British electors, on the face of it, are an ungrateful bunch. Consumer confidence, as measured by the EU Commission / GfK monthly indicator, is at the top of its range over the last 40 years – in the 96th percentile, to be precise, up from the 44th just before the May 2010 general election. The governing Conservative and Liberal Democrat parties, however, command the support of only 42% of voters, according to the poll of polls compiled by ukpollingreport.com, down from a 59% share at the last election.
Mismatches between consumer confidence and government popularity, in fact, are nothing new. The party of government has changed in elections four times since the early 1970s: February 1974 (Conservative to Labour), May 1979 (Conservative win), May 1997 (Labour win) and May 2010 (Conservative- Liberal Democrat coalition). Consumer confidence was also at the top of its range in 1979 and 1997, standing in the 96th and 95th percentiles respectively – see first chart. (Confidence had slumped during the 1978-79 “winter of discontent” but rebounded strongly into the election.)
It would be wrong to conclude that economic / financial factors are of little importance to voters. Statistical research reported in previous posts (e.g. here) shows that the poll difference between the main governing and opposition parties depends positively on average earnings growth and house price inflation, and negatively on interest rates, consumer price inflation and the unemployment rate. A model based on these factors explains a significant portion of historical poll variation and continues to suggest a small Conservative lead over Labour on 7 May.
Consumer confidence is an inferior political guide probably for two reasons. First, the confidence indicator is a forward-looking measure: it combines consumers’ expectations of their finances, saving behaviour, the economy and unemployment over the next 12 months. Voters, however, appear to rate governments on what they have delivered to date, discounting promised improvement, even when this is believed.
Secondly, earnings growth is much more important for voting intentions than other influences on confidence. The statistical research indicates that a 1 percentage point (pp) rise in earnings growth moves the poll gap by 4 pp in favour of the governing party; a 1 pp fall in consumer price inflation or the unemployment rate, by contrast, delivers a boost of only 1 pp. (Changes in interest rates also have a significant impact, explaining why governments and their central bank appointees try so hard to hold rates down before elections.)
These considerations suggest that political analysts should focus attention on the component of the consumer survey tracking current personal finances rather than the broader and forward-looking confidence measure. This component has lagged the pick-up in confidence, currently standing in the 70th percentile of its historical range. It is, however, rising fast, regaining its 2008 pre-recession level in March – second chart.
The Bank of England forecasts a rise in earnings growth to 3.5% in the fourth quarter of 2015, from 1.7% in the three months to February. The polling model suggests that the Conservative lead over Labour would be 6 pp if such growth was occurring now. Tory-supporting business leaders are increasingly frustrated by the lack of traction of the party’s election campaign, according to today’s Financial Times. Have they considered the impact of their own wage policies on the electoral arithmetic?
The latest Eurozone purchasing managers’ survey indicates that economic growth is currently stronger in the periphery than the core. This had been signalled by relative monetary trends in late 2014 but real money growth in the core has since caught up with the periphery, suggesting similarly solid prospects for the two groups.
The Eurozone PMI composite output index edged down in April but remains consistent with respectable economic expansion. The forward-looking new business index was little changed from its March level, a 46-month high, while the employment index reached its strongest level since August 2011.
More interesting than the headline readings was news that the output index for the “rest of the Eurozone” rose further, reaching its highest level since August 2007 and exceeding the level in Germany as well as France – see first chart. The employment index showed similar relative strength.
This outperformance had been predicted by faster real money growth in the periphery than the core in late 2014 – second chart. The gap has since closed, however, with core growth marginally higher in February.
French real money growth has risen particularly strongly and is now second to Spain in the big four ranking – third chart. The French PMI survey has lagged improvements elsewhere but may now catch up. The INSEE industrial survey for April, also released today, was more encouraging than its PMI counterpart: the turning-point indicator derived from the survey rose further and indicates a “favourable short-term economic situation”, according to the commentary – fourth chart.
Narrow money trends last autumn predicted that the Eurozone and Japanese economies would regain momentum while the US and China would slow, a shift confirmed by recent coincident data. Current monetary trends suggest that the US and Eurozone will grow solidly in the second half of 2015 with Japan expanding moderately but China remaining sluggish.
The first chart shows six-month changes in industrial output. The US and Chinese changes fell to their lowest levels since 2009 in March, although recent weakness has probably been exaggerated by special factors – bad weather and a ports strike in the US and a late New Year holiday in China. Eurozone growth in February*, by contrast, was the highest since 2011, while Japanese output has also rebounded after weakness in mid-2014.
This pattern had been suggested by monetary trends last autumn. The second chart shows six-month changes in real narrow money M1, with the last data points referring to October 2014. Eurozone real money growth was rising strongly following the ECB’s easing actions in June and September, while a recovery was under way in Japan, mainly reflecting a reversal of the inflation spike caused by April’s sales tax rise. US and Chinese trends, however, had weakened sharply, warning of an economic slowdown in early 2015, allowing for the usual half-year lead.
The third chart shows the latest monetary data. Real narrow money growth is higher than last autumn in the US, Eurozone and Japan but little changed in China**.
The most notable development has been a rebound in the US, probably partly attributable to a significant fall in Treasury yields in late 2014 / early 2015. US real money growth in February almost matched its peak in December 2012, which preceded GDP growth of 4.0% annualised in the second half of 2013.
Eurozone real money is also giving a strongly positive economic signal, with growth remaining notably higher than in Japan. This suggests that the ECB policy of imposing a negative interest rate on excess bank reserves has been more effective in delivering monetary stimulus than the Bank of Japan’s record-breaking QE.
Chinese real M1 growth appeared to be recovering in January / February but March data delivered a set-back. The broader M2 measure and bank lending are giving a more reassuring message – see previous post – but Chinese economic expansion may remain sub-par through the autumn, at least.
*February latest for Eurozone and Japan.
**March data for US, Japan, China; February for Eurozone.
In its October 2014 World Economic Outlook (WEO), the IMF downgraded its Eurozone growth forecast and warned of a 38% risk of a recession. Its pessimism was representative of the consensus at the time but was viewed here as groundless, because monetary trends were signalling an improving economic outlook – see previous post.
In its latest WEO, the IMF raised its 2015 GDP growth forecast to 1.5%. Its estimate of recession risk, however, remains high, at 25% between the second and fourth quarters of 2015. This assessment, on the face of it, is inconsistent with current positive economic and monetary trends.
A likely explanation is that the IMF expects a Greek default and / or EMU exit and views this as a significant risk to the emerging economic upswing.
Concern about a negative shock from “Grexit” probably played a key role in the ECB’s decision to launch QE. The ECB’s economists monitor monetary trends closely and will have recognised the signal of improving prospects in late 2014. The sharp fall in inflation, meanwhile, was clearly due to external commodity price weakness, with the “core” rate – excluding energy, food, alcohol and tobacco – remaining stable. This suggests that ECB President Draghi’s claim of heightened deflation risk, promulgated by useful idiots in the media, was a smokescreen to push through QE, the main purpose of which was to protect other peripheral bond markets from contagion from a Greek default / exit.
The IMF / ECB concerns about the threat posed by a Greek crisis cannot be dismissed. Major defaults are often a harbinger of a sustained deterioration in financial and economic conditions. Such defaults, however, are usually the result of increased borrower stress due to a tightening of liquidity conditions rather than a voluntary decision to repudiate debt.
Current ECB policy is calibrated to deal with a possible financial crisis and is excessively accommodative relative to current economic and monetary trends. If "Grexit" is avoided or its fall-out contained, Mr Draghi’s dismissal of QE tapering is likely to prove “premature”.
The Chinese economy slowed sharply in early 2015 but money / lending trends are consistent with moderate economic expansion over coming months. Further policy easing, nevertheless, is likely.
Annual growth of real GDP was 7.0% in the first quarter, down from 7.3% in the fourth quarter of 2014 but in line with the 2015 target. This result, however, is difficult to reconcile with much weaker nominal (i.e. current price) data: annual nominal GDP growth fell from 7.7% to 5.8% between the two quarters.
The preferred growth measure here is the six-month change in industrial output*. This slumped to 1.5% in March, or 3.1% annualised – the lowest since 2009.
The Chinese New Year holiday occurred later than usual in 2015, which may have resulted in production being shifted from March to February. Combining the two months, however, six-month output growth was still only 2.6%, or 5.3% annualised.
The recent economic slowdown was signalled by weaker monetary trends in late 2014. Six-month growth of real M2 fell to a 39-month low in December – see chart. It has, however, stabilised in early 2015. The fall in output growth appears exaggerated relative to the current level of real M2 expansion, suggesting some recovery.
Growth of real bank lending, meanwhile, has picked up since late 2014. The normal approach here is to regard credit as a coincident or lagging indicator of economic activity but, in China’s case, it appears to lead. This may reflect the importance of supply shifts in driving credit changes in China, with such shifts often related to policy measures designed to boost or restrain economic growth. In the major developed economies, by contrast, credit demand is typically a stronger influence on lending fluctuations than supply changes. Credit demand depends partly on current economic trends, explaining the coincident / lagging relationship.
Six-month growth of real bank lending slipped back in March but remains above its average in recent years. Medium- and longer-term loans for infrastructure investment and real estate have led recent strength, consistent with official initiatives to boost these areas. Admittedly, overall credit – as measured by “total social financing” – is growing more slowly than bank lending, reflecting weakness in “shadow banking” (i.e. trust loans, entrusted loans and bankers’ acceptances) . Such shadow activities, however, may have less direct implication for economic trends than bank lending. In any case, six-month growth of real total credit, like M2, has moved sideways since end-2014
Today’s weak economic news is likely to result in further policy easing, despite concerns about a bubbly stock market. Together with reassuring money and credit trends, this suggests improving second-half economic prospects, when China should also benefit from stronger global demand – see previous post.
*World Bank seasonally-adjusted level series updated using annual growth data.