Monday, April 7, 2014

7/4/2014: EU's latests dis-inspiring growth forecasts...


So German Ifo upgraded euro area growth forecasts for 2014 and the numbers are... well... dis-inspiring?

"The Eurozone recovery is expected to pick up in the first quarter of 2014 with a GDP growth rate of +0.4% (after +0.2%  and +0.1% respectively in the previous two quarters)." Blistering it ain't.

But wait, things are not exactly 'improving' thereafter: "Growth is forecasted to decelerate slightly in the following two quarters."

Actually, 2014 full year forecast is for 1.0%. I know, don't go running out with flowers and champagne on this one. It is lousy. And it is even more depressing when you pair it with a forecast of 0.8% for inflation.

I mean, good news: official recession is over. Bad news: the recovery is going to feel like stagnation this year. Bad news >> Good news. Doubting? See this table summarising growth forecasts by main components:

  • Consumption is expected to rise by 0.5% - so euro area consumers (aka households) are lifeless for another year. Lifeless because Europe will remain jobless: "owing to fiscal austerity measures in some member States combined with a continuing labor market slack and slow growth in real disposable income."
  • Investment is expected to rise 2.1%, which is good news as most of this is expected to come from capacity investment (equipment and tech, rather than building more shed, homes and hangars to accommodate for imports from China). You wanna have a laugh? Per Ifo: "Private investment will continue to grow over the forecasting horizon due to the increase in activity and the need for new production capacity after the sharp adjustment phase determined by the financial crisis." Let me translate this for you: things got so ugly during the crisis that old capital stock was left to deteriorate without proper maintenance and replacement. Now we are going to start replacing that which was made obsolete in the crisis. And we will call that growth. Or rather the 'Kiev Model of Growth': Torch --> Rebuild...
  • Industrial production is expected to 'jump' 1.5% y/y which, when paired with consumption growth at 0.5% suggests that once again 2014 will see European workers toiling hard to provide luxury goods they can't afford themselves for the world's better-off, increasingly found outside of the euro area.


Ugly? You bet. Even before the crisis euro area wasn't known for healthy growth figures, but now, watch this recovery plotted in the following two charts:



If one ever needed an image of the culture of low aspirations, go no further - the above show that whilst growth is basically non-extant, a mere sight of anything with a '+' sign on it triggers celebrations in Brussels…

Oh, a little kicker: Ifo projections for growth and inflation are based on following two assumptions: "oil price stabilizes at USD 107 per barrel and that the euro/dollar exchange rate fluctuates around 1.38". Now, should, say Ukraine-Russia crisis spill over to deeper sanctions against Moscow, I doubt oil price will be sitting at USD107pb marker for long. And should Sig. Draghi diasppoint with (widely expected by the markets) QE measures, Euro/USD will jump out of that 1.38 range like a rabbit out of the proverbial hole chased by a hound. In either case, kiss the 'growth' story good bye...

There are more downside risks to this forecast than upside hopium in Mr. Rehn's cup of tea...

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