Month: April 2016

Economic Insights – Monday 25th April


  • Global economy: pulse rate down again everywhere
  • UK and US consumers may not be doing enough
  • ECB still strutting and fretting without effect
  • Brexit: Obama charm and Boris boorishness help but economists turn the tide for the Remainians.


Chart 1 Contributions to year-on-year volume and value growth in the UK from the 4 main retail sectors (March 2016 compared with March 2015)


Source: ONS

Economics: slower still and slower

A big data week lies ahead for most major economies apart from China, which as usual has already won the monthly competition to produce the quickest and most optimistic numbers.

For once, I shall give pride of place to the UK although not much good news is in prospect. The first (and incomplete) cut of Q1 GDP will hinge on the data displayed in Charts 1 and 2 from the Office of National Statistics. Consumers are still buying cheerfully but at lower prices and less so in shops while the Services sector (including retailing) is currently the only likely source of overall growth. The consensus expectation is for Q1 to be +0.4% quarter on quarter (vs. + 0.6% in Q4) but I reckon it could be as low as +0.3%. Other ‘highlights’ are likely to include another dismal CBI Survey of Industrial Orders and Gfk Consumer Confidence slipping below zero. Mortgage lending, however, will have surged in March, which is just what we do not need!

Chart 2 UK GDP contribution to the quarter-on-quarter % change, Quarter 4 (Oct to Dec) 2015


Source: ONS

The US also reports on Q1 GDP (together with a raft of numbers for the month of March) and here too +0.3% is also very likely but with the crucial difference that this would be on an annualised basis. This is the latest reading from the Atlanta Fed Nowcast, which has become a very accurate predictor of first cuts of GDP but it has to be said that US GDP is notoriously reported lower in Q1 than in the rest of the year. The Cleveland Fed also have a Nowcast of their own and it forecasts a modest fall in March to 1.5% year on year in the FOMC’s preferred inflation gauge of the Core Personal Consumption Price Index. As in the UK, Consumption is key to future growth and the two major surveys of Consumer Confidence, the Conference Board and Thomson Reuters/University of Michigan, are also due out this week. As both have been (gently) trending in opposite directions, a dramatic improvement seems improbable with inevitable implications for overall growth in the US economy in Q2 and beyond.

It seems tactful not to dwell on expectations of the data from Japan but the numbers will include CPI, Industrial Production, Household Spending and Retail Sales. Judging by the smoke signals with regard to the Bank of Japan’s pushing interest rates into negative territory, we should expect nothing but further gloom.

Chart 3 EZ banks neither borrowers nor lenders


While listening to Mr Draghi’s press conference some lines from Macbeth did come to mind but I have since reserved them for another ‘performer’ (see below). However, as we all celebrate the anniversary of Shakespeare’s death (also his birthday, by the way) I thought an allusion to Hamlet would be appropriate in the caption for Chart 3. Essentially, EZ banks are not lending much to businesses or consumers and prefer buying sovereign bonds with what little of the ECB’s funding largesse they elect graciously to accept.

Nevertheless, Mr Draghi did manifest some ‘sound and fury’ on Thursday as clearly German politicians, not least Finance Minister Schaüble, are vexing him on at least three fronts: (1) blaming ECB policies for the rise of anti-EU protest parties (2) insisting on austerity instead of moderately expansionary fiscal policies and (3) daring to challenge ECB independence (supremacy?) just because zero interest rates do not suit the domestic German banking sector.How long will it be before Mr Draghi blames the politicians for the lack of lending that  means there is little prospect of much growth in the next year and beyond? This week should bring another set of poor data headed by persistently low inflation and high unemployment. No lending means very little growth and data from the EZ this week should report more of the same: persistently low inflation and high unemployment. Spain should have the best story to tell with Germany and France lagging some way behind while Italy still struggles with high unemployment, low wages and, of course, a host of migrants from Libya.

Mr Schaüble has also been stirring up trouble in suggesting that Greece may not need debt relief, as now demanded by the IMF, if it would only try harder to meet its deficit targets. However, the latest exercise in can-kicking requires Greece to agree to an extra €3.6bn of ‘contingency savings’ to hit the 2016 deficit targets just in case the previously imposed €5.4bn is not enough. Hubble bubble, toil and trouble but probably not just yet, during the Brexit referendum campaign!

Chart 4 Brexit rises to top of concerns in April’s BAML global investor survey


Brexit: two-handed economists to the rescue

Investors have been getting increasingly alarmed by the prospect that a grand alliance of romanticists, genuine reactionaries, anarchists and the merely bloody-minded might win the day on June 23rd. UK equities and the pound have been hit and Chart 4 shows how Brexit since January has overtaken a hard landing in China and a US slowdown as the chief concern of respondents to the monthly BofA Merrill Lynch survey of global investors.

The latest betting implies the probability of Remain winning has jumped to 75% after last week’s wobble and the last few days may yet prove to be the turning point. President Obama may have been at his most charming (also with flashes of ruthlessness) but the heavy lifting had already been done by economists, of all people. The fact is that it is impossible to construct a realistic case that the UK would be better off economically outside the EU. In contrast, as with the Scottish Independence referendum, a political case can be made provided one is willing to pay a short-term price and risk longer-term damage. The best one can say (as Lord Merv of Swerve did last week) is it would not make much difference but even that requires, awkwardly, some sort of new deal with the EU. The crux of the matter is that trade just cannot be ignored, no matter how loudly the Leavers complain about the three models (Norway, Canada and the World Trade Organisation) set out by the Treasury and even their own ‘Albanian’ model requires something on trade.

Here I want to make a plug for the Centre for European Reform (CER) who describe themselves as ‘an independent think-tank devoted to making the EU work better, and strengthening its role in the world. We are pro-European but not uncritical.’ Indeed, the CER regularly publishes learned papers on both EU reform and Brexit. Regular readers will know just how much I sympathise with such sentiments and that I am a proud ‘Remainian’ as Share Radio’s Simon Rose described me as I set off last Thursday to a CER-sponsored debate on the motion that ‘Leaving the UK would damage the UK economy’. The debate was preceded by Gordon Brown in as good form as I have ever heard him (and I have known him since we were undergraduates), who made a brave attempt to inject some passion into the Remain camp but, as the FT’s Janan Ganesh keeps pointing out, it is really all about economics. Proposing the motion were JP Morgan’s Stephanie Flanders and the FT’s Martin Wolf while opposing were Capital Economics’ Roger Bootle and Gerald Lyons from the Mayor of London’s office. As Mr Wolf observed with uncharacteristic generosity, Messrs Bootle and Lyons are two of the few serious economists in the Leave camp, which made their overwhelming defeat all the more significant. Chart 5 sets out the voting from the audience of academic, business and journalist economists. I might add I have rarely come across such a strong consensus amongst so many economists, despite all of them appearing to be of the two-handed variety famously reviled by President Harry Truman.

Chart 5 CER Economists debate: the Remainians have it!


The political debate will go on but it all seems so unnecessary unless one actively wishes to change the leadership of the Tory Party. At least Michael Gove is a romanticist given leave of absence from reality by his friend the Prime Minister but others have less respectable aims. For the erudite but shameless Boris Johnson and in honour of the Bard’s anniversary I address this passage from Macbeth (after I had looked for something from Comedy of Errors)

…a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

Economic Insights – Monday April 18th 2016


  • Politics at centre stage: oil, impeachment, protectionism, Eurosquabbles and even laughs
  • More cold water from the IMF but China’s exports gladden hearts
  • Making money is hard to do: earnings, yields, everything under pressure


Chart 1 Is the price right?


Political drama week

A dramatic week kicked off with the OPEC meeting in Doha failing to decide on freezing output although, of course, the really important bit would have come later with an agreement that sticks if it can ever be reached in the first place. Chart 1 shows yet again the leverage of Saudi Arabia and Iran, if only they could ignore their political rivalry (Iran did not even show up in Doha). It also shows how much producers have been suffering since the golden years 2011-14, most of whom, with the major exception of the US, must be desperate for some sort of deal. Their best hope is prices’ stabilising in the range of $40-50 as the Saudis are in a hurry to get the black stuff out of the ground before world governments get serious about fossil fuels. Then, of course, there is Wall St, which having cleaned up with forecasts of a top of $150 and a bottom of $20, will want to catch everyone out again. In the immediate aftermath of this set-back, $40 looks in danger.

The Brazilian ‘House of Cards’ screenplay has reached a new melodrama with the lower house of Congress voting on the impeachment of the beleaguered (and less than competent) President Dilma Rousseff. Since February, equities and the real have been rapturously anticipating a clean-out of the bad guys but profit-taking if not disillusionment could send them into reverse if everyone concludes that there are no good guys.

On Tuesday, the New York State primary may not prove as decisive as was originally thought with both Trump and Clinton stumbling a bit. With Congress increasingly polarised into gridlock, highlighted in fascinating BBC documentaries in the Obama White House, it may not matter much who ends up winning in November. Somewhat depressingly, all four contenders are trade protectionist to varying degrees, which is, alas, one area where they definitely will be able to work with members of both parties in Congress.

Meanwhile in Europe, SuperMario has another spar first with his critics within the ECB Governing Council and afterwards with the increasingly sceptical financial press. Apart from insisting that all is going to (his) plan, he probably wants to keep his head down while the Germans squabble amongst themselves over ECB independence vs. its ‘reckless’ policies. Mr Draghi has, however, got new fans through including Greek bonds in his asset buying spree, which should help kick the Greek can down the road while the IMF and the Germans quarrel and the Tsipras government wriggles. The fact remains that the Greeks cannot meet all their targets even if they wanted to. This could end awkwardly for Mr Draghi, albeit not as much as will the European banks’ recalcitrant perversion of his asset purchase programmes through their buying ever more government bonds and cutting back on lending. Mrs Merkel faces her own uncomfortable week over her apparent kowtowing to President Erdogan of Turkey, which is threatening to overshadow the coup of securing both CSU and SDP support for her bold and enlightened approach to integrating immigrants.

Chart 2 Waiting for the Boris Bus


Source: @neiledwardlovat

Here in the UK, there also seems to be a ‘House of Cards’ building with the Brexit campaign seemingly overtaken by a struggle for the keys to Number 10. The venerable Kenneth Clarke gave the game away when he said Mr Cameron would not survive in office for 30 seconds if he lost the referendum while the less venerable Europhobe MP Bernard Jenkin reckons the Tory Party would overthrow him if he won. Who needs enemies with friends like that? (A matter to be pursued by Nick Robinson on TV on Tuesday evening, by the way). Jeremy Corbyn is in on the plot too as his ‘wholehearted’ conversion to EU membership neatly papers over the other divisions in his own party and should (coincidentally?) also help the Remain cause. However, the real drama will start with Mr Johnson’s setting off on his Boris Bus Comedy Tour bound for destination Downing Street while President Obama (also very witty on occasion) gets there next week to help out Dave, their ‘common’ mate. The publicity given to cricket legend Sir Ian Botham’s support for Brexit adds some piquancy but so far, as Chart 2 (from my mate Neil Lovatt) confirms, the punters are unmoved. Meanwhile, the Treasury is certainly not playing it for laughs in issuing a much-needed warning to those of us who are neither anarchists nor romantics.

Chart 3 China to the rescue?


Source: IMF/FT

Economics sclerosis week

Last week the IMF published their latest quarterly forecasts for world output and individual country GDPs, which told a familiar tale of slowing growth and further downward revisions. Economic forecasting is, of course a mug’s game but the IMF usually manages to get the direction right and, of course, provides insights into a comprehensive list of economies, albeit subject to local political sensitivities. The latest big ‘surprise’ of upward revisions to China’s GDP somehow managed to reflect the government’s official 6.5-7% target at least for 2016. Only India at 7.5% is expected to do better while no other economy of any importance is forecast to grow by more than 2.5% in either 2016 or 2017, with Japan back in recession next year.

As luck would have it, China has just published data which shows Q1 GDP to be bang on target at 6.7% annualised, albeit down from 6.8% in the previous quarter. In fact, it has to be said that almost all the official numbers from China are felicitous to a surprising extent, including not just GDP, Industrial Production, Retail Sales and Trade but also FX Reserves and even the Producer Price Index. In contrast, the US economy is not ‘doing its bit’ with a seventh consecutive month of negative changes in Industrial Production and faltering Retail Sales. Chart 4 from Jeffrey Snider of Alhambra Investment Partners shows a jagged but generally declining trend in Retail Sales excluding Autos.

Chart 4 US consumers not to the rescue!


This week attention switches to the EZ and it is all about surveys, especially from Germany and including the ZEW (Economists), IFO (Business) and the flash Manufacturing and Services PMI surveys from Markit. Not much can be expected from any of them.  Meanwhile, following last week’s dire Manufacturing Output numbers, the UK puts a better foot forward in the form of Unemployment and Retail Sales. Even the Public Finance numbers should be quite favourable, albeit confirming that the Chancellor has missed his target for 2015-16.

From macro to micro

One of the tougher parts of my job is being obliged to descend from the Olympian heights of macroeconomics to mundane microeconomics. Last week took me to the Isle of Purbeck in Dorset where I was obliged to study in depth various restaurants, bars and (cream) tea rooms, all of which were full to capacity and charging prices to warm the hearts of members of the BoE’s MPC. Even the historic buildings and the local steam railway seemed full of visitors and I was assured on my my diligent enquiry that the Easter holidays had been even busier. I also should report that many of the serving staff were not……er….English. Figure 5 shows the view from my desk in Dorset, where I failed to write Economic Insights last week.

Chart 5 Daniel Stewart’s Dorset HQ last week