GDP revisited

Official data are expected to confirm that Britain’s recovery from the worst recession in generations has been far stronger than previously thought.

GDP revisions to be published by the ONS on 30 September will reveal significantly stronger growth in recent years, perhaps going some way to explain the productivity conundrum that has confounded so many smarties for so long.

The ONS has already indicated the scale of revisions up to the fourth quarter of 2013, and this Wednesday’s release of national accounts for the second quarter will extend the process to the present. The numbers currently available show that the recovery in 2010 was weaker than previously thought, but significantly stronger from 2011 to 2013. GDP is now estimated to have risen by a cumulative 6.0% between the fourth quarters of 2010 and 2013, equivalent to 2.0% at an annualised rate, versus a prior 4.2%, or 1.4% annualised.

Figures are set to show UK growth in 2011 was a rosy 2% at the height of the Eurozone’s battles – up from 1.6% in previous estimates, while growth in 2012 is likely to be revised up to 1.2% from 0.7%, and in 2013 from 1.7% to 2.2% — with GDP overtaking its pre-recession peak in Q2 2013, one quarter earlier than previously thought. The consensus at the time was for a sub-1% outcome, with much talk most unforgettably from the IMF of the risk of a recession.

Wednesday’s release may extend the upward revisions to growth since Q4 2013 — but even if the quarterly path since then remains unchanged, the upgrades to earlier data imply that the GDP increase in 2014 will be raised to 3.3%.

the story so far

the story so far

The revisions reflect a combination of methodological changes and new data.

Just to remind ourselves, the headline three months ago read “Building growth: UK economy grew 3% not 2.8% in 2014 as statistics body changes the way it measures construction.” According to the ONS, the biggest impact has come from measures to improve coverage of small business activity and to capture income concealed by tax evasion. The revisions could affect financial balances in some sectors i.e. income minus spending: notably the household sector is currently estimated to be running a deficit, where net lending was -£5.4bn, equivalent to 1.7% of available income in Q1 2015.

The revisions are unlikely to alter MPC thinking — the direction, if not the scale, was expected and the MPC will likely attribute most of the upgrade to better supply-side performance, implying little change to its estimate of slack. They are, however, potentially more significant for fiscal policy, since they may result in the OBR raising its estimate of trend GDP growth, in turn boosting revenue forecasts — which will doubtless be of great cheer to UK Chancellor George Osborne ahead of his spending review and the Autumn Statement due in November, as the scale of spending cuts needed to meet targets may be smaller than the OBR judged at the time of the July Budget.

Nevertheless, the revised data could give rise to speculation of an earlier interest rate rise — which would add spice to the anticipation of next week’s MPC meeting and minutes — but most conomists are of the opinion that the BoE will stand pat until the spring of next year.

Putting bread in the basket

Earlier this year, Premier Li Keqiang spoke of the need to modernise Chinese agriculture, to help counter slower economic growth by driving investment in rural infrastructure and boosting consumption.

Investing in infrastructure in rural areas would help mop up some of the excess capacity in China’s steel and cement industries, for instance, as well as create new jobs, while overhauling farming models and improving efficiency in distribution systems should also boost rural incomes.

Farmers constitute the country’s largest consumer group, with some 630m people still making a living from agriculture, but productivity lags far behind that of developed countries as its share of GDP has declined over the years — and by increasing farmers’ incomes through accelerated agricultural modernisation, “we can activate farmers’ huge potential consumption demand,” he wrote in the Party journal Qiushi.

Although the country is self-sufficient in its most important food crops, its intensive farming practices which employ the excessive use of fertilisers, pesticides and plastic sheeting have caused serious environmental damage and threaten food safety. Farmers needed to focus on consumer demand rather than production volumes, and Li urged them to produce safe food and specialty products including organic ones.

“Currently, the quality and safety of agricultural products is generally stable, but hidden risks linger and people still frequently break the law,” Li said. “There are many steps in the distribution of farm products so costs are high. There is much wastage and efficiency is low, leading to farmers having trouble selling their products while consumers pay too much. This has long been a chronic problem.”

Li iterated the need to promote new types of farming models such as larger family farms, and to encourage the transfer of land rights to allow people who remain in the countryside to expand their farms — but farmers struggle to get loans to expand, as they have no assets to use as collateral. All Chinese farmland is owned by the State and the right to farm the land is leased to rural residents, and while Beijing has recently allowed them to transfer farming rights to others, larger farms struggle to obtain financing to increase their output.

It’s late into the night now here, but six months on, Li’s word is his deed — the State Council announced earlier today that China will launch a pilot programme allowing farmers to use their land and property as collateral for loans. In an effort to bolster financial support for the cash-starved farm sector, the move is aimed at deepening monetary reform.

As it is, Heilongjiang province, China’s breadbasket in the northeast, and eastern Shandong province have already begun experimenting with the use of land rights as collateral. Under the new project, both land use rights and property could be pledged to secure bank loans, and farmers’ interests would be strictly enforced.

“We will steadily and appropriately conduct the pilot programme on the use of the two rights as collateral, on condition that risks will be controlled and on the basis of relevant laws and policies on rural and reforms,” the Council stated.

The PBoC will encourage financial institutions to participate in the pilot and increase support for qualified institutions through re-lending, while the banking regulator would study ‘differentiated’ policies in setting capital adequacy ratios.

The Council will maintain the ‘red line’ in arable land – a minimum area mandated by the government to be reserved for growing crops to protect food security.

There is still an argument, however, that farmers should be allowed to use their contracted land rights rather than their operating rights as collateral. Contracted rights are derived from the collective land owner or local government to households for 30 or 40 years, who in turn can lease the right to use the land to others, while operating rights are only awarded for a few years — thus longer-term contracted rights generate an income stream which would be of more value to banks as security.

This all adds up to a timely moment to reduce lending rates.
But banks may yet be reluctant to take land and property rights as collateral, and the most important step the State could take would be to allow them to be traded freely.
Not unlike the yuan then.

In your own time, China.

Dragon on the Fringe

Dragon on the Fringe

Well that was super!

On our way to friends last night, the moon was nowhere to be seen — a familiar feature of a British summer up north. Hours later as everyone came outside to see us off, there it was, brighter than a bright moon — and bigger than a big moon.
No such thing, came a chorus from the blokes, it’s an optical illusion, there’s an explanation for it.
Well they wuz wrong!
Yes, it was a blue moon, we knew that. So-called because it achieved its full rotundity for the second time in a month — but the extra special treat is that it was at its perigee, when earth, moon and sun are all aligned, the moon being at its closest approach to earth.
And I discovered today that some astrologer called Richard Nolle named this phenomenon a supermoon in 1979. Well you gotta be famous for something.

Debussy described it so very mellifluously, as does my mate Paul 🙂

The Chinese Way

8 July, and there is nothing traditional about gatherings in mini stock exchange centres across China, where ordinary folk who have been tempted to play, some of whom have borrowed in order to participate, watched the value of their share portfolios plummeting. They have lost confidence in the market, newly hailed as a symbol of dynamic Chinese capitalism.

“When I chose to buy stocks, I did not think that much, everyone told me they would earn me money.”

A few days later, it was over. The Government intervened suddenly and heavily, suspending or banning whole areas of trading. They bought shares to push up prices and it worked. And what a bounce, one of the most rapid stock market gains ever. Panic seemed to pass just like that.
One view is that this was just a hiccup, much like earlier ups and downs in a market known for its endemic volatility. Another, is that this was a hint of a deeper crisis that goes well beyond the stock market.

Since the stock markets in Shanghai and Shenzhen opened in the 1990s their rise has been spectacular, punctuated by dramatic falls and even bigger rises — the Shanghai a shining star, growing at 8, 9 sometimes 10% a year these last decades, so investors have been keen to get a piece of the action. Before the market took a downturn on 12 June, the Shanghai composite had risen by 152% since July 2014 and nearly 60% since the beginning of the year, driven by domestic retailers pursuing sexy stocks and galloping far ahead of economic fundamentals during the period — small wonder then it fell by nearly a third. Up again since then, not quite as much, but the rise over two days marked the strongest since the 2008 crisis. Now this week the market had its 2nd biggest fall in history, its sharpest slide since February 2007 — but why wouldn’t investors lock in profits following last week’s rally of around 20%, which was, after all, a bit steep? Like everything else in China, even volatility is big.

There’s a paradox about these superlatives, though. In a country where everything is big, numbers can be deceptive. The Chinese market is very important in terms of aggregate size. Before the recent falls it was the biggest stock market in Asia by market capitalisation, but in terms of household wealth, it actually isn’t that important. Out of a population of 1.35bn people, even if a small fraction invest in the stock market, it is huge. At most 50m households are invested, of which less than 10-15% of their assets are held in stocks — so in these terms a very small percentage is affected. While some have suffered losses, and others who came late to the party have been wiped out, many who lost, lost only their earlier gains.

From the very beginning, Beijing adopted a supportive attitude and people believed their strong policy endorsement to make money as fast as possible. Comments from the state controlled media didn’t halt the trend of rising speculation. “This is just the start of the bull market,” declared the Official People’s daily newspaper in an editorial. “It has support from China’s grand development strategy and economic reforms … the current red hot capital market is a normal reflection of such a development.”

The Government was complicit in the boom, because it thought this was the answer to another problem. Banks have refused to lend these last two or three years. This problem isn’t specific to China of course, but it is more severe there as the Chinese real economy is more dependent on bank lending than most other developed economies. If banks won’t lend, said the Government, go to the stock market instead and sell shares to raise funds. It also encouraged people to buy those shares, with the expectation of making a profit. A new channel for business investment and a new source of funding was opened, so went the thinking, encouraging retail money into the stock market — a naïve plan with good intentions which hasn’t worked well. As the market rose, instead of money going into the real economy, even more was sucked out. Instead of returning money to companies for industrial investment purposes, it went straight back into the market.

Among China’s investors, the highest proportion of daily turnover comes from domestic retailers, who tend to exhibit herding behaviour: e.g. someone sells, others think they are privy to information so they sell — and it is they who are seeking relief from government intervention. Clearly a more diversified investor base is required, which is why Beijing is trying to attract foreign investors as well as many more institutions, who employ a longer term investment horizon vs. retailers. So it appears the only way to maintain equilibrium is to pump in vast sums.

Share prices already fluctuated Friday on rumours of the authorities retreating from supportive measures, causing the aggressive sell off in Monday’s afternoon session; regulators announced over the weekend that lock-up shares worth around 元90.6bn ($14.6bn) would become eligible for trade on China’s stock market this week. The amount is more than five times the value of shares unlocked in the past week, which reached around 元17.5bn. Around 3.7bn shares from 28 companies will become tradable on the Shanghai and Shenzhen bourses between 27 and 31 July.

If volatility is not unusual, and shareholding not that widespread, and the stock market is far from being the whole economy, and if most investors only put in a limited amount of their wealth, which they have already seen grow before it tracked back, why the panic, again?

The real issue is that the Government implemented a questionable policy in the slump a few weeks ago. Companies could go into voluntary suspension, without any fundamental reason for doing so. They didn’t want their stocks to be heavily sold off, begging the question, why invest in such a company at all? Liquidity has been severely curtailed — at one point on that Tuesday during the first slump for example, 90% of the market was untradeable.

Markets tend to react to what might happen next, and it is within this speculative space that fear can take hold, where expectations become self fulfilling. And then everyone wants to get out first. The downward spiral is all the worse when sell orders are automated. Funds are managed to the effect that if the index falls by maybe 2-3%, positions are liquidated, over and over. Because of the mechanical nature of forced liquidation, the market won’t be stabilised until the free fall is halted.

Far more is at stake than reputation

The Government has invested enormous effort into making Shanghai the financial centre of the future. The big strategic objective is to make China a nation of affluent consumers, so any problems impact on this story of China being an aspirational economy and not just a global sweat shop. And this is what Beijing is defending — a national symbol of purpose and direction, that expresses the ambitions of the emerging middle class; a symbol of hope and epochal change from Communism to the market, an economic strategy.

This emerging class of 750m service sector working, urban living people is expected to become the source of greater consumption in China. Consumption as a part of GDP is still only a third, so any economist would pin a strategy on that area for future growth — and Shanghai has become the epicentre, where the stock exchange is expected to oil the wheels of capitalism. An important place too for companies to go for investment and credibility, important as a place for entrepreneurialism. One or two stock market stumbles matter little to a nation of 1.35bn people, but as a measure of the hard paths China has taken and the long history of its transformation, it is a warning of the tensions and struggles ahead.

Growing up in the 70s, people were taught that capitalism was bad — evil in fact, citing exploitation, child labour, working over 12 hours a day — and the future for mankind was socialism. It was the obligation of the Chinese to liberate people all over the world, particularly people living under capitalism, likened to an enslaved society.

Contrast that propaganda then with more recent, starkly different Chinese surveys of Chinese attitudes now.
“Under a market economy people are generally going to be better off, even though some are rich, some are poor — answer yes or no?” Over 85% said yes. And that response is higher than similar surveys in the USA, Japan or Europe. Basically Chinese accept wealth inequality as a consequence of capitalism, more than any other country in the world. Such inequality has become a serious problem in China, in spite of which an overwhelming majority endorses the market economy.

China has come a long way from capitalism as evil, to one of the world’s most eager exponents of the free market. Its transformation was possible, because the state steadily withdrew from the economy. Compare China today with other leading economies, Japan and the USA, and the state sector is pretty big — but compare China today with China under Mao, and the role of the State has significantly and consistently declined, creating more room for the market and the private sector.

This highlights the biggest tension of all. China’s future is the free market, says the Government, but its latest act has been a dramatic assertion of state control, just like the old days. To Western eyes that looks like a plain contradiction; similarly its people want economic freedom but they also have high expectation that the Government will protect them from the consequences of that freedom. Resolving these contradictions will be an immense task, with a host of difficulties still to be addressed — from technical change to fundamental questions about the whole system.

The idea of lacing socialism with Chinese characteristics, which is the Government mantra, is incongruous. Chinese communism in charge of a very capitalistic economy has always posed a conundrum, and it has become even more enigmatic in the last two years, as the current regime under economist Premier Li Keqiang talks up the market as being an absolute necessity to facilitate further reform. The question is though, what is the market in China? It is regulated, but not completely. It is not transparent, as the Government still plays a heavy role. The institutions needed to run an economy must have an effective rule of law. Regulation, legislation and institutions take time to develop, and until then the market will very likely not be effectively governed.

There is a notion that the authorities still have a ‘nuclear’ trump card up their sleeve: they could cut the reserve requirement ratio from 18.5% to as little as 5% or even to zero, thus enabling the big state banks to start lending again by injecting $2-3trn into the economy, putting off the day of the big bump with another cycle of growth. I can’t see that happening, but those thoughts will keep for another rainy day.

Still scope to fall further – still more scope to rise further

“It’s not possible that it will drop like this again tomorrow!”
“If it happens again, it’s just not right.”
“It can’t fall again, tomorrow it has to rise.”
“The huge rise and fall isn’t good, there should be some rules to this. There don’t seem to be any rules.”
“We’re confident it will go back up, it must be temporary, there must be a limit to how much it can fall!”
“This isn’t the first time it has happened, I think we can cope this time.”
“We trust our country’s leaders.”

That is where China is today. At some point the State will have to recognise that the rule of the Party has no place in the proper working of a market economy. Long term growth prospects for blue chips are still incredibly attractive, as is the rise of the Chinese consumer and the shift turning toward e-commerce. But Beijing cannot intervene in the market forever — after all, how much more can the market grow? If the market is big now, think ten or even fifteen times bigger, and how much harder that will be to manage. Can the Government meet all the expectations that come with promising both control and freedom, caught between its Communist past and ambition for the future? Because at the moment, every faltering step brings fear of social unrest in a country with no safety valves. There is a convincing case that this is the reason the Government has stepped in so quickly. Even if the rout only affects a small proportion of urban households, that is still tens of millions of people.

In such an immense economy, the crisis is less about money than social stability, which is paramount during its transformation. What it tells us is that China is having difficulty riding two tigers as they pull in different directions.

The Chinese way. Who knows what they know?

A Letter to GeoRgEY

Dear George,

How have you been?

All’s well with us, and we’re still loving life pottering around the house. We’re surrounded by nice people, but it’s good to be home again after all that baby cooing yesterday, and back to our own desk. We are in the heart of it all, and things are really heating up. In fact, it’s getting quite hot in here.

It’s been a while since we wrote you a proper letter and so much has changed, in fact we really don’t know where to begin.

Gosh we’ve just been leafing through our scrapbook and are tickled to note that old foul bunch-back’d toad Richard III, whom we finally managed to despatch this year, was crowned King of England 532 years ago, preceded by Richard the Lionheart 826 years ago today.

Goodness, there’s a little smudgie where the ink got on my finger. You’d think it would stay in the nib, but no! Naughty nib.

We are still so grateful to you for charging to our rescue early last year. The thing is we’ve got something that we need to get off our chest.

We want to tell you about our figure. It’s getting bigger. It’s quite a lot bigger than twelve months ago, and even the year before. It’s certainly bigger than three years ago, and in fact, it might be the biggest it’s ever been.

We are simply delighted to hear that you will be setting out on Wednesday to protect people like us who may want to downsize, but are worried that their families will miss out on the benefits of your new proposed tax break.

How time flies – did you know it was 480 years ago to the day that Thomas More, Lord High Chancellor, was beheaded for treason?

Let’s meet to discuss this soon. We want you not to worry. We must dash to get the post.

We loved the tie you wore in your interview with the BBC yesterday. It was so blue. Blue blue blue. We hope you got to talk about other things than Greece. Did you get very tired doing it? Those chairs are so small for a well built man.

Keep it up.

What on earth is so special about 30 June?

Hang on a sec

Hang on a sec!

It’s all go!

It is my godson’s birthday, blimey and my anniversary — he was chief bride’s little helper.
Forget half year, quarter and month end. Forget Greece *cough*
Before Big Ben (or whatever chimes your way) strikes midnight, dials will read 11:59:60 as clocks across the world hold their tocks for a second to allow the earth’s rotation to catch up with atomic time.

What could possibly go wrong?

The last time a second was added in 2012, Mozilla, Reddit, Foursquare, Yelp, LinkedIn, and StumbleUpon (nope, never stumbled upon it) all reported crashes, and there were problems with the Linux operating system and programmes written in Java. So far so good 😉
But then over 400 flights were grounded in Australia as the Qantas check-in system crashed.

While European stock markets will largely be closed, the poxy second’s change will affect trading floors in the US, Japan, Australia, New Zealand, South Korea and Singapore, to name a few.
True to form, Asian markets plan to trade as normal — and US exchanges are expected to down tools early.
Forex, of course, never sleeps — at least not Tuesdays — and with the increasing avalanche of algos, I am a tidge curious to see how many programmes are equipped to deal with the blip.

A leap of time — a leap of faith, what could remotely be achieved in that second to change its course?

Atomic time is constant, and therein lies the drift.