Entries from January 1, 2013 - January 31, 2013
UK money growth solid as corporate liquidity surges
UK monetary trends continue to support optimism about growth prospects while arguing against more QE.
The preferred narrow and broad money aggregates here are non-financial M1 and M4, comprising holdings of households and private non-financial corporations*. Annual growth in the M1 measure rose further to 6.5% in December, the highest since September 2007 (i.e. before the recession), while M4 expansion was stable at 5.1%, the best since August 2008.
Empirical analysis suggests focusing on six-month growth in real money (i.e. deflated by consumer prices) to forecast the economy. This remains solid at 2.0% (not annualised) for non-financial M1 and 0.8% for M4 – see first chart. The recent further pick-up in nominal money expansion, however, has not resulted in real acceleration because of faster inflation. The main risk to the economy this year is another inflation squeeze on real money, not insufficiently loose policy.
Proponents of more easing may alight on the lack of monthly growth in the Bank of England’s preferred broad money measure, M4ex, in December to suggest that weakness is reemerging following the suspension of QE. M4ex, however, was depressed by a fall in volatile financial sector money holdings – the non-financial M4 measure preferred here rose by 0.3%. The above-discussed aggregates, moreover, exclude foreign currency deposits, which rose strongly in December, possibly reflecting companies switching out of sterling in (correct) anticipation of exchange rate weakness. A wider aggregate comprising M4ex and foreign currency holdings of the non-financial sector grew by 0.8% in December alone.
A further encouraging feature of the monetary data is the concentration of the recent cash build-up in the corporate sector – stronger corporate liquidity typically encourages more investment, hiring and M&A. Sterling and foreign currency deposits of non-financial corporations surged at an 11.5% annualised rate during the fourth quarter, while their bank borrowing continued to contract. The corporate liquidity ratio (i.e. deposits divided by loans) therefore rose sharply to its highest level since the third quarter of 2000. Excluding the overleveraged real estate sector, the ratio is now well above its range in the decade preceding the financial crisis – second chart.
Other stand-outs in today’s data include a further rise in mortgage approvals for house purchase in December to the highest undistorted level since April 2008** and surprisingly strong foreign purchases of gilts, despite reduced Eurozone tensions – foreign buying was £15.4 billion, a 13-month high, with UK banks and non-banks unloading £2.7 billion and £8.0 billion respectively.
*Financial sector money holdings are also important but their volatility can sometimes obscure underlying trends. Non-financial M1 is not calculated by the Bank of England but can be constructed from published data.
**Higher approvals in January 2012 and October-December 2009 reflected a bunching of demand ahead of the expiry of stamp duty holidays.
Eurozone monetary pick-up stalls in December
Eurozone narrow money trends remain consistent with an economic recovery but today’s December numbers were slightly disappointing, showing some loss of momentum into year-end. Country divergences, moreover, remain large, with troubling weakness recently in Spain and, to a lesser extent, France.
Narrow money M1 – comprising physical cash and overnight deposits – is a better economic leading indicator than the broader M3 measure, while credit is a coincident indicator. The six-month change in Eurozone real M1 has recovered from -0.8% (not annualised) in April 2012 to 2.7%* in December, a level historically consistent with respectable economic expansion – see first chart. This is down, however, from a 4.7% peak in October, suggesting that the growth pick-up will fade from the spring, allowing for the typical half-year lead.
A key focus here has been whether capital reflux and returning confidence would be reflected in a rise in narrow money in peripheral economies, warranting recovery hopes. The latest news is mixed: the six-month change in real M1 deposits was positive for a second month in Italy (0.7%) but has plunged further into negative territory in Spain (-4.5%)**. Elsewhere, growth continues in Ireland while Portuguese real M1 deposits are flat and the rate of decline in Greece has slowed – second chart.
The Italian / Spanish divergence within the periphery is mirrored by a contrast between German strength and French weakness in the core, although the decline in French real M1 deposits moderated in December. A recent sharp slowdown in Dutch growth, meanwhile, bears monitoring – third chart.
With the Eurozone monetary pick-up showing signs of stalling, the ECB may have been unwise to allow banks to make large repayments of their three-year LTRO loans, thereby reducing dramatically “excess” system liquidity. Was this Maestro Draghi’s first misstep?
*The six-month M1 change may be artificially inflated by 0.7 of a percentage point because of the initial capital subscriptions, totalling €32 billion, paid by governments to the European Stability Mechanism (ESM) in October. (ESM deposits, unlike those of central governments, are included in the money measures.)
**Spanish banking sector balance sheet statistics for December reflect both a transfer of bad loans to SAREB, a government-sponsored agency, and a capital injection in the form of securities from the ESM. These transactions have distorted credit and capital data but should not have affected deposits.
UK onshore GDP up 0.5% since Q1 2012 vs similar Eurozone fall
The reported 0.3% decline in fourth-quarter GDP rests on an official guess that construction output slumped in December. Even if the number stands, however, it suggests underlying growth in the economy last quarter, allowing for drags from the unwind of the Olympics ticket sales boost and lower North Sea output. The best “clean” comparison is between the levels of non-oil GDP in the first and fourth quarters – there was a rise of 0.5%, indicating a continuing, if weak, recovery.
A post on 11 January stated that the production data then in hand – for October and November for industry and construction and October only for services – were consistent with a 0.1% rise in fourth-quarter GDP. So what went wrong? The assumption in the post that industrial and services output would remain stable for the balance of the quarter proved correct, taking the two sectors together. The forecast miss, instead, reflected an estimated 16.0% plunge in construction output in December – this wiped out strength in October / November to leave the quarterly total only 0.3% above a very weak third quarter.
It is important to realise that the December construction output figure is little more than a guess based on early responses to the monthly business survey and a judgemental fudge factor. It is certain to be revised significantly, though not necessarily upwards. A strong case can be made that the Office for National Statistics should eschew this sort of guess-work and either extrapolate data for the first two months to derive a quarterly estimate or, preferably, delay publication of the highly-sensitive preliminary GDP report until the second month of the subsequent quarter when more reliable information is available.
Even assuming that today’s weak number is confirmed, however, it does not imply that the onshore economy contracted in late 2012, because the quarterly GDP change was depressed by at least 0.2 percentage points by an unwind of the Olympics boost and a further 0.2 from a decline in North Sea oil and gas extraction. Adjusted for the Olympics, in other words, non-oil GDP rose by about 0.1%.
The strong third-quarter GDP rise reflected a bounce-back from a second quarter depressed by an additional bank holiday as well as the Olympics boost. The last quarter unaffected by such distortions was the first quarter of 2012. Non-oil GDP rose by 0.5% between the first and fourth quarters – weak but a much better performance than in the Eurozone, where GDP is likely to have contracted by at least 0.5% over the same period.
Will today’s number prompt further MPC easing at its February meeting? A key consideration is that output sluggishness coupled with an apparent solid rise in aggregate hours worked last quarter (based on data through November) suggest ongoing weak productivity performance, offsetting an "output gap" argument for more stimulus. The “MPC-ometer” model followed here rates the probability of further action in February at less than 50% even incorporating today’s news; the final reading will depend importantly on January purchasing managers’ surveys released at the start of the month.
French worries rise as PMI slumps
Previous posts discussed French post-election narrow money weakness and a deterioration in the country’s TARGET2 balance, suggesting an outflow of capital. French real M1 deposits contracted in the six months to November, contrasting with a surge in Germany and moderate growth in the rest of the Eurozone – see first chart. This warned that the French economy would underperform not only Germany but also a stabilising periphery.
Today’s “flash” purchasing managers’ surveys provide further support for this theme. The second chart, extracted from the press release of data provider Markit Economics, shows composite output indices for Germany, France and the rest of the Eurozone. The suggestion is that GDP is still falling in France even as it recovers in Germany and stabilises in the rest of the region. (The output index reading for the latter remains below 50 but is above a level historically associated with GDP contraction. No further country breakdown is available at this stage.)
December monetary statistics released on Monday will be important for assessing whether France is simply lagging a regional recovery or is on a divergent path of weakness, implying mounting pressure on President Hollande and likely further financial strains.
UK economic pick-up on track
The view here that the UK economy is strengthening in lagged response to faster real money expansion receives support from labour market statistics released today, showing a surprisingly large drop in claimant-count unemployment along with a further rise in vacancies. A GDP trend indicator based on claimant-count changes continues to climb solidly – see first chart. (The indicator rises if the monthly change in unemployment is below a fixed level.)
Further indirect evidence of economic improvement is a January rebound in the equity analysts’ revisions ratio – the net proportion of company earnings estimates raised over the last month. This ratio correlates with business survey activity indicators, including purchasing managers’ new orders indices, which could strengthen significantly this month – second chart. (The indicator shown is a weighted average of the manufacturing new orders and services new business indices.)
Shirakawa's last stand
The Bank of Japan, under departing Governor Shirakawa, has resisted government pressure for substantial further monetary easing. While introducing a “price stability target” of 2% inflation to replace the previous “goal” of 2% or lower “in the medium to long term”, the BoJ will stick with previous plans to add ¥36 trillion to its securities portfolio in 2013. Purchases will continue in 2014 but will fall to a net ¥10 trillion.
This decision is sensible since money supply measures are growing solidly – see previous post – and current purchases are already huge: ¥36 trillion equals 7.6% of projected 2013 GDP. If a monetary slowdown warrants further stimulus, this would be best achieved by lengthening the maturity of securities purchases rather than expanding the size of the programme.
Fans of yen debasement must now pin their hopes on Prime Minister Abe finding his Arthur Burns.