OECD leading indicator preview: further weakness

Posted on Thursday, April 4, 2019 at 03:50PM by Registered CommenterSimon Ward | CommentsPost a Comment

A February update of the OECD’s leading indicators is due next week*. Calculations here suggest that the G7 composite indicator fell further, signalling a continuation of below-trend GDP expansion – see first chart. This could temper market optimism that global economic weakness is starting to abate, following a boost to such hopes from this week’s stronger-than-expected Chinese PMI results.

With regard to the latter, some caution is in order. Official (NBS) manufacturing PMI survey results, though supposedly seasonally adjusted, tend to strengthen in March. The new orders index, for example, rose from 50.6 to 51.6 last month but the average March increase over 2010-18 was 1.9 points. The index fell in only one of the nine years.

The second chart compares the published data with the output of a standard seasonal adjustment programme. The double-adjusted series was little changed last month and below the published level.

The procedure used does not adjust for the changing date of the Lunar New Year holiday. Timings were similar to 2018 / 2019 in 2015 / 2016. The published series rose from 48.6 to 51.4 between February and March 2016 but fell slightly in each of the next four months, reaching 50.4 in July. Policy was being eased in late 2015 / early 2016 and narrow money growth was much stronger than now.

A sceptical view of the China reflation story will be maintained here pending a convincing acceleration in narrow money. Even if upcoming March numbers confirm such a pick-up, a significant recovery in economic momentum may be delayed until late 2019.

*The February indicators incorporate component data through March, where available.

UK corporate money trends giving recession warning

Posted on Monday, April 1, 2019 at 10:59AM by Registered CommenterSimon Ward | CommentsPost a Comment

UK top-line monetary growth rates were little changed in February but sectoral details show that the six-month change in narrow money (M1) holdings of private non-financial corporations (PNFCs) turned negative in inflation-adjusted terms. Such a development historically has preceded business retrenchment and a slowdown or contraction in aggregate economic activity. With GDP growth already weak, even a slowdown would imply economic stagnation, at best.

The first chart shows two-quarter / six-month changes in GDP and real (CPI-deflated) non-financial M1, along with the household / corporate breakdown of the latter. The three monetary series have been supported by a sharp fall in six-month inflation since September but this is about to go into reverse, reflecting rising vehicle fuel prices and the planned lifting in April of the price cap on household energy bills. Despite the favourable inflation effect, real non-financial M1 growth has remained weak while corporate real M1 holdings have contracted.

Corporate M1 fell in nominal as well as real terms in the four months to February. Corporate broad money (M4) trends have also weakened, with six-month nominal growth down to 0.9% in February, implying near-stagnation in real terms. M1 and M4 holdings fell by 0.6% and 0.2% respectively in February alone.

The relative resilience of household money trends is of limited consolation, for two reasons. First, corporate developments often lead household trends, e.g. the six-month change in real PNFC M1 turned negative six months before that of real household M1 ahead of the 2008-09 recession – first chart. Business retrenchment feeds through to slower growth of worker incomes, with negative implications for consumer spending unless offset by timely policy stimulus.

Secondly, household money trends have been boosted by a portfolio shift out of mutual funds – outflows from retail funds may have totalled about £6 billion in the six months to February, based on extrapolating Investment Association data through January, following inflows of £7.5 billion in the prior six months. This shift into money is unlikely to signal a rise in spending intentions. The second chart shows two-quarter / six-month changes in consumer spending, real household M1 / M4 and an expanded real savings aggregate also including holdings of National Savings and mutual funds (“M4++”). The weakness of the latter measure may be a better guide to spending prospects.

Euroland money update: surprising strength

Posted on Thursday, March 28, 2019 at 12:06PM by Registered CommenterSimon Ward | CommentsPost a Comment

Euroland economic weakness was signalled by a monetary slowdown in late 2017 / early 2018. Money growth rates stabilised in mid-2018, while more recent data have shown an improvement, particularly in real terms. Current trends may be contrasted with 2008 and 2011, when unwise ECB policy tightening resulted in real money contraction and subsequent recessions. The suggestion is that economic momentum will stabilise during the first half of 2019 and recover later in the year, barring negative external developments. External risks, however, are high, with possible adverse scenarios including an inventory-led US recession, further Chinese economic weakness, a US / EU trade war and an early no deal Brexit.

Annual growth rates of the headline M1 and M3 measures rose to 6.6% and 4.3% respectively in February, the latter representing an eight-month high. It has been claimed that headline money growth has been artificially inflated by “double-counting” of deposits of certain financial institutions. The basis for this claim is unclear. The focus here is on “non-financial” M1 and M3, excluding deposits of all financial institutions, on the grounds that movements in such deposits are unlikely to provide information about near-term prospects for spending on goods and services. Annual growth of the two measures rose to 7.4% and 4.9% in February, higher than for the headline aggregates – see first chart.

The second chart shows six-month growth rates of the four measures deflated by consumer prices. There has been a significant upswing since mid-2018 in all four cases, suggesting that economic momentum will begin to revive from the second quarter of 2019, allowing for a typical nine-month lead.

Six-month real money growth, admittedly, has been boosted by an energy-driven fall in inflation, which is now starting to reverse. Nominal growth rates, however, have also firmed, particularly for broad money – third chart. The counterparts analysis of M3 indicates that the negative impact of ending QE has been offset by a strengthening "basic" balance of payments position, reflecting a slowdown in portfolio capital outflows. This supports the long-held view here that QE "leaks" abroad and has disappointingly small domestic monetary effects.

Real narrow money growth of both households and non-financial corporations (NFCs) has recovered – fourth chart.

Money trends diverged significantly across the major Euroland economies in the run-up to the 2008-09 and 2011-12 recessions. Italian real money growth is lagging but a similar gap has yet to open up – fifth chart. Italian corporate narrow money, however, is contracting, suggesting further economic weakness – sixth chart.  This negative signal contrasts with solid money trends, both household and corporate, in France and Spain.


Why isn't the UK MPC easing?

Posted on Tuesday, March 26, 2019 at 10:39AM by Registered CommenterSimon Ward | Comments2 Comments

The MPC last week left policy unchanged but the judgement here is that incoming news warrants a reversal of August’s quarter-point rate hike. Monetary trends are worryingly weak, the global economy continues to slow and business confidence has fallen to a level historically associated with policy easing.

On the latter point, the CBI yesterday released its first-quarter financial services survey, which echoed earlier industrial and business / consumer services surveys in reporting a plunge in optimism. The distributive trades survey, surprisingly, is still showing some resilience but it has often lagged the other sectors historically – see first chart.

The second chart shows a simple average of the optimism balances across the four surveys, along with Bank rate. At -28, the average is the weakest since the 2008-09 recession and similar to the level reached in 1998, during the Russian / LTCM financial crisis. The MPC has always eased policy when the average has fallen to -8 or below. (In 2011, easing took the form of additional QE rather than a Bank rate cut.)

The MPC is reluctant to admit that the August hike was a mistake and is using Brexit turmoil as an excuse to hold fire. This risks allowing a negative confidence / spending spiral to develop, requiring more substantial policy action later. The proximity of rates to the effective lower bound strengthens the case for the MPC to act pre-emptively. A rate cut could be reversed swiftly in the unlikely event of a smooth Brexit and subsequent economic bounce.

Five reasons for fading UK labour market strength

Posted on Tuesday, March 19, 2019 at 03:59PM by Registered CommenterSimon Ward | Comments3 Comments

1. Employment is a lagging indicator – strength in late 2018 may reflect a pick-up in quarterly GDP expansion to 0.6% in the third quarter. Growth fell back to 0.2% last quarter.

2. Business surveys are signalling slower hiring – see first chart, which shows an average of employment expectations across the CBI / EU Commission monthly services, industry and retailing surveys.

3. As well as building inventories of physical goods, firms may be “stockpiling” labour to protect against an early end to freedom of movement in the event of a no deal Brexit. This could partly explain continued dismal productivity performance.

4. Solid increases in employment and average earnings have pushed annual growth of aggregate wages up to 5.1%, well above nominal GDP expansion of 3.0% – second chart. The excess implies a further squeeze on profits, with negative feedback to future investment and hiring.

5. Weak corporate real narrow money growth corroborates a squeeze on finances and is a negative signal for future employment – third chart.