country that does not reflect falls in the price of cocoa.

Comment

So far I have avoided looking at the economic depression in growth or Gross Domestic Product terms so let us now catch up with that.

In 2016, the GDP fell 3.6% in relation to the previous year, slightly lower than the 2015 result, when it had been 3.8%. There were drops in Agriculture (-6.6%), Industry (-3.8%) and Services (-2.7%). The GDP totaled R$ 6,266.9 billion in 2016.

The GPD fell 0.9% in the 4th quarter of 2016 against the 3rd quarter, considering the seasonally adjusted series. It is the eighth consecutive negative result in this kind of comparison. Agriculture grew 1.0%, whereas Industry (-0.7%) and Services (-0.8%) fell.

The only real ripple of good news I can find is that wheat production has been strong in 2017 so far so maybe agriculture will continue to grow. I note that the central bank was not especially optimistic in its April report and neither was the Markit manufacturing survey from earlier this month although it did not expect a further decline.

However, rising from 49.6 in March to 50.1 in April, the latest reading was indicative of broadly unchanged business conditions facing goods producers.

So the political and financial crisis as so often is hitting an economy when it is already down. I also note that when a shock hits even interest-rates of 11.25% do not protect a currency which is a lesson that has been taught many times before. Although for buyers of the Real at current levels there are likely to be fewer interest-rate cuts in 2017 now for obvious reasons. For s start the lower currency if sustained will lead to higher inflation.

As to quality of life even the recent Olympics has been seen to have a dark side. From the Guardian yesterday.

The area where most of our homes once stood is now a large concrete car park that is usually empty and insufferably hot. It is sad. There used to be 650 families here. Today, there are 20……..Hosting was a mistake. When the Games were over, those that already had money and investments – the hotel owners, businessmen, building companies, tourist agents and government officials – were better off, while the country and the people were left with the bill.

What are the economic prospects for France?

This weekend sees the first stage of the French Presidential elections which seem to be uncertain even for these times. A big issue will be economic prospects which will be my subject of today. But before I do let me send my best wishes to the victims of the terrorist attack which took place in Paris last night. If we move back to the economic situation we can say that the background in terms of the Euro area looks the best it has been for a while. From French Statistics.

In Q1 2017 the Eurozone economy is expected to grow at a similar pace as registered at the end of 2016 (+0.4%), then slightly faster in Q2 (+0.5%) before returning to +0.4% in Q3 2017. The main force behind the expansion in aggregate activity should be private consumption which benefits from the increase in disposable income and favourable labour market conditions and despite the upturn in inflation which is eroding household purchasing power. Moreover investment is forecast to strengthen, driven by improved expectations about near term outlook. Also investment in construction should accelerate. Finally, the positive international environment will likely reinforce external demand growth and exports.

As you can see according to them Goldilocks porridge seems pretty much exactly the right temperature as everything is expected to rise.

What about France itself?

 Some perspective

If we look back 2016 was an erratic year where quarterly economic growth was 0.6%,-0.1%,0.2% and then 0.4%. So whilst it began and ended well there was a near recession in the middle. Overall the growth at 1.1% was in fact less than the 1.2% of 2015 and it does pose a question as that is the level of economic growth which has caused such problems in both Italy and Portugal. Indeed if we look back we see that as 2011 opened quarterly economic output was 509 billion Euros whereas in the last quarter of 2016 it had only risen by 4,4% to 531.6 billion Euros ( 2010 prices).

This lack of economic growth has contributed to what is the major economic problem in France right now.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016……Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The fact so long after the credit crunch hit the unemployment rate is still in double-digits albeit only just echoes here. Also there is the issue of underemployment.

In Q4 2016, 6.2% of the employed persons were underemployed, a ratio decreasing by 0.1 percentage points quarter on quarter, and by 0.4 percentage points over a year. Underemployment mainly concerns people who have a part-time job and wish to work more.

Oh and if we return to the unemployment rate actually 10% is only a reduction because the previous quarter was revised higher. We could improve like that forever and remain at the same level!

The next consequence of slow/low economic growth can be found in the public finances.

At the end of 2016, the Maastricht debt accounted for €2,147.2 billion. It rose by €49.2 billion in 2016 after € +60.2 billion in 2015. It reached 96.0% of GDP at the end of 2016, after 95.6% at the end of 2015.

In essence this has risen from 65% pre credit crunch and the combination of an annual fiscal deficit and slow growth has seen it rise. France seems to have settled on an annual fiscal deficit of around the Maastricht criteria of 3% of GDP so to get the relative debt level down you can see how quickly it would need to grow.

What about prospects?

This morning’s business survey from Markit has been very positive.

The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 57.4, compared to March’s reading of 56.8. The latest figure was indicative of the sharpest rate of growth in almost six years.

The idea that elections and indeed referenda weaken economies via uncertainty may need to be contained in Ivory Towers going forwards.

The numbers provide further evidence that the French private sector remains resilient to political uncertainty around the upcoming presidential election. Indeed, business optimism hit a multi-year high in April, with a number of respondents anticipating favourable business conditions following its conclusion.

Even better there was hope of improvement for the labour market.

Moreover, the rate of job creation quickened to a 68-month peak. Both manufacturers and service providers continued to take on additional staff, with the pace of growth sharper at the former.

However a little caution is required as we were told by this survey that there was manufacturing growth in February as the index was 52.2 but the official data told us this.

In February 2017, output diminished for the third month in a row in the manufacturing industry (−0.6% after −0.9% in January). It decreased sharply in the whole industry (−1.6% after −0.2%). Manufacturing output decreased slightly over the past three months (−0.3%)…..Over a year, manufacturing output also edged down (−0.5%)

Bank of France

In a reversal of the usual relationship the French central bank is more downbeat than the private business surveys as you can see below.

In March, industrial production rose at a less sustained pace than in February.

Whilst it describes the services sector as dynamic I note that its index for manufacturing fell from 104 in February to 103 in March leading to the overall picture described below.

According to the monthly index of business activity (MIBA), GDP is expected to increase by 0,3% in the first quarter of 2017. The slight revision (-0,1 point) of last month estimate does not change the overall perspective for the year.

The cost of housing

This is very different to the situation across La Manche ( the Channel) and a world apart from the Canadian position I looked at yesterday.

In Q4 2016, house prices slightly decreased compared to the previous quarter (−0.3%, not seasonally adjusted data) after two quarters of increase. This slight downturn was due to secondhand dwellings (−0.4%). However, the prices of new dwellings grew again (+0.7%).

Indeed some more perspective is provided by the fact that an annual rate of growth of 1.9% is presented as a rise!

Year on year, house prices accelerated further in Q4 2016 (+1.9% after +1.4% in Q3 and +0.7% in Q2). New dwelling prices grew faster (+2.9% y-o-y) than second-hand dwelling prices (+1.8%).

Not much seems to be happening to rents either.

In Q1 2017, the Housing Rent Reference Index stood at 125.90. Year on year, it increased by 0.51%, its strongest growth since Q2 2014.

Just for perspective the index was 124.25 when 2013 began so there is little inflation here.

Comment

There is much that is favourable for the French economy right now. For example the European Central Bank continues with very expansionary monetary policy with an official interest-rate of -0.4% and 60 billion Euros a month of QE bond purchases. The Euro as an exchange-rate is below the level at which it started although only by 6%. So France finds that it gets a boost from very low debt costs as the recent rise in them only leaves the ten-year yield at 0.83%.

So 2017 should be a good one although there is the issue of why other countries have out-performed France. We only have to look south to see a Spain where economic growth has been strong. A couple of years of that would help considerably. But as I type that I am reminded of some of the comments to yesterday’s article especially the one saying house prices in Barcelona are on the march again. To get economic growth these days do we need booming house prices? This leads into my argument that we are calling what is really partly inflation as growth. The catch is that the numbers tell people they are better off but then they find housing ever more expensive and increasingly frequently unaffordable. As we stand France does better here but is that at the cost of higher unemployment?

 

 

 

 

UK employment improves and so does underemployment

As we look at the UK labour market today let us start with something which in one way is good news and in another poses questions. From Reuters last week.

Manchester United winger Jesse Lingard has signed a new contract that will keep him at Old Trafford until 2021, the Premier League club said in a statement on Thursday.

Lingard, who will earn up to 100,000 pounds a week according to British media reports, has an option to extend the deal by a further year.

Firstly congratulations to Jesse and for once it is nice to see an English player benefit from the largesse of the Premier League these days. There is invariably hype in the exact numbers but he seems to have approximately trebled his wages which will do there bit for the average wages series in the future. However those who watched an outstanding display by Juventus last night in the Champions League as they put Barcelona to the sword have been mulling the concept of relativity. From @Football_Tweet

– Paulo Dybala earns €3M a season at Juventus. – Jesse Lingard earns €6M a season at Man Utd.

we return to a familiar question which is how much of the wages growth is in effect a type of inflation?

The impact of Robots

If we look ahead on a more general level then we can expect to see not only more robots in our economy but more advanced ones appear. Not quite as advanced as the ones in the Foundation saga of Isaac Asimov that I am currently reading again but considerable advances are being made. According to Bloomberg such improvements are likely to have an impact on labour markets and wages especially.

Robots have long been maligned for job-snatching. Now you can add depressing wages and promoting inequality to your list of automation-related grievances.

Industrial robots cut into employment and pay for workers, based on an new analysis of local data stretching from 1990 and 2007. The change had the biggest impact on the lower half of the wage distribution, so it probably worsened America’s wage gap.

The exact results are as follows.

One additional robot per thousand workers reduces the employment-to-population ratio by 0.18 percentage points to 0.34 percentage points and slashes wages by 0.25 percent to 0.5 percent, based on their analysis.

Food for thought as we look forwards in years and decades and of course ground which many of the best science fiction writing has warned about.

Today’s data

The quantity data remains pretty strong as you can see.

There were 31.84 million people in work, 39,000 more than for September to November 2016 and 312,000 more than for a year earlier.

There was an additional kicker to this as we got a glimpse into a potentially improving situation regarding underemployment as well.

with an increase in full-time employment (positive 146,000) partly offset by a fall in part-time employment (negative 107,000)………….strong demand for labour is translating into a shift from part-time to full-time employment, and an increase in the average hours worked per week by both full time and part-time employees.

Here is the analysis of hours worked.

Average hours worked per week increased from 32.0 to 32.4 in the 3 months to February 2017, the highest since July to September 2002, largely due to more hours being worked over the Christmas and New Year period compared with recent years.

Fewer part-time workers are looking for full-time work.

Data released today (12 April 2017) show that this measure continued to contract with the proportion falling to 12.6%, down from 14.2% a year ago (and down from a peak of 18.4% in 2013). This proportion is now at its lowest since March to May 2009, but still well above its pre-crisis average of 8.3%.

So it looks as though the situation regarding underemployment has improved as well although the data is only partial and let us finish this section with the unemployment numbers.

There were 1.56 million unemployed people (people not in work but seeking and available to work), 45,000 fewer than for September to November 2016 and 141,000 fewer than for a year earlier.

What about wages?

These were the same as last month in terms of growth.

Between the three months to February 2016 and the three months to February 2017, in nominal terms, total pay increased by 2.3%, the same as between the three months to January 2016 and the three months to January 2017.

Actually there was a rise in the month of February by 2.9% on the year before so maybe a hopeful hint of a pick-up! We will find out as we go through the bonus months of March and April. One thing we do know is that both Sky News and the Financial Times ( “UK wages have grown at their weakest pace in seven months,”) have not checked this.

The official numbers on real wages are below.

adjusted for inflation, average weekly earnings grew by 0.2% including bonuses and by 0.1% excluding bonuses, over the year, the slowest rate of growth since 2014.

So we have something of a discontinuity as we had some real wage growth in February it would appear. Let us cross our fingers that it continues but sadly it seems unlikely ( the comparison is flattered by bonuses falling last year). Of course even if we use the figures for February alone then real wage growth was negative if we compare it to the Retail Price Index.

Also the exclusion of the self-employed from the wages data gets ever more shameful.

self-employed people increased by 114,000 to 4.78 million (15.0% of all people in work).

Can we increase tax on income from wages?

After the debacle of the U-Turn on higher National Insurance contributions from the self-employed there have been arguments that the UK is unable to ever raise more taxes from income. It was interesting therefore to see some international comparisons from the OECD today.

The average single worker in Belgium faced a tax wedge of 54.0% in 2016 compared with the OECD average of 36.0%…..Belgium had the 4th highest tax wedge in the OECD for an average married worker with two children at 38.6% in 2016, which compares with the OECD average of 26.6%.

Not the best place to be single and childless it would appear! But now the UK.

The average single worker in the United Kingdom faced a tax wedge of 30.8% in 2016……..The United Kingdom had the 22nd lowest tax wedge in the OECD for an average married worker with two children at 25.8% in 2016,

So in theory we could if we wished to reach the peak that is Belgium. The Anglosphere ( US, Australia and Canada) if I can put it like that has similar numbers to the UK although the Kiwis stand out at only 17.9% for a single person. The lowest is Chile at 7%.

Interestingly with its debt and deficit problems income in Japan is slightly more taxed than here.

Comment

I would like to take a step back and consider the last couple of years. Remember the number of economists and media analysts who warned about what they called “deflation” and sometimes they shouted it so loud it was “DEFLATION”? Well it morphed into this.

By late-2014, an increase in nominal wage growth and low CPIH inflation, led to average real earnings increasing by 1.7% in the 18 months to mid-2016. ( Office for National Statistics).

This of course boosted the economy mostly via the retail sales boom but also in other ways as I pointed out on the 29th of January 2015.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

If there was a musical theme to the deflation paranoia then it was “clowns to the left of me, jokers to the right” from Stealers Wheel. Please do not misunderstand me I am talking about the so-called experts here not those influenced by them. Sadly we seem to be heading into a period where something they wanted ( higher inflation) will slow the economy down. I wonder how the inflationistas will spin that?

 

 

 

 

 

UK real wages fell in January ending over 2 years of growth

Today sees us receive the latest UK labour market data with the main emphasis being on wages as we mull how they will compare with inflation as 2017 progresses. The phase where low inflation boosted real wages is over for now at least as we cross our fingers and hope it will not rise too far. On that front we have had some better news from the recent dip in the price of crude oil but as a ying to that particular yang there has also been this.

In case you missed it, iron ore in China is up 10% since Monday. Cheers ( @DavidInglesTV )

On the usual pattern we would know the latest inflation data but that is not due until next week whilst our statisticians perhaps drink gin, play jigsaws whilst wearing a base layer and a cycle helmet.

Public-Sector Pay

This is something which has perhaps been too much in the background. For many who work in the public-sector wages have been under an austerity style squeeze for some time now. The area has also got more complex as many such jobs have been outsourced to private companies as for example many of the staff in Battersea Park work for a company called Enable now rather than Wandsworth Council. In terms of scale here are the numbers involved.

There were 5.44 million people employed in the public sector for December 2016. This was little changed compared with September 2016 and with a year earlier. Public sector employment has been generally falling since December 2009.

Although the picture gets ever more complex.

The Institute of Fiscal Studies has looked into the wages trend and point out that it is more complex than it may initially appear.

Public sector pay has been squeezed since public spending cuts began to take effect from 2011, and it looks set to be squeezed even further up to 2020. However, this comes on the back of an increase in public sector wages relative to those in the private sector during the Great Recession.

They think that this is set to continue for the rest of this decade.

On the basis of current forecasts and policy, we expect public sector pay to fall by 5 percentage points relative to private sector pay between 2015 and 2020. This would take the raw wage gap to its lowest level for at least 20 years.

However the starting point may not be what you would have expected.

In 2015–16, average hourly wages were about 14% higher in the public sector than in the private sector, according to the Labour Force Survey. After accounting for differences in education, age and experience, this gap falls to about 4%.

This is a complex area as we mull the usefulness of some type of education. For example by interest (athletics) I know people who specialise in the physiotherapy area where attainment is higher in that graduates are recruited but some for example have never manipulated someone’s back. Of course there is also the issue of pensions.

Reforms to public sector pensions have reduced the value of the pension public sector workers can expect to enjoy in retirement, though this is still probably more than private sector workers can expect

I do not know what the IFS has been smoking here as public sector pensions look ever more valuable in relative if not absolute terms to me.

Good News

This as so often these days comes from the quantity numbers in the labour market report.

There were 31.85 million people in work, 92,000 more than for August to October 2016 and 315,000 more than for a year earlier……..There were 23.34 million people working full-time, 305,000 more than for a year earlier. There were 8.52 million people working part-time, 10,000 more than for a year earlier.

The extra number of people in work helped reduce unemployment as well, oh and in case you assumed it was an obvious link it is not always that simple due to a category for inactivity.

There were 1.58 million unemployed people (people not in work but seeking and available to work), 31,000 fewer than for August to October 2016 and 106,000 fewer than for a year earlier………….The unemployment rate was 4.7%, down from 5.1% for a year earlier. It has not been lower since June to August 1975.

 Bad News

This was demonstrated by this on the wages front.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.2% including bonuses, and by 2.3% excluding bonuses, compared with a year earlier.

So we see a slowing from the 2.6% reported last time. If we look into the single month detail it is worrying as you see December was 1.9% and January 1.7% giving a clear downwards trend. If we look further we see that those months saw much lower bonus payments than a year before and in fact falls as for example -3.9% and -2.7% was reported respectively. Putting it another way UK average earnings reached £509 in November but were £507 in both December and January.

Ugly News

This comes from the position regarding real wages.

Comparing the 3 months to January 2017 with the same period in 2016, real AWE (total pay) grew by 0.7%, which was 0.7 percentage points smaller than the growth seen in the 3 months to December 2016.

There has been something of a double whammy effect at play here as inflation has risen as we expected but sadly wage growth has dipped as well. So the period since October 2014 when real wages on the official measure began to rise is certainly under pressure and frankly seems set to end soon.

If we look at January alone then real wages were 0.1% lower than a year before as inflation was 1.8% and using the new headline measure ( from next month) they fell by 0.3% on a year before. Using the Retail Price Index or RPI has real wages falling at an annual rate of 0.9% in January.

Comment

There are quite a few things to laud about the better performance of the UK economy over the past few years as employment has risen and unemployment fallen. Although of course we would like to know more ( indeed much more…) about the position relating to underemployment which is one of the factors at play in the situation below.

The number of people employed on “zero-hours contracts” in their main job, according to the LFS, during October to December 2016 was 905,000, representing 2.8% of all people in employment. This latest estimate is 101,000 higher than that for October to December 2015 (804,000 or 2.5% of people in employment).

For a while this was also true of real wages although to be fair the situation here mostly improved due to lower levels of recorded consumer inflation. Sadly if the data for January is any guide that happier period is now over even using the official inflation data.Of course this also omits the ever growing self-employed sector.

City-AM

Here are my views on US interest-rates from today’s City-AM newspaper