UK Real Wages have fallen by over 2% as the unemployment rate looks to have passed 5%

On Friday we got some insight into the state of play of UK output and GDP in April with the caveats I pointed out at the time. This morning has seen us receive the official figures on employment, unemployment and wages which shed with caveats further insight as to where we are. So let us take a look at the opening line.

Early indicators for May 2020 suggest that the number of employees in the UK on payrolls is down over 600,000 compared with March 2020. The Claimant Count has continued to rise, enhancements to Universal Credit as part of the UK government’s response to the coronavirus (COVID-19) mean an increase in the number of people eligible.

There is quite a bit going on in that paragraph and it is hard to avoid a wry smile at us being directed towards the Claimant Count that was first regarded as unreliable and manipulated back in the 1980s in the Yes Minister TV series,

Sir Humphrey: We didn’t raise it to enable them to learn more! We raised it to keep teenagers off the job market and hold down the unemployment figures.

There is also an episode where Jim Hacker tells us nobody actually believes the unemployment ( Claimant Count) numbers. The tweek to the Universal Credit system is welcome in helping people in trouble but does also add more smoke to the view.

Employment

We can dig deeper and let us start with a little more precision.

Experimental data of the number of payroll employees using HM Revenue and Customs’ (HMRC’s) Pay As You Earn Real Time Information figures show a fall in payroll employees in recent months. Early estimates for May 2020 from PAYE RTI indicate that the number of payroll employees fell by 2.1% (612,000) compared with March 2020.

Let me give our statisticians credit for looking at other sources of data to glean more information. But in this area there is an elephant in the room and it is a large one.

The International Labour Organization (ILO) definition of employment includes those who worked in a job for at least one hour and those temporarily absent from a job.

Regular readers of my work will be aware of this issue but there is more.

Workers furloughed under the Coronavirus Job Retention Scheme (CJRS), or who are self-employed but temporarily not in work, have a reasonable expectation of returning to their jobs after a temporary period of absence. Therefore, they are classified as employed under the ILO definition.

As the estimate for them is of the order of 6 million we find that our employment fall estimate could be out by a factor of ten! Breaking it down there are all sorts of categories from those who will be unemployed as soon as the scheme ends to those who have been working as well ( sometimes for the same employer) who may be getting an official knock on the door. Also the numbers keep rising as HM Treasury has pointed out today.

By midnight on 14 June there’s been a total of: 9.1m jobs furloughed £20.8bn claimed in total

So the best guide we have comes from this in my opinion.

Between February to April 2019 and February to April 2020, total actual weekly hours worked in the UK decreased by 94.2 million, or 8.9%, to 959.9 million hours. A decrease of 91.2 million or 8.7% was also seen on the quarter.

In terms of a graph we have quite a lurch.

I doubt many of you will be surprised to learn this bit.

The “accommodation and food service activities” industrial sector saw the biggest fall in average actual hours; down 6.9 hours to 21.2 hours per week.

With hotels shut and restaurants doing take out at best I am in fact surprised the numbers have not fallen further.

Unemployment

The conventional measures are simply not cutting it.

For February to April 2020: the estimated UK unemployment rate for all people was 3.9%; 0.1 percentage points higher than a year earlier but unchanged on the previous quarter.

We can apply the methodology I used for Italy on the 3rd of this month where we discovered that a flaw  meant that we found what we would regard as unemployed in the inactivity data.

The single-month estimate for the economic inactivity rate, for people aged 16 to 64 years in the UK, for April 2020, was 20.9%, the highest since August 2019. This represents an increase of 0.7 percentage points on the previous month (March 2020) and a record increase of 0.8 percentage points compared with three months ago (January 2020).

If we count the extra inactivity as unemployed we have some 349,000 more or if you prefer an unemployment rate of 5.1%. This begins to bring the numbers closer to reality although we are not allowing for those who will be unemployed as soon as the furlough scheme ends. Also we are not allowing for the scale of underemployment revealed by the hours worked figures.

Wages and Real Wages

I doubt anyone is going to be too surprised by the fall here.

Estimated annual growth in average weekly earnings for employees in Great Britain in the three months to April 2020 was 1.0% for total pay (including bonuses) and 1.7% for regular pay (excluding bonuses).

It is quite a drop on what we had before.

Annual growth has slowed sharply for both total and regular pay compared with the period prior to introduction of the corona virus lockdown measures (December to February 2020), when it was 2.9%.

We see that bonuses plunged if we throw a veil over the double negative below.

The difference between the two measures is because of subdued bonuses, which fell by an average negative 6.8% (in nominal terms) in the three months February to April 2020.

If we look at April alone we get an even grimmer picture.

Single month growth in average weekly earnings for April 2020 was negative 0.9% for total pay and 0% for regular pay.

Already real wages were in trouble.

The 1.0% growth in total pay in February to April 2020 translates to a fall of negative 0.4% in real terms (that is, total pay grew slower than inflation); in comparison, regular pay grew in real terms, by 0.4%, the difference being driven by subdued bonuses in recent months.

So even using the woeful official measure driven by Imputed Rents we see a real wages decline of 1.8% in April. A much more realistic measure is of course the Retail Prices Index or RPI which shows a 2.4% fall for real wages in April.

On this subject there has been some research from my alma mater the LSE giving more power to the RPI’s elbow.

Aggregate month-to-month inflation was 2.4% in the first month of lockdown, a rate over 10 times higher than in preceding months.

I will look at this more when we come to the UK inflation data but it is another nail on the coffin for official claims and if I may be so bold a slap on the back for my arguments.

 

Comment

Today’s journey shows that with a little thought and application we can do better than the official data. Our estimate of the unemployment rate of 5.1% is more realistic than the official 3.9% although the weakness is an inability to allow for what must be underemployment on a grand scale. Shifting to real wages we fear that they may have fallen by over 3% in April as opposed to the official headline of a 0.4% fall. So we get closer to reality even when it is an unattractive one.

Staying with wages the numbers are being influenced by this.

Pay estimates are based on all employees on company payrolls, including those who have been furloughed under the Coronavirus Job Retention Scheme (CJRS).

Also Is it rude to point out that we are guided towards the monthly GDP statistics but told that the monthly wages ones ( a much longer running series) are less reliable?. Someone at the UK Statistics Authority needs to get a grip and preferably soon .

 

 

 

 

The Italian Job covers unemployment.zombie banks and industrial production

Sometimes economic news makes you think of a country via its past history.

LONDON/FRANKFURT (Reuters) – European Central Bank officials are drawing up a scheme to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak, two people familiar with the matter told Reuters.

After all the Italian banks have plenty of expertise, if I may put it like that, in this area. So perhaps a growth area for them in more ways than one.

The amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans and mortgages, according to official statistics.

There is a conceptual issue though as we mull why we always need “bad- banks” and whether the truth is that ordinary banks are bad? Also the Irish banking crisis taught us that the numbers are fed to us on a piece of string with notches and are driven by what they think we will accept rather than reality. So get ready for the half a trillion to expand and that may get a little awkward if this from Kathimerini proves true.

Enria said the ECB was studying how banks could cope were the crisis to worsen. He said banks had more than 600 billion euros ($680 billion) of capital and this would probably be enough, unless there were a second wave of infections.

If we focus now on the Italian banks there is of course the issue of the Veneto banks and Monte Paschi in particular. Let me take you back 3 days over 3 years.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

Back then I also pointed out the problems for the bailout vehicle called variously Atlante and Atlas. Looking at Monte dei Paschi the share price is 1.4 Euros which if we allow for the many rights issues and the like compares to a pre credit crunch peak of around 8740 Euros according to my chart.. Some quite spectacular value destruction as we again mull what “bad bank” means and recall that in 2016 Prime Minister Renzi told people it was a good investment. That is before we get to this from January 2012 on Mindful Money.

In October, Shaun Richards outlined a 13-step timeline for the collapse of a bank . He appeared on Sky News yesterday suggesting that Unicredit, Italy’s had now reached stage 3 of that process – i.e. “The Bank tries to raise more private capital in spite of it having no need for it”.

It was worth 19 Euros then and as it is worth 8.24 Euros now my description of it as a zombie bank was right, especially if we allow for all the aid packages and subsidies in the meantime.

Oh and in case we had any doubts about the story I see this from ForexLive.

European Commission says no formal work is underway for an EU ‘bad bank’

So they are informally looking at it then….

The Economy

This morning’s official release was always likely to be bad news.

In April 2020 the seasonally adjusted industrial production index decreased by 19.1% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -23.2%.

The theme was unsurprisingly continued by the annual picture.

The calendar adjusted industrial production index decreased by 42.5% compared with April 2019 (calendar
working days being 21 versus 20 days in April 2019).
The unadjusted industrial production index decreased by 40.7% compared with April 2019.

If we compare to 2015 we see that the calendar adjusted index was at 58.4. The breakdown shows that pharmaceuticals were affected least ( -6.7%) and clothing and textiles the most ( -80.5%). The latter was a slight surprise as I though the manufacture of masks and other PPE might help but in fact it did even worse than the transport sector ( -74%).

On Monday Italy’s statisticians reminded us of our Girlfriend in a Coma theme.

At the end of 2019, the Italian economy was in stagnation with few recovery signals coming from industrial production and external trade at the very beginning of 2020.

Which was followed by this.

Eventually, the conventional economic indicators assessing the dramatic fall of GDP in the first quarter 2020 (-5.3% q-o-q) were published.

They point out it is difficult to collect data right now but were willing to have a go at a forecast.

Under these assumptions, we forecast a strong GDP contraction in 2020 (-8.3%) followed by a recovery in 2021 (+4.6%, Table 1). This year, the fall of GDP will be determined mainly by domestic demand net of inventories (-7.2 p.p.) due to the contraction of household and NPISH consumption (-8.7%) and of investments (-12.5%). Net exports and inventories will also contribute negatively to GDP growth (respectively -0.3 p.p. and -0.8 p.p.).

I wonder how much of what is called domestic demand reflects the fall in tourism as the summer is already well underway and it is a delightful country to visit? Here is the OECD version from earlier this week that highights the tourism issue.

GDP is projected to fall by 14% in 2020 before recovering by 5.3% in 2021 if there is another virus outbreak
later this year (the double-hit scenario). If further outbreaks are avoided (the single-hit scenario), GDP is
projected to fall by 11.3% in 2020 and to recover by 7.7% in 2021. While Italy’s industrial production may
restart quickly as confinement measures are lifted, tourism and many consumer-related services are
projected to recover more gradually, weighing on demand

As we know so little about what is happening right now the forecasts for 2021 are about as much use as a chocolate teapot in my opinion.

Switching back to Italy’s statisticians they seem to have doubts about their own unemployment numbers. perhaps they read my post on the third of this month.

The trend of unemployment rate will be different because it reflects the ricomposition between unemployed and inactive people and the fall in hours worked.

Anyway they have reported the unemployment rate at 6.3% and I think it is more like 11%.

Comment

Now we need to switch tack to one of the consequences of all this which relates to the fact that Italy already had a large national debt in both relative and absolute terms. If we use the OECD data as a framework we see that the debt to GDP ratio will be of the order of 160 to 170% at the end of this year which looks rather Greek like, Now we see the real reason for the forecasted bounce back in 2021 which reduces the number to 150% to 165%. The establishment assumption that we will see a “V-shaped” recovery has nothing to do with believing in it,rather it is to make the debt metrics look better. Again there are echoes of Greece here when Christine Lagarde was talking about “Shock and Awe” back in the day. Remember when we were guided to a debt to GDP ratio of 120%? That was to protect Italy ironically ( as well as Portugal).

That was then and this is now. The game-changed in the meantime has been the fall in bond yields due mostly to the policies and buying of the ECB. So a benchmark yield that rose to 7% in the last crisis is now 1.45% as I type this. Thus the previous concept of debt vigilante’s has been neutered and debt costs are low. The catch is that the debt burden will soar and that does seem to have an impact if we think of the issue of Japanification. Italy has already had its “lost decade” since it joined the Euro and the lack of economic growth has been the real issue here. For it to change I think we need reform of its structure and especially its zombie banks but instead we are being guided towards yet another bailout in what feels like a never-ended stream. Let me leave you with some humour on the issue of bad banks from GreatLakesForex.

They should correct that statement to the actual fact that they are desperate to create a Good bank in the Eurozone.

The problems posed by mass unemployment

A sad consequence of the lock downs and the effective closure of some parts of the economy is lower employment and higher unemployment. That type of theme was in evidence very early today as we learnt that even the land “down under” looks like it is in recession after recording a 0.3% decline in the opening quarter of 2020. The first for nearly 30 years as even the commodities boom seen has been unable to resist the effects of the pandemic. This brings me to what Australia Statistics told us last month.

Employment decreased by 594,300 people (-4.6%) between March and April 2020, with full-time employment decreasing by 220,500 people and part-time employment decreasing by 373,800 people.Compared to a year ago, there were 123,000 less people employed full-time and 272,000 less people employed part-time. Thischange led to a decrease in the part-time share of employment over the past 12 months, from 31.5% to 30.3%.

I have opened with the employment data as we get a better guide from it in such times although to be fair it seems to be making a fist of the unemployment position.

The unemployment rate increased 1.0 points to 6.2%and was 1.0 points higher than in April 2019. The number of unemployed people increased by 104,500 in April 2020 to 823,300 people, and increased by 117,700 people from April 2019.

The underemployment rate increased by 4.9 pts to 13.7%, the highest on record, and was 5.2 pts higher than in April 2019.The number of underemployed people increased by 603,300 in April 2020 to 1,816,100 people, an increase of almost 50% (49.7%), and increased by 666,100 people since April 2019.

As you can see they have picked up a fair bit of the changes and it is nice to see an underemployment measure albeit not nice to see it rise so much. The signal for the Australian economy in the quarter just gone is rather grim though especially if we note this.

Monthly hours worked in all jobs decreased by 163.9 million hours (-9.2%) to 1,625.8 million hours in April 2020, larger than the decrease in employed people.

Italy

In line with our “Girlfriend in a coma” theme one fears the worst for Italy now especially as we note how hard it was hit by the virus pandemic. Even worse a mere headline perusal is actively misleading as I note this from Istat, and the emphasis is mine.

In April 2020, in comparison with the previous month, employment significantly decreased and unemployment sharply fell together with a relevant increase of inactivity.

The full detail is below.

In the last month, also the remarkable fall of the unemployed people (-23.9%, -484 thousand) was recorded for both men (-17.4%, -179 thousand) and women (-30.6%, -305 thousand). The unemployment rate dropped to 6.3% (-1.7 percentage points) and the youth rate fell to 20.3% (-6.2 p.p.).

Yes a number which ordinarily would be perceived as a triumph after all the struggles Italy has had with its economy and elevated unemployment is at best a mirage and at worst a complete fail for the methodology below.

Unemployed persons: comprise persons aged 15-74 who:
were actively seeking work, i.e. had carried out activities in the four week period ending with the reference week
to seek paid employment or self-employment and were available to start working before the end of the two
weeks following the reference week;

Some would not have bothered to look for work thinking it was hopeless and many of course would simply have been unable to. We do find them elsewhere in the data set.

In April the considerable growth of inactive people aged 15-64 (+5.4%, +746 thousand) was registered for
both men (+6.0%, +307 thousand) and women (+5.0%, +438 thousand), leading the inactivity rate to
38.1% (+2.0 percentage points).

If we look back we see that there was a similar issue with the March numbers so a published unemployment rate of 6.3% looks like one of over 11% if we make some sort of correction for the April and March issues.

We get a better guide to the state of play from the employment position which as we observe from time to time has become something of a leafing indicator.

On a monthly basis, the decline of employment (-1.2%, -274 thousand) concerned both men (-1.0%, -131 thousand) and women (-1.5%, -143 thousand), and brought the employment rate to 57.9% (-0.7 p. p.)…….With respect to the previous quarter, in the period February – April 2020, employment considerably decreased (-1.0%, -226 thousand) for both genders…….Compared to March 2019, employment showed a decrease in terms of figures (-2.1%, -497 thousand) and rate (-1.1 percentage points).

Oh and in the last sentence they mean April rather than March. But looking ahead we see a 1.2% fall for employment in April alone which has implications for GDP and of course it is before the furlough scheme.

 Italy has furloughed 7.2 million workers, equivalent to 31% of employment at end-2019; ( FitchRatings )

Germany

This morning has also brought news about the state of play in Germany.

WIESBADEN – Roughly 44.8 million persons resident in Germany (national concept) were in employment in April 2020 according to provisional calculations of the Federal Statistical Office (Destatis). Compared with April 2019, the number of persons in employment decreased by 0.5% (-210,000). This means that for the first time since March 2010 the number of persons in employment decreased year on year (-92,000; -0.2%). In March 2020, the year-on-year change rate had been +0.2%.

For our purposes we get a signal from this.

According to provisional results of the employment accounts, the number of persons in employment fell by 161,000 in April 2020 on the previous month. Normally, employment rises strongly in April as a result of the usual spring upturn, that is, by 143,000 in April on an average of the last five years.

Perhaps the headline read a lot better in German.

No spring upturn

Switching to unemployment the system seems less flawed than in Italy.

Results of the labour force survey show that 1.89 million people were unemployed in April 2020. That was an increase of 220,000, or 13.2%, on March 2020. Compared with April 2019, the number of unemployed persons increased by 515,000 or +38.0%. The unemployment rate was 4.3% in April 2020.

There is a clear conceptual issue here if we return to Fitch Ratings.

Germany has enrolled more than 10 million workers on its scheme, representing 22% of employment at the end-2019. This number ultimately may be lower because some firms that have registered employees as a precaution may decide not to participate.

Germany employed the Kurzarbeit to great effect during the global financial crisis when its implementation prevented the mass lay-offs that were seen elsewhere in Europe. While unemployment in Germany remained broadly unchanged in 2008-2009, other countries reported significant increases.

Comment

There are deep sociological and psychological impacts from these numbers and let me give my sympathies to those affected. Hopefully we can avoid what happened in the 1930s. Returning to the statistics there are a litany of issues some of which we have already looked at. Let me point out another via the German employment data.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment decreased by 271,000 (-0.6%) in April 2020 compared with March 2020.

The usual pattern for seasonal fluctuations will be no guide this year and may even be worse than useless but it will still be used in the headline data. But there is more if we switch to Eurostat.

In April 2020, the second month after COVID-19 containment measures were implemented by most Member
States, the euro area seasonally-adjusted unemployment rate was 7.3%, up from 7.1% in March 2020. The EU
unemployment rate was 6.6% in April 2020, up from 6.4% in March 2020.

We have the issue of Italy recording a large rise as a fall but even in Germany there is an issue as I note an unemployment rate of 4.3%. Well after applying the usual rules Eurostat has published it at 3.5%. There is no great conspiracy here as the statisticians apply rules which are supposed to make things clearer but some extra thought is requited as we note they are in fact making the numbers pretty meaningless right now, or the opposite of their role.

The Investing Channel

 

 

 

 

What to do when we do not know GDP,Inflation or even Unemployment levels?

Today has brought a whole raft of data for our attention and much of it is eye-catching. So let is begin with La Belle France a subject on my mind after watching the film Waterloo last night.

In Q1 2020, GDP in volume terms fell sharply: –5.8%, the biggest drop in the series’ record, since 1949. In particular, it is bigger than the ones recorded in Q1 2009 (–1.6%) or in Q2 1968 (–5.3%). ( Insee )

I have to confess I am a little in the dark as to 1968 and can only think it may have been related to the student riots of the era. The Covid-19 vibe is established by the way that domestic demand plunged.

Household consumption expenditures dropped (–6.1%), as did total gross fixed capital formation in a more pronounced manner (GFCF: –11.8%). Overall, final domestic demand excluding inventory changes fell sharply: it contributed to –6.6 points to GDP growth.

I guess no-one is going to be surprised by this either.

Overall production of goods and services declined sharply (–5.5%). It fell the hardest in construction (–12,6%), while output in goods declined –4.8% and output in manufactured goods dropped –5.6%. Output in market services declined by –5.7% overall.

Such production as there was seems to have piled up.

Conversely, changes in inventories contributed positively to GDP growth (+0.9 points).

At a time like this GDP really struggles to deal with trade so let me use France as an example on the way to explaining the issue.

Exports also fell this quarter (–6.5%) along with imports (–5.9%), in a less pronounced manner. All in all, the foreign trade balance contributed negatively to GDP growth: –0.2 points, after –0.1 points the previous quarter.

As you can see the net effect here is rather small especially in these circumstances. But there is a lot going on as we see large moves in both exports and imports. Another way of looking at this is provided by the Bureau of Economic Analysis in the US.

Imports, which are a subtraction in the calculation of GDP, decreased

A lot less detail for a start. Let me help out as imports in the US fell heavily by US $140.1 billion in fact and exports only fell by US $56.9 billion. So net exports rose by US $83.3 billion and boosted the numbers. This is really awkward when a signal that the US is doing badly raises GDP by 2.32% on its own and in net terms by 1.3% ( care is needed with US numbers because they are annualised).

So here is a major caveat that the US may appear to be doing better but the trade breakdown hints strongly things are much worse than that.

Spain

Spain had been having a good run but sadly that is now over.

Spanish GDP registers a -5.2% variation in the first quarter of 2020 compared to the previous quarter in terms of volume. This rate is 5.6 points less than the Registered in the fourth quarter. ( INE)

The chart is quite extraordinary as the good run since around 2014 is replaced by quite a plummet. We see that it is essentially a domestic game as like France the international factor small.

For its part, external demand presents a contribution of 0.2 points, three tenths lower than that of the previous quarter.

We do get a hint of what is about to hit the labour market and indeed unemployment which had remained high in Spain.

The employment of the economy, in terms of hours worked, registers a variation of ,5.0% compared to the previous quarter.

Inflation

Let me return to France to illustrate the issues here.

Over a year, the Consumer Price Index (CPI) should rise by 0.4% in April 2020, after +0.7% in the previous month, according to the provisional estimate made at the end of the month. This drop in inflation should result from an accentuated fall in energy prices and a sharp slowdown in service prices.

A problem leaps off the page and ironically they have unintentionally described it

an accentuated fall in energy prices

That is because the weight for energy is too high as for example factories stopped work and there was much less commuting. Then there is this.

Food prices should rebound sharply, due to a strong rise in fresh food product prices.

Fresh food prices rose by 18.1% in March but are weighted at a mere 2.3% as opposed to the 8.1% of energy, when we know that there was heavy demand to stock up. I do not wish to demean their efforts but the claim that other food prices rose by 1.4% compared to 2.3% this time last year looks dodgy and may well be suffering from this

The price collection carried out by collectors on the field (about 40% in the CPI) has been suspended since 16 March:

Also it was a rough month for smokers as tobacco rose by 13.7%.

If we look at Spain we see the energy/fuel problem emerge again.

The preliminary data that is presented today through the leading indicator of the CPI, places its annual variation at –0.7% in April, seven tenths below that registered in March, influenced for the most part by the drop in fuel prices and fuels, compared to the increase registered in 2019.

Also with food prices albeit it on a lower scale.

It is remarkable the behavior of food prices, whose annual rate passes from 2.5% in March to 4.0% in April. Of these, fresh food reaches a rate of 6.9%, three points above that of the previous month, and packaged foods, place their annual rate at 2.2%, six tenths above that of March.

Although to be fair to INE in Spain they are trying to adapt to the new reality.

the prices of the products included in the goods special group COVID-19 increased 1.2% in April, compared to the previous month. While the services COVID-19 decreased 1.4% in April compared to March.

Unemployment

This may well be the biggest statistical fail I have seen in the world of economics.

In March 2020, in comparison with the previous month, employment slightly decreased and unemployment sharply fell together with a relevant increase of inactivity.

Yes you did read the latter part correctly.

In the last month, also the remarkable fall of the unemployed people (-11.1%, -267 thousand) was
recorded for both men (-13.4%, -169 thousand) and women (-8.6%, -98 thousand). The unemployment
rate dropped to 8.4% (-0.9 percentage points) and the youth rate fell to 28.0% (-1.2 p.p.).

They had two issues to contend with but tripped over a theoretical flaw. The issues were having to do the survey by telephone and a sample size some 20% lower. The flaw is that to be unemployed you have to be available for work and in this situation I am sure many reported that they were not. Indeed you can see this below.

In the last three months, also the number of unemployed persons decreased (-5.4%, -133 thousand), while
a growth among inactive people aged 15-64 years was registered (+1.5%, +192 thousand)……..On a yearly basis, the decrease of employed people was accompanied by a fall of unemployed persons
(-21.1%, -571 thousand) and a growth of inactive people aged 15-64 (+4.4%, +581 thousand).

Comment

I summarised the situation on social media yesterday.

Reasons not to trust the US GDP print

1. Advance estimates only have ~50% of the full data

2. Inflation estimates will be nearly hopeless at a time like this.

3. Output of say planes for no one to fly in them has obvious issues….

Let me add a fourth which is the impact of imports that I have described above.

Switching to the unemployment numbers from Italy I do not blame those compiling the numbers and find them helpful when I have an enquiry. But someone higher up the chain should at least have put a large warning on these numbers and maybe even stopped their publication as statistics are supposed to inform not mislead. They seem to have taken Talking Heads a little too literally.

Stop making sense
Quit talking
Stop making sense
Start falling
Stop making sense
Hold onto me
You’re always at your best
When you’re not making sense

Me on The Investing Channel

The spectre of mass unemployment is starting to haunt us

Today’s topic is one that I hoped never to have to write. If we look back to the last century then mass unemployment scarred the economic landscape on several occasions and particularly so in the Great Depression. The credit crunch era initially brought higher unemployment but fortunately we managed to reduce that over time. Indeed from around 2013 we saw considerable improvements on that front in mnay countries. The leader of the pack in this regard has been Japan where the unemployment rate has fallen as low as 2.2%. The UK and US saw strong improvements too with the unemployment rate falling below 4%. More latterly the Euro area has seen unemployment fall too although its progress has been slower leading to its unemployment rate being more like 7%

That was the good news section of the labour market as employment rose and unemployment fell. Although there always was the issue of under employment as a cloud in the sky as we wondered what jobs were being taken and how employment is defined? The waters also had something of a shark in them as the strong quantity numbers were accompanied by at best weak real wage growth something my country the UK has been particularly affected by. Especially troubling is the way the establishment has responded which is to impose poorer measures of inflation  ( the Imputed Rent driven CPIH ) to flatter the figures and mislead the unwary. Along the way the economic Ivory Towers had plenty of troubles too as the unemployment rate fell below their definitions of “full employment ” and made their “output gap” theories crumble. I am sure many of you still remember when Governor Carney of the Bank of England signposted a 7% unemployment rate as significant before exhibiting the sort of behaviour that led to him being called the “Unreliable Boyfriend ”

The US

Last week this provided something of a forerunner of what we can now expect.As Politico points out below even that shock may have been an understatement.

Last week’s headline number of 3.28 million claims — itself a more than 1,000 percent increase — is also expected to be revised upward, in part because of stark discrepancies between data that states reported at the ground level and what the Department of Labor recorded.

Florida’s initial claims hit a record for the week ended March 21, and then tripled to 222,054 for the week ended March 28, according to the state Department of Economic Opportunity.Florida’s initial claims hit a record for the week ended March 21, and then tripled to 222,054 for the week ended March 28, according to the state Department of Economic Opportunity…..Florida’s initial claims hit a record for the week ended March 21, and then tripled to 222,054 for the week ended March 28, according to the state Department of Economic Opportunity.

So as you can see the situation in the United States looks as though it may be even worse than we feared even last week. The old saying that a week is a long time in politics is being outdone by economics at the moment.

The UK

Yesterday brought a moment to the UK which we had feared was about to arrive.

Nearly a million people have successfully applied for universal credit in the last fortnight, in a rush to welfare support that reveals the depth of the jobs crisis caused by the UK’s lockdown.

Despite the government’s job support schemes offering 80% of earnings to employees and the self-employed who cannot work, 950,000 people applied for the main income support benefit between 16 and 31 March. There are normally about 100,000 applicants for the benefit in any given two-week period.

Applications started flooding in as soon as Boris Johnson told the nation to stop non-essential contact with others and cease all unnecessary travel. ( The Guardian)

Care is needed here as these are social security payments rather than a labour force measure or indeed a claimant count but we do get a very string hint from the data here.Out of it there is at least a small positive.

The DWP said it had moved more than 10,000 staff to deal with claims and was recruiting more.

The numbers above compare to a situation only a couple of weeks ago when we were told this by our official statisticians.

For November 2019 to January 2020, an estimated 1.34 million people were unemployed. This is 5,000 more than a year earlier but 515,000 fewer than five years earlier. The small increase on the year is the first annual increase in unemployment since May to July 2012, and it was caused by a 20,000 increase for men.

Sadly we seem set to go through 2 million fairly quickly and maybe 3 million. However the numbers will need some interpreting because it looks as though those who are “furloughed” will continue to be counted as in employment. Personally I think it would be better if a new category was created.

Let me welcome the effort by the Office of National Statistics to produce some new data although sadly even the new weekly measures are of course now well behind the times.

Over a quarter (27%) of responding businesses said they were reducing staff levels in the short term in the period 9 March to 22 March 2020, while 5% reported that they were recruiting staff in the short term.

Spain

This mornings news from Spain was grim too.

MADRID (Reuters) – The rise in Spanish jobless numbers in March is the highest monthly increase ever recorded, Labour Minister Yolanda Diaz said at a news conference on Thursday.

The number of jobless jumped 9.3% from the previous month bringing the total number of unemployed people to around 3.5 million. That total number was still below record highs of 2013.

The recent better phase of economic growth for Spain had played its part in bringing unemployment down from a bit over 5 million to just over 3 million last summer. But sadly the mood music had changed and is now dark.

Comment

This is a grim phase with echoes of the 1920s and 30s. I fear for the unemployment numbers that will come from Italy which had its own economic problems ( the essentially 0% economic growth of our “Good Italy: Bad Italy” theme ) before the pandemic started. Some yesterday were promoting this as good news.

The unemployment rate slightly decreased to 9.7% (-0.1 percentage points) while the youth rate stayed stable to 29.6%.

Sadly they did not seem to have read this bit.

This press release is referred to February 2020, therefore it is related to the pre-COVID-19 health emergency phase.

Italy and many other countries are about to see a tsunami of unemployment and our best hope is that it will be brief.

Meanwhile maybe attitudes will change as the other day I looked up at a residential care home where a worker was assisting an elderly lady on her balcony. As she had no protective clothing I could see she put herself at risk. I was thinking of that as I read this from Sarah O’Connor in the Financial Times.

This precarious army labours around the clock. On Monday I spoke to a domiciliary care worker who visits bed-bound clients in their homes (she did not want to be named for fear of punishment by her employer). She was in the middle of a 10-hour shift, having worked 14 hours on Saturday and 14 on Sunday. “We’re all putting the effort in,” she said. She is paid £9.75 an hour at weekends and £8.75 in the week, which amounts to about £1,700 a month.

It got worse.

Unison, the union for many care staff, has been raising concerns about the lack of personal protective equipment. The care worker I spoke to had gloves but no mask; she had purchased her own hand sanitiser. Her company, which employs her on a zero-hours contract, would only pay statutory sick pay of £94.25 a week if she developed symptoms and had to self-isolate. “Before, I would have gone into work with a cold or a cough — now I’d have to stay off but then I don’t know how I would pay the bills.”

Let me say welcome back from maternity leave to Sarah who is easily the FT’s best journalist.

The Investing Channel

What can the UK do in the face of an economic depression?

We are facing quite a crisis and let us hope that we will end up looking at a period that might have been described by the famous Dickens quote from A Tale of Two Cities.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.

The reason I put it like that is because we have examples of the worst of times from food hoarders to examples of an extreme economic slowdown. On a personal level I had only just finished talking to a friend who had lost 2 of his 3 jobs when I passed someone on the street talking about her friend losing his job. Then yesterday I received this tweet.

Funny, Barclays quoted me 18% interest on a £10k business loan this morning to keep my employees paid, unfortunately the state will now need to pay them. Bonkers! ( @_insole )

If we look at events in the retail and leisure sector whilst there are small flickers of good news there are large dollops of really bad news. Accordingly this is a depression albeit like so many things these days it might be over relatively quickly for a depression in say a few months. Of course the latter is unknown in terms of timing. But people on low wages especially are going to need help as not only will they be unable to keep and feed themselves they will be forced to work if they can even if they are ill. In terms of public health that would be a disaster.

Also I fear this from the Bank of England Inflation Survey this morning may be too low.

Question 2b: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, remaining the same as in November.

Whilst there are factors which will reduce inflation such as the lower oil price will come into play there are factors the other way. Because of shortages there will be rises in the price of food and vital purchases as illustrated below from the BBC.

A pharmacy which priced bottles of Calpol at £19.99 has been criticised for the “extortionate” move.

A branch of West Midlands-based chain Jhoots had 200ml bottles of the liquid paracetamol advertised at about three times its usual price.

The UK Pound

If we now switch to financial markets we have seen some wild swings here. The UK Pound always comes under pressure in a financial crisis because of our large financial sector and as I looked at on Wednesday we are in a period of King Dollar strength. Or at least we were as it has weakened overnight with the UK Pound £ bouncing to above US $1.18 this morning. Now with markets as they are we could be in a lot of places by the time you read this but for now the extension of the Federal Reserve liquidity swaps to more countries has calmed things.

Perhaps we get more of a guide from the Euro where as discussed in the comments recently we have been in a poor run. But we have bounced over the past couple of days fro, 1.06 to 1.10 which I think teaches us that the UK Pound £ is a passenger really now. We get hit by any fund liquidations and then rally at any calmer point.

The Bank of England

It held an emergency meeting yesterday and then announced this.

At its special meeting on 19 March, the MPC judged that a further package of measures was warranted to meet its statutory objectives.  It therefore voted unanimously to increase the Bank of England’s holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion to a total of £645 billion, financed by the issuance of central bank reserves; and to reduce Bank Rate by 15 basis points to 0.1%.  The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME).

Let me start with the interest-rate reduction which is simply laughable especially if we note what the business owner was offered above. One of my earliest blog topics was the divergence between official and real world interest-rates and now a 0.1% Bank Rate faces 40% overdraft rates. Next we have the issue that 0.5% was supposed to be the emergency rate so 0.1% speaks for itself. Oh and for those wondering why they have chosen 0.1% as the lower bound ( their description not mine) it is because they still feel that the UK banks cannot take negative interest-rates and is nothing to do with the rest of the economy. So in an irony the banks are by default doing us a favour although we have certainly paid for it!

QE

Let us now move onto this and the Bank of England is proceeding at express pace.

Operations to make gilt purchases will commence on 20 March 2020 when the Bank intends to purchase £5.1bn of gilts spread evenly between short, medium and long maturity buckets.  These operations will last for 30 minutes from 12.15 (short), 13.15 (medium) and 14.15 (long).

But wait there is more.

Prior to the 19 March announcement the Bank was in the process of reinvesting of the £17.5bn cash flows associated with the maturity on 7 March 2016 of a gilt owned by the APF.

As noted above, and consistent with supporting current market conditions, the Bank will complete the remaining £10.2bn of gilt purchases by conducting sets of auctions (short, medium, long maturity sectors) on Friday 20 March and Monday 23 March (i.e. three auctions on each day).

So there will be a total of £10.2 billion of QE purchases today and although it has not explicitly said so presumably the same for Monday. As you can imagine this has had quite an impact on the Gilt market as the ten-year yield which had risen to 1% yesterday lunchtime is now 0.59%. The two-year yield has fallen to 0.08% so we are back in the zone where a negative Gilt yield is possible. Frankly it will depend on how aggressively the Bank of England buys its £200 billion.

The next bit was really vague.

The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME)……

Following today’s special meeting of the MPC the Initial Borrowing Allowance for the TFSME will be increased from 5% to 10% of participants’ stock of real economy lending, based on the Base Stock of Applicable Loans.

Ah so it wasn’t going to be the triumph they told us only last week then? I hope this will do some good but the track record of such schemes is that they boost the banks ( cheap liquidity) and house prices ( more and cheaper mortgage finance).

We did also get some humour.

As part of the increase in APF asset purchases the MPC has approved an increase in the stock of purchases of sterling corporate bonds, financed by central bank reserves.

Last time around this was a complete joke as the Bank of England ended up buying foreign firms to fill its quota. For example I have nothing against the Danish shipping firm Maersk but even they must have been surprised to see the Bank of England buying their bonds.

Comment

There are people and businesses out there that need help and in the former case simply to eat. So there are real challenges here because if Bank of England action pushes prices higher it will make things worse. But the next steps are for the Chancellor who has difficult choices because on the other side of the coin many of the measures above will simply support the Zombie companies and banks which have held us back.

Also this is a dreadful time for economics 101. I opened by pointing out that unemployment will rise and maybe by a lot and so will prices and hence inflation. That is not supposed to happen. Then the UK announces more QE and the UK Pound £ rises although of course it is easier to state who is not doing QE now! I guess the Ivory Towers who so confidently made forecasts for the UK economy out to 2030 are now using their tippex, erasers and delete buttons. Meanwhile in some sort of Star Trek alternative universe style event Chris Giles of the Financial Times is tweeting this.

In a moment of irritation, am amazed at how little UK public science has learnt from economics – making mistakes no good economist has made in 50 years Economists have been beating themselves up for a decade Shoe now on other foot…

Podcast

 

Italy continues to see features of an economic depression

Today gives us an opportunity to compare economic and financial market developments in Italy as this week has brought some which are really rather extraordinary. Let us start with the economics and look at the IMF ( International Monetary Fund ) mission statement yesterday.

Real GDP growth in 2019 is estimated at 0.2 percent, down from a 10-year high of 1.7 percent in 2017.

As you can see they are agreeing with my theme that Italy struggles to sustain any rate of economic growth above 1% per annum. Then they also agree with my “Girlfriend in a Coma” theme as well.

 Real personal incomes remain about 7 percent below the pre-crisis (2007) peak and continue to fall behind euro area peers. Despite record employment rates, unemployment is high at close to 10 percent, with much higher rates in the South and among the youth. Female workforce participation is the lowest in the EU.

The real income situation is particularly damning of the economic position especially if we note that unemployment has continued to be elevated. That brings us back to the economic growth not getting above 1% for long enough for unemployment to fall faster.

What about now?

The IMF has a go at saying things will get better but then lapses into the classic quote of a two-handed economist.

The economic situation is projected to improve modestly but is subject to downside risks.

So let us see if the detail does better than it might go up or down?

Real GDP growth is forecast at ½ percent in 2020 and 0.6-0.7 percent thereafter. These forecasts are the lowest in the EU, reflecting weak potential growth. Materialization of adverse shocks, such as escalating trade tensions, a slowdown in key trading partners or geopolitical events, could lead to a much weaker outlook.

As you can see there is not much growth which frankly in measurement terms would take several years even to cover any margin of error. I also note a rather grim ending as the IMF maybe gives us its true view “could lead to a much weaker outlook.” Another slow down or recession would be a real problem as we note again that real personal incomes are 7% lower than before. If that is/was the peak then how long will this economic depression go on?

The Euro zone

If we look wider for en economic influence the news is not that good either. For example the situation from the overall flash Markit PMI business survey was this.

The ‘flash’ IHS Markit Eurozone Composite PMI®
was unchanged at 50.9 in January, signalling a
further muted increase in activity across the euro
area economy. The rate of expansion has remained
broadly stable since the start of the final quarter of
2019, running at the weakest for around six-and-ahalf years.

If we now move to my signal for near-term economic developments the ECB told us this yesterday.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.0% in December from 8.3% in November.

The money supply situation had improved in 2019 but as you can dipped at the end. So the impetus is weaker than it was. In case you are wondering we have seen this before in phases of QE which is currently 20 billion Euros a month and thus boosting the numbers. There are other influences as well.

The broader money supply had a sharper fall and represents the outlook for 2021/22.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in December 2019 from 5.6% in November, averaging 5.4% in the three months up to December.

We will have to see if this is a new development or just a financial market glitch.

The annual growth rate of marketable instruments (M3-M2) was -7.2% in December, compared with -1.1% in November.

Back to Italy

The troubled area across much of the world is the industrial sector and the latest we have on that is this from the Italian statistics office.

The seasonally adjusted volume turnover index (only for the manufacturing sector) remained unchanged
compared to the previous month; the average of the last three months increased by 0.3% compared to
the previous three months. The calendar adjusted volume turnover index increased by 0.2% with respect
to the same month of the previous year. ( November )

This morning there was troubling news for those of us who have noted that employment has often been a leading ( as opposed to the economics 101 view of lagging) indicator in the credit crunch era.

The estimate of employed people decreased (-0.3%, -75 thousand); the employment rate went down to
59.2% (-0.1 percentage points).
The fall of employment concerned both men and women. A rise is observed among 15-24 aged people (+6
thousand), people aged 25-49 decreased (-79 thousand), while people over 50 remained stable.

This meant that if we look for some perspective progress seems to have stopped.

In the fourth quarter 2019, in comparison with the previous one, a slight increase of employment is registered (+0.1%, +13 thousand) and it concerned only women.

We will have to see if that continues as we worry about possible implications for this.

The number of unemployed persons slightly grew (+0.1%, +2 thousand in the last month); the increase
was the result of a growth among men (+2.2%, +28 thousand) and a decrease for women (-2.2%, -27
thousand), and involved people under 50. The unemployment rate remained stable at 9.8%, as also the
youth rate, unchanged at 28.9%.

Italian bond market

If we return to the IMF statement the story starts badly.

 Italy needs credible medium-term consolidation as fiscal space remains at risk.Debt is projected to remain high at close to 135 percent of GDP over the medium term and to increase in the longer term owing to pension spending. If adverse shocks were to materialize, debt would rise sooner and faster.

Somehow in the current economic environment the IMF seems to think that more austerity would be a good idea. Amazing really!

But this week has in fact seen this.

Massive, massive move in #Italy’s 10-year bond yield from 1.44% to 0.95% now. A 50 basis point move in a matter of days party driven by a #Salvini right-wing loss in regional elections. ( @jeroenblokland ) 

These days almost whatever the fiscal arithmetic we see that investors are so desperate for yield they will buy anything and hope the central bank will step up and buy it off them for a profit. Just as a reminder back around 2012 the yield went above 7% on fears the fiscal position suggested Italy was insolvent which of course were self-fulfilling as a yield of 7% made sure it was. But apart from QE what is really different now?

Comment

The depth of the problem is highlighted by this from the IMF.

Steadfast implementation of structural reforms would unlock Italy’s potential and durably improve outcomes. Reforms to liberalize markets and decentralize wage bargaining should be prioritized. They are estimated to yield real income gains of about 6-7 percent of GDP over a decade.

That’s a convenient number isn’t it? But the real issue is that this is a repetition of the remarks at the ECB press conference which are repeated every time. Why? Nothing ever happens.

The longer the economic depression goes on then the demographics become a bigger issue.

The number of births continues to decrease: in 2018, 439,747 children were registered in the General Register Office, over 18,000 less than the previous year and almost 140,000 less than 2008.

The persistent decline in the birthrate has an impact above all on the firstborn children, who decreased to 204,883, 79 thousand less than 2008.

Italy is a lovely country but the economics is an example of keep trying to apply the things that have consistently failed.

The Investing Channel

 

 

 

The UK Labour Market continues to look strong

This week has already seen a fair flurry of new information on the UK economy, so let us start with what will have caught the eye of Mark Carney and the Bank of England.

LONDON (Reuters) – Asking prices for British houses put on sale in the five weeks to Jan. 11 rose by a record amount for the time of year, property website Rightmove said on Monday, adding to signs of a post-election bounce in consumer and business confidence…….Rightmove said average asking prices of property marketed between Dec. 8 and Jan. 11 jumped 2.3% in monthly terms, the biggest increase for that period since the survey started in 2002.

The cautionary note is that it is asking prices ( you can ask what you want…) and not sold or traded prices but those looking for a post election bounce will add it to the Halifax numbers.

Yesterday also brought positive news on UK household finances as well.

“Latest survey data certainly show some post-election
bounce for UK households, with the headline index up
to a one-year high and house price expectations at their
strongest since October 2018. That said, cooling inflation
was most likely the real driving force, propping up real
earnings and disposable incomes” ( Markit )

So there are various surveys suggesting optimism for house prices and one saying something similar for household finances. This is really rather awkward for a Bank of England not only warming up for a Bank Rate cut with Gertjan Vlieghe explicitly saying he will look at sentiment measures. Of course Friday’s Retail Sales showed weakness but they can be unreliable and erratic.

Employment

This morning has brought both good and not so good news on the employment situation. So let us start with the positive.

Facebook says it is to create 1,000 new jobs in the UK this year, delivering a vote of confidence in the UK economy ahead of Brexit.

The tech firm issued a long-term commitment to the country as it made the announcement, in the run-up to a speech to be made in London later on Tuesday by its chief operating officer Sheryl Sandberg.

Facebook said the new roles would take its UK workforce beyond 4,000 people. ( Sky News)

Meanwhile the Financial Times is doing some scaremongering about HS2.

Hundreds of employees could face job cuts, while companies working on HS2 have been told to slow down work as uncertainty mounts over the fate of Britain’s most ambitious infrastructure project

I do not wish for people to lose their jobs but in this instance we have the issue of what are they actually producing?

UK Labour Market Release

We saw another in a long-running series where there was strong employment growth.

There was a 208,000 increase in employment on the quarter. This was, again, mainly driven by quarterly increases for full-time workers (up 197,000; the largest increase since September to November 2015) and for women (up 148,000; the largest increase since February to April 2014). The quarterly increase in women working full-time (up 126,000) was the largest since November 2012 to January 2013.

The tilt towards female employment was also to be found in the annual comparison where of an increase of 349,000 full-time jobs some 317,000 were for women.

This meant that there was another record.

The UK employment rate was estimated at a record high of 76.3%, 0.6 percentage points higher than a year earlier and 0.5 percentage points up on the previous quarter.

I will look at the broader consequences of this later but for the moment let us stay in the labour market and note the influence of what with apologies to those in it is something of a residual category.

The UK economic inactivity rate was estimated at a record low of 20.6%, 0.4 percentage points lower than the previous year and the previous quarter.

Okay so what is going on here?

Estimates for September to November 2019 show 8.51 million people aged between 16 and 64 years not in the labour force (economically inactive). This was 145,000 fewer than a year earlier and 587,000 fewer than five years earlier. The annual decrease was driven by women, with the level down 157,000 to reach a record low of 5.18 million.

So it is another case of let’s hear it for the girls where women have stopped being recorded as inactive and are now employed instead. There is a combination of good news and the influence of the raising of the state pension age at play here. As an aside the broad sweep has been women moving from inactivity to employment since these records began in 1971. The timing of the recent move also suggests that there was an influence from students as well.

There were fears of a rise in unemployment but as you can see below they were unfounded.

For September to November 2019, an estimated 1.31 million people were unemployed. This is 64,000 fewer than a year earlier and 618,000 fewer than five years earlier……The UK unemployment rate was estimated at 3.8%, 0.2 percentage points lower than a year earlier but largely unchanged on the previous quarter.

Wages

The previous release had seen a fall but this was not repeated.

Estimated annual growth in average weekly earnings for employees in Great Britain remained unchanged at 3.2% for total pay (including bonuses), and slowed to 3.4% from 3.5% for regular pay (excluding bonuses).

There was a switch towards bonus payments although slightly confusingly less than last year!

The annual growth in total pay was weakened by unusually high bonus payments paid in October 2018 compared with more typical average bonus payments paid in October 2019.

Let me now switch to the official view on real pay.

In real terms, annual pay growth has been positive since December 2017 to February 2018, and is now 1.6% for total pay (compared with 1.5% last month) and 1.8% for regular pay (unchanged from last month).

Sadly this relies on the woeful CPIH inflation measure and if we now switch from good news ( real wage growth) to the overall picture we get some bad news.

The equivalent figures for total pay in real terms are £503 per week in November 2019 and £525 in February 2008, a 4.1% difference.

Regular readers will be aware of my views on the inflation measure so let me present the issue another way today. The offiicial release points us towards the numbers for real regular pay. Can you guess which of the lines below that one is and no cheating?!

https://pbs.twimg.com/media/EOy_EsTXsAEsM8G?format=jpg&name=900×900

The chart was provided by Rupert Seggins and as you can see rather changes both the narrative and the perspective.

Comment

We find that if we look back the sequence of strong UK employment data started in 2012 and it is ongoing. There is a particular context to this though and let me illustrate with a tweet from Chris Dillow of the Investors Chronicle.

ONS also says hours worked rose 0.5% in Sep-Nov. With GDP rising only 0.1%, this means productivity fell. Might be partly a Brexit effect (uncertainty cut output but encouraged labour hoarding). But it reinforces the picture of long-term stagnation.

The issue here is that with the numbers we have productivity fell. But it is also true that last time the UK labour market and GDP diverged like we are seeing now it was the ( more positive) labour market which was correct as GDP later rose. It is another problem for the economics 101 view that the labour market responds in a lagged fashion as back then it led and GDP followed. More specifically we often see these days that employment is a driver of the economy rather than a follower.

Moving to wages we see that finally the employment growth gave us real wage growth but it took so long we have a bit of a mountain to climb. That is really quite a devastating critique of the Ivory Tower “output gap” thinking that has as many holes in it as I am hoping Arsenal’s defence will have tonight. Yet only last week Bank of England policymakers were repeating their output gap mantra. On that subject they have something of a problem again because they have got us ready for an interest-rate cut just in time for most of the data to be good. The bad bit was the retail sales numbers from Friday which now look out of phase with the employment numbers making me wonder if their seasonality algorithm has had a HAL-9000 moment? Whilst there is an intra-market shift in their favour as well maybe Aldi thinks do if this is any guide.

Aldi plans to increase pay for its staff by just over 3%, making it one of the best-paying supermarkets in the UK.

The discounter said its minimum hourly pay rates will rise from £9.10 an hour to £9.40, with workers inside the M25 getting £10.90 an hour instead of £10.55…….Aldi, Britain’s fifth-largest supermarket, also said it would be hiring 3,800 new employees for store level positions.

 

Will UK real wages and its banks ever escape the depression they seem trapped in?

Today brings the UK labour market into focus and in particular the situation regarding both real and nominal wage growth. Before we get to that there was news yesterday evening from the Bank of England on one of the highest paid categories.

The 2019 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs. It would therefore be able to withstand the stress and continue to meet credit demand from UK households and businesses.

Yes it is time for the results of the annual banking stress tests which of course are designed to look rigorous but for no-one to fail. So far the Bank of England has avoided the embarrassment of its Euro area peers who have seen a collapse quite soon after. In terms of the detail there is this.

Losses on corporate exposures are higher than in previous tests, reflecting some deterioration in asset quality and a more severe global scenario. Despite this, and weakness in banks’ underlying profitability (which reduces their ability to offset losses with earnings), all seven participating banks and building societies remain above their hurdle rates. The major UK banks’ aggregate CET1 capital ratio after the 2019 stress scenario would still be more than twice its level before the crisis.

As you can see the Bank of England is happy to slap itself on the back here as it notes capital ratios. Although of course higher capital ratios have posed their own problems abroad as we have seen in the US Repo crisis.

Major UK banks’ capital ratios have remained stable since year end 2018, the starting point of the 2019 stress test. At the end of 2019 Q3, their CET1 ratios were over three times higher than at the start of the global financial crisis. Major UK banks also continue to hold sizeable liquid asset buffers.

Actually the latter bit is also an explanation as to why banks struggle to make profits these days and why many think that their business model is broken.

Also I note that their view is that the highest rate of annual house price growth in the period 1987-2006 was 6.6% and the average 1.7%. I can see how they kept the average low by starting at a time that then saw the 1990-92 drop but only 6.6% as a maximum? Odd therefore if prices have risen so little that house prices to income seem now to have become house prices versus household disposable income and thereby often two incomes rather than one.

In terms of share prices this does not seem to have gone down that well with Lloyds more than 4% lower at 64 pence, Royal Bank of Scotland more than 3% lower at 252.5 pence and Barclays over 3% lower at 186 pence. Meanwhile it is hard not to have a wry smile at the fact that the UK bank which you might think needs a stress test which is Metro Bank was not included in the test. Although it has not avoided a share price fall today as it has fallen over 3% to 198 pence. Indeed, this confirms that it is the one which most needs a test as we note it was £22 as recently as January.

Labour Market

Let us start with what are a couple of pieces of good news.

The UK employment rate was estimated at 76.2%, 0.4 percentage points higher than a year earlier but little changed on the previous quarter; despite just reaching a new record high, the employment rate has been broadly flat over the last few quarters.

They get themselves into a little bit of a mess there so let me zero in on the good bit which is tucked away elsewhere.

There was a 24,000 increase in employment on the quarter.

There was also a favourable shift towards full-time work.

This was driven by a quarterly increase for men (up 54,000) and full-time employees (up 50,000 to a record high of 20.71 million), but partly offset by a 30,000 decrease for women and a 61,000 decrease for part-time employees.

I do not know why there was some sexism at play and suspect it is just part of the ebb and flow unless one of you have a better suggestion.

The next good bit was this.

the estimated UK unemployment rate for all people was 3.8%, 0.3 percentage points lower than a year earlier but largely unchanged on the previous quarter…….For August to October 2019, an estimated 1.28 million people were unemployed. This is 93,000 fewer than a year earlier and 673,000 fewer than five years earlier.

There were fears that the unemployment rate might rise. But the reality has been reported by the BBC like this.

UK unemployment fell to its lowest level since January 1975 in the three months to October this year. The number of people out of work fell  by 13,000 to 1.281 million.

Wages

This area more problematic and complex so let me start my explanation with the data.

Estimated annual growth in average weekly earnings for employees in Great Britain slowed to 3.2% for total pay (including bonuses) and 3.5% for regular pay (excluding bonuses).

The first impact is simply of lower numbers than we have become used to especially for total pay. Let us move to the explanation provided.

The annual growth in total pay was weakened by unusually high bonus payments paid in October 2018 compared with more typical average bonus payments paid in October 2019.

I have looked at the detail and this seems to have been in the finance and construction sectors where bonus pay was £12 per week and £6 per week lower than a year before. I have to confess I am struggling to think why October 2018 was so good as the numbers now are in line with the others? Anyway this should wash out so to speak in the next 2 months as October 2018 really stood out. Otherwise I would be rather troubled about a monthly increase this year that is only 2.4% above a year before.

So if we now switch to regular pay then 3.5% is a bit lower than we had become used to but in some ways is more troubling. This is because the spot figure for October was 3.2% and it looks as if it might be sustained.

This public sector pay growth pattern is affected by the timing of NHS pay rises which saw some April 2018 pay increases not being paid until summer 2018. As a result, public sector pay estimates for the months April to July 2019 include two NHS pay rises for 2018 and 2019 when compared with 2018. In addition, the single month of April 2019 included a one-off payment to some NHS staff.

Thus public-sector pay growth has faded away and is also now 3.2% on a spot monthly basis.

Anyway the peaks and troughs are as follows.

construction saw the highest estimated growth at 5.0% for total pay and 5.4% for regular pay…….retail, wholesale, hotels and restaurants saw the lowest growth, estimated at 2.3% for total pay and 2.5% for regular pay; this is the sector with the lowest average weekly pay (£339 regular pay compared with £510 across the whole economy)

Comment

There are elements here with which we have become familiar. The quantity numbers remain good with employment rising and unemployment falling although the rate of change of both has fallen. Where we have an issue is in the area of wage growth. The context here is that it did improve just not as much as we previously thought it did. However we still have this.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.5%, and annual growth in regular pay is estimated to be 1.8%.

That is calculated using the woeful CPIH inflation measure but by chance it at CPI are pretty similar right now, so I will simply point out it would be lower but still positive using RPI.

Thus we see that wage growth and inflation seem both set to fall over the next few months as we wait to see how that balances out. But the underlying issue is that we have an area which in spite of the recent improvements is still stuck in a depression.

For October 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at £510 per week in nominal terms. The figure in real terms (constant 2015 prices) is £472 per week, which is still £1 (0.2%) lower than the pre-recession peak of £473 per week for April 2008.

The equivalent figures for total pay in real terms are £502 per week in October 2019 and £525 in February 2008, a 4.3% difference.

Fingers crossed that we can escape it…..

 

Sweden has a growing unemployment problem

Today is one for some humility and no I am not referring to the UK election. It relates to Sweden and developments there in economic policy and its measurement which have turned out to be extraordinary even for these times. Let me start by taking you back to the 22nd of August when I noted this.

I am less concerned by the contraction than the annual rate. There had been a good first quarter so the best perspective was shown by an annual rate of 1.4%. You see in recent years Sweden has seen annual economic growth peak at 4.5% and at the opening of 2018 it was 3.6%.

We now know that this broad trend continued into the third quarter.

Calendar adjusted and compared with the third quarter of 2018, GDP grew by 1.6 percent.

What was really odd about the situation is that after years of negative interest-rates the Riksbank raised interest-rates at the end of last year to -0.25% and plans this month to get back to 0%. So it has kept interest-rates negative in a boom and waited for a slow down to raise them. But there is more.

The Unemployment Debacle

If we step forwards to October 24th there was another development.

As economic activity has entered a phase of lower growth in
2019, the labour market has also cooled down. Unemployment is deemed to have increased slightly during the year. ( Riksbank)

Actually it looked a bit more than slightly if we switch to Sweden Statistics.

In September 2019, there were 391 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 62 000 compared with September 2018.

The Riksbank at this point was suggesting it would raise to 0% but gave Forward Guidance which was lower! Make of that what you will.

But in late October Sweden Statistics dropped something of a bombshell.

STOCKHOLM (Reuters) – Recent Swedish jobless figures – which that have shown a sharp rise in unemployment and led to calls for the central bank to postpone planned interest rate hikes – are suspect, the country’s Statistics Office said on Thursday………….The problems also led to the unemployment rate being underestimated at the start of the year and then overestimated in more recent months.

The smoothed unemployment rate was lowered from 7.3% to 6.8% in response to this and changed the narrative, assuming of course that they had got it right this time. The headline rate went from 7.1% to 6%.

This morning we got the latest update and here it is.

In November 2019, there were 378 000 unemployed persons aged 15─74, not seasonally adjusted, which is an increase of 63 000 persons compared with the same period a year ago. The unemployment rate increased by 1.0 percentage points and amounted to 6.8 percent.

As you can see eyes will have turned to the headline rate having gone from 6% to 6.8% making us wonder if the new methodology has now started to give similar results to the old one. It had been expected to rise but to say 6.3% not 6.8%. We get some more insight from this.

Among persons aged 15–74, smoothed and seasonally adjusted data shows an increase in both the number of unemployed persons and the unemployment rate, compared with nearby months. There were 384 000 unemployed persons in November 2019, which corresponds to an unemployment rate of 6.9 percent.

A much smaller move but again higher and because it is smoothed we also start to think we are back to where we were as this from Danske Bank makes clear.

Ooops! The very unreliable revised new #LFS data showed a significant bounce back up to 7.3 % seasonally adjusted! This is very close to what our model suggested. Ironically, this is just as bad as the old figures suggested. But perhaps these are wrong too? ( Michael Grahn )

So the new supposedly better data is now giving a similar answer to the old. Just for clarity they are taking out the smoothing or averaging effect and looking to give us a spot answer for November unemployment.

The Wider Economy

One way of looking at the work situation is to look at hours worked.

On average, the number of hours worked amounted to 154.3 million per week in November 2019.

But that is lower than under the old system.

On average, the number of hours worked amounted to 156.5 million per week in September 2019…..On average, the number of hours worked amounted to 156.2 million per week in August 2019.

This is really awkward as under the new system Sweden has just under an extra half a million employees but the total number of house worked has fallen. Make of that what you will.

If switch to production we saw a by now familiar beat hammered out earlier this month.

Production in the industry sector decreased by 3.0 percent in October in calendar adjusted figures compared with the same period of the previous year. The industry for machinery and equipment n.e.c. decreased by 6.8 percent in fixed prices and accounted for the largest contribution, -0.2* percentage points, to the development in total private sector production.

Monthly output was up by 0.2% seasonally adjusted but as you can see was well below last year’s. This means Sweden is relying on services for any growth.

Production in the service sector increased by 1.1 percent in October in calendar adjusted figures compared with the same period of the previous year. Trade activities increased by 3.6 percent in fixed prices and contributed the most, 0.5 percentage points, to the development in total private sector production.

So Sweden has maybe some growth which will get a boost from construction.

Production in the construction sector increased by 2.1 percent in October in calendar adjusted figures compared with the same period of the previous year. This sector increased by 2.1 percent in fixed prices, not calendar-adjusted.

If we switch to private-sector surveys then Swedbank tells us this.

The purchasing managers’ index for the private service sector (Services PMI) dropped in November for the third month in a row to 47.9 from 49.4 in October. The
decrease in the index means that service sector activity is continuing to decline in the fourth quarter to levels that have not been seen in six years and that are
contributing to lower hiring needs in service companies,

So maybe the service sector growth has gone as well. The overall measure speaks for itself.

Silf/Swedbank’s PMI Composite index dropped for the third straight month to 47.2 in November from 48.5 in October, reinforcing the view that private sector activity is
slowing in the fourth quarter. Since November of last year the composite index has fallen 7.6 points

Comment

There are two clear issues in this. Of which the first is the insane way in which the Riksbank kept interest-rates negative in a boom and now is raising them in a slowing.

Updated GDP tracker after Nov LFS dropped to a new low since 2012, just 0.26% yoy. ( Michael Grahn of Danske )

Some signals suggest that this may now be a decline or contraction. But whatever the detail the Swedish economy has slowed and will not be helped much by the slower Euro area and UK economies. An interest-rate rise could be at the worst moment and fail the Bananarama critique.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

Next is the issue of lies, damned lies and statistics. I am sure Sweden’s statisticians are doing their best but making mistakes like they have about unemployment is a pretty basic fail. It reminds us that these are surveys and not actual counts and adds to the mess Japan made of wages growth. So we know a lot less than we think we do and this poses yet another problem for the central bankers who seem to want to control everything these days.

Let me end with the thought that UK readers should vote and Rest In Peace to Marie Fredriksson of Roxette.

She’s got the look (She’s got the look) She’s got the look (She’s got the look)
What in the world can make a brown-eyed girl turn blue
When everything I’ll ever do I’ll do for you
And I go la la la la la she’s got the look