6/2/21: Longer Trends in Economic Uncertainty

 

Quite dramatic trends in terms of rising economic uncertainty over the last 21 years:

And, not surprisingly, the rise of uncertainty in Europe, the U.S., and globally pre-dates the Covid19 pandemic. In fact, Europe has been experiencing dramatically elevated uncertainty levels since the start of the Euro area crisis, while the U.S. saw a virtually exponential rise in uncertainty from 2017 on. Global measures of uncertainty have been running high through 2016 and rose dramatically thereafter. 

While amelioration in the Covid19 pandemic dynamics is likely to lower the levels and the volatility of the uncertainty in global economic systems, it is highly unlikely to return us to the pre-Global Financial Crisis state of affairs.

25/8/20: Germany's Economic Recovery: ifo Survey

ifo Institute's latest economic barometer for Germany is showing continued signs of recovery in the German economy, with remaining pressures in terms of current assessment of business conditions and more positive outlook forward (expectations):

Business expectations are now ahead of the same for December 2019 - February 2020 pre-pandemic period, which really says little about the levels of activity expected and more about the speed of adjustments to the expected activity. What matters more is the current climate perception. This is still some 11 points below the three months prior to the pandemic.

Given that German economy has largely moved past the stage of restricted activity, this is worrying, as it suggests the lack of domestic demand recovery in the medium term.

3/7/20: ECB Jumping the Proverbial Shark?

ECB's money-printing press has been running overtime these weeks. So let's put the Euro area central banks' monetary policy shenanigans into perspective, comparing them to the Global Financial Crisis (GFC) related measures, the Euro area sovereign debt crisis and the subsequent painful recovery:

Good thing: ECB has deployed COVID19 response at scale and fast. Bad thing: it is highly uncertain how much growth all of this activism is going to sustain. From 2000 through 1Q 2020, there is zero (statistically) relationship between current GDP growth (nominal) and ECB assets accumulation in the same year and in prior year:

Even ignoring statistical significance, the relationship itself is not positive, especially in the lagged data. In other words, there is absolutely no evidence of causality from ECB asset purchases to higher economic growth. While reasons for this results are complex (and not really a matter for this post), there are some serious questions to be asked as to how much tangible growth is being sustained by the Central Bank's activism. On the other side of the same argument, if we assume that the ECB purchases of assets are effective at sustaining growth in the Euro area economy, then we must have some serious questions as to what the Euro area economy is capable of producing in terms of GDP growth without such interventions.

In simple terms: we are damned if we do, and damned if we do not:

• Either monetary activism is not effective at sustaining growth, or
• If monetary activism is effective, then the state of the economic institutions overall is so dire, it remains comatose even with extraordinary supports from Frankfurt.

Neither is a pleasant conclusion. And there is not a third alternative.

Just in case you need a reality check on how poor Euro area's growth has been, here is a summary:

29/6/20: Eurocoin Growth Indicator June 2020

Using the latest Eurocoin leading growth indicator for the Euro area, we can position the current COVID19 pandemic-related recession in historical context.

Currently, we have two data points to deal with:

1. Q1 2020 GDP change reported by Eurostat (first estimate) came in at -3.6 percent with HICP (12-mo average) declining from 1.2 percent in January-February to 1.1 percent in March.
2. Q2 2020 Eurocoin has fallen from 0.13 in March 2020 to -0.37 in June 2020 and June reading is worse than -0.32 recorded in May. This suggests continued deterioration in GDP growth conditions, with an estimate of -2.1 percent decline in GDP over 2Q 2020. HICP confirms these: HiCP dropped from 1.1 percent in March 2020 to 0.9 percent in May. 

Here are the charts:

We are far, far away from the growth-inflation 'sweet spot':

24/6/20: German Business Sentiment for June: Mixed Signs of the Ongoing Recovery

Germany's ifo Institute published June survey results for business confidence, reflecting the latest changes arising from the graduate, but fast, 'normalization' of economic activities. There are some improvements in forward expectations, set against virtually no improvement in current conditions:

The gap between pre-COVID19 and current conditions sentiment remains massive, with trough to current reading improvement of just 2.4 points, compared to the pre-crisis to trough fall of 20.2 points. Expectations (6 months forward) gains 11.9 points on the trough, with pre-crisis to trough decline of 21.5 points. This implies that forward expectations are now just over half-way into recovering pre-COVID19 levels, but current conditions assessment still shows dire state of the economy.

So far, current conditions dynamics do not suggest a V-shaped recovery, but there is some hope in terms of expectations. Manufacturing and construction sectors dominate negative outlook. Services sectors current assessment is matched by forward expectations, while trade sectors are showing more robust recovery across the board.

12/6/20: Summary of the Eurosystem Response Measures to COVID19

Great and tight summary of the Eurosystem monetary policies deployed in response to COVID19 pandemic: https://blocnotesdeleco.banque-france.fr/en/blog-entry/monetary-policy-measures-taken-eurosystem-response-covid-19.  Cumulative total through the end of May, EUR 1.27 trillion.

26/5/20: Franco-German Eurobonds: A First Step on the Road to Federalism

My recent article on the Franco-German proposal for Euro bonds for The Currency: https://www.thecurrency.news/articles/17392/france-and-germany-have-proposed-a-e500m-fund-to-shield-european-economy-what-does-it-mean-for-ireland.

6/5/20: Eurozone Composite PMI: Covid Horror Show

Final Eurozone Composite Output Index came in at 13.6 (Flash: 13.5, against March Final: 29.7). March was bad. April is worse. Final Eurozone Services Business Activity Index was at 12.0 (Flash: 11.7, March Final: 26.4), final Manufacturing PMI covered here: https://trueeconomics.blogspot.com/2020/05/4520-eurozone-manufacturing-pmis-crater.html.

1Q 2020 implied decline in Euro area GDP is at around 3.5%. 2Q 2020 start is now worse than 1Q 2020.

24/4/20: "Sentiment at German companies is catastrophic" ifo Institute

ifo Institute's German business sentiment barometer out today. Direct quote: "Sentiment at German companies is catastrophic. The ifo Business Climate Index crashed from 85.9 points in March to 74.3 points in April. This is the lowest value ever recorded, and never before has the index fallen so drastically. This is primarily due to the massive deterioration in the current\ situation. Companies have never been so pessimistic about the coming months. The coronavirus crisis is striking the German economy with full fury."

Here's the bigger kicker: Expectations plunged more over the last 3 months than current situation assessments, down from 93.8 in December 2019 to 69.4 in April 2020, as compared to the current situation index drop from 98.8 to 79.5 over the same period.

Two key sectors: woeful dynamics

22/4/20: Eurozone Growth Forecasts

April data on analysts and institutional forecasts for Eurozone growth over 22 sources, including a range of investment banks and international institutions are summarized here:

So far, estimated 2020-2021 economic fallout from COVID19 pandemic is in the range of 3.48-3.87 percentage points compared to January forecasts. In other words, markets expectations are currently at 2021 full year real GDP being 3.48-3.97 percent below the market consensus forecast back in January. Markets are now pricing in cumulative 2020-2021 decline in GDP of 1.22-1.70 percentage points on 2019 levels. Put differently, by the end of 2021, investment banks and international institutions are, on average, expecting the Eurozone economy to be 1.22-1.7 percentage points worse than at the end of 2019.

Should 2019 growth rate prevail in 2022, by the end of 2022, based on the above forecasts, Eurozone economy will still be worse off than at the end of 2019.

These expectations are not consistent with a V-shaped recovery expectations by the majority of the European political leaders and media pundits.

7/1/20: Euromoney on 2020 Risk Outlook for the Eurozone

Euromoney on Eurozone risks into 2020, with some comments from me: https://www.euromoney.com/article/b1js9nd289vtm9/country-risk-2020-vision-brings-the-eurozones-risks-into-focus. 

10/12/19: Irish Banks: Part 2

Continuing with the coverage of the Irish banks, in the second article for The Currency, available here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks, I cover the assets side of the banks' balancesheets.

The article argues that "The banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what does not make sense to investors does not make sense to society at large." In other words, strategic errors that have been forced onto the banks by deleveraging post-crisis have resulted in the Irish banks becoming a de facto peripheral play within the Euro area financial system, making them unattractive - from growth potential - to international markets.

The key conclusions are: "From investors’ perspective, neither of these parts of the Irish lenders’ story makes much sense as a long term investment proposition. From the Irish economy’s point of view, the banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what doesn’t make sense to investors doesn’t make sense to the society at large."

10/12/19: Irish Banks: Part 1

Returning back to the blog after a break, some updates on recent published work.

In the first article on Irish banking for The Currency, titled "Culture wars and poor financial performance: examining Ireland’s dysfunctional, beleaguered banking system", I argued that "The financial performance of the Irish banks has been abysmal. Not for the lack of profit margins, but due to strategic decisions to withdraw from lending in the potential growth segments of the domestic and European economies." The article shows the funding side of the Irish banks and the explicit subsidy they receive from the ECB through monetary easing policies - a subsidy not passed to the end credit users.

In simple terms, high profit margins are underpinned - in Irish banks case - by low cost of funding.

Conclusions: "The implications of the lower cost of banks equity, interbank loans, as well as deposits for the Irish banking sector are clear cut: since the start of the economic recovery, Irish banks have enjoyed an effectively free ride through the funding markets courtesy of the ECB and the blind eye of the Irish consumer protection regulators. Yet, despite sky-high profit margins extracted by the banks from the households and businesses, the Irish banking sector remains the weakest link in the entire Eurozone’s financial services sector, save for Greece and Cyprus. If the funding side of the equation is not the culprit for this woeful record of recovery, the other two sides of the banking business, namely assets and regulatory costs, must be."

Read the full article here: https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks. 

16/10/19: Ireland and the Global Trade Wars

My first column for The Currency covering "Ireland, global trade wars and economic growth: Why Ireland’s economic future needs to be re-imagined": https://www.thecurrency.news/articles/1151/ireland-global-trade-wars-and-economic-growth-why-irelands-economic-future-needs-to-be-re-imagined.

Synopsis: “Trade conflicts sweeping across the globe today are making these types of narrower bilateral agreements the new reality for our producers and policymakers.”

20/8/19: Public Spending in the Euro Area: Post-Crisis Austerity?

Given the never-ending repetition of the 'austerity narrative' in European economic analysis, it is virtually impossible to conclusively address the issue of changes in public spending during the crisis and the post-crisis periods and the relationship between fiscal policies and economic growth. Thew reason for this is the lack of singular set metrics that can capture these dimensions of the debate.

However, this lack should not be a reason for not trying.

Here is an interesting chart (based on the IMF WEO data and 2019 forecasts), plotting average Government expenditure as a share of GDP for two periods for euro area economies. The two periods under consideration are: 2000-2007 and 2013-2019. I am also showing two metrics for Ireland: the GDP (a measure of economic activity that vastly overstates the true extent of national economic activity) and GNI* (an official Irish Government metric of national economic activity). Note: using 2014-2019 average paint effectively the same picture.

The picture is worrying. Thirteen out of nineteen euro area economies have witnessed a rise in Government spending as a share of GDP in post-crisis period compared to pre-crisis period, two experienced virtually no change, and four experienced declines. In other words, based on the ratio of Government spending to economic activity, only four states exhibit a clear case of 'austerity'.

Ireland is an interesting outlier to the picture (hence, reporting of GNI* metric): based on GDP measure, Ireland's Government spending as a share of GDP averaged 32.85 percent per annum in 2000-2007, and this fell to 30.32 percent in 2013-2019 - an austerity gap of 2.53 percentage points per annum. But based on GNI* measure, Ireland's Government spending rose from 38.69 percent in pre-crisis years to 45.51 percent in post-crisis period - an expansion gap of 6.82 percentage points.

Overall, using the above metric, top austerity countries in the euro area are:

• Malta (gap of -4.86 percent)
• Ireland (GDP gap of -2.53 percent)
• Germany (gap of -2.227 percent)
• Austria (gap of -1.311 percent)

Top fiscal expansion countries are:

• Finland (7.514 percent)
• Ireland (GNI* gap of 6.822 percent)
• Spain (4.3 percent)
• Estonia (4.26 percent)

16/7/19: Corporate Yields are Heading South in the Euro Land

Some of the euro area's junk-rated corporate debt is now trading at negative yields, and over 15% of near-junk debt is also charging the lenders to provide cash to financially weaker companies:

Source: WSJ

While the overall stock of negative yielding debt (sovereign and corporate) is now nearing $13.5 trillion worldwide:

Source: Bloomberg

All in 51 percent of all European Government bonds are trading at negative yields, and just over 30 percent of all investment grade corporate bond issued in Euro.

The percentage of negative yielding debt amongst junk-rated corporates is small. Bank of America ML estimated that the percentage of BB-rated European corporate bonds with negative yield rose from 0.225% at the end of May to 1.5% at the end of June. Back then, 14 companies had junk-rated bonds rated BB or lower with negative yields, with total market value of $3 billion.

The chart below plots corporate junk-rated bond yields index for the euro issuers:

Meanwhile, Greek Government bonds auction this week went into a massive demand overdrive. Greece sold more than EUR13 billion worth of 7-year bonds, almost EUR11 billion more than it planned originally, at the yields of 1.9 percent, or 2.4 percentage points above the Eurozone benchmark average. The spread to Eurozone benchmark has now fallen from 3.73 percent in March sale. In fact, U.S. 7 year bonds are selling at a yield of 1.97 percent, implying lower yields for Greek debt than the U.S. debt.

Here is the chart plotting Euro area sovereign yield curves for AAA-rated and for all bonds:

The yields on AAA-rated debt are negative out to 13 years maturity, and for all bonds to 8 years maturity. 

29/6/19: Why Moody’s is wrong to keep Cyprus on junk status

Euromoney on Cypriot economy: "Why Moody’s is wrong to keep Cyprus on junk status" https://www.euromoney.com/article/b1g125jl1wvf0v/why-moodys-is-wrong-to-keep-cyprus-on-junk-status with a comment from myself.

12/6/19: All's Well in the Euro Paradise

All is well in the Euro [economy] Paradise...

Via @FT, Germany's latest 10 year bunds auction got off a great start as "the country auctioned 10-year Bunds at a yield of minus 0.24 per cent, according to Germany’s finance agency. The yield was well below the minus 0.07 per cent at the previous 10-year auction in late May. The previous trough of minus 0.11 per cent was recorded in 2016. Notably, demand in Wednesday’s auction was the weakest since late January, with investors placing bids for 1.6-times more than the €22bn that was issued."

Because while the "Euro is forever", economic growth (and the possibility of monetary normalisation) is for never... 

14/5/19: Monetary Policy at the edge of QE

My new column for the Cayman Financial Review on the current twists in global Monetary Policies is now available on line: https://www.caymanfinancialreview.com/2019/05/07/monetary-policy-at-the-edge-of-qe/.

15/2/19: Euro area is sliding toward recession

Based on the latest data through January 2019, Eurozone’s economic problems are getting worse. In 4Q 2018, Euro area posted real GDP growth of just 0,.2% q/q - matching the print for 3Q 2018. Meanwhile, inflation has fallen from 1.7% in December 2018 to 1.6% in January 2018. And Eurocoin - a leading growth indicator for euro area GDP expansion slipped from 0.42 in December 2018 to 0.31 in January 2019. This marked the third consecutive month of decline in Eurocoin, and the steepest fall in 8 months. Worse, July 23016 was the last time Eurocoin was at this level.

Within the last 12 months, Eurozone growth has officially fallen from 0,.7% q/q in 4Q 2017 to 0.2% in 4Q 2018, HICP effectively stayed the same, with inflation at 1.6% in January 2018 agains 1.5% in January 2018. And forward growth indicator has collapsed from 0.95 in January 2018 to 0.31 in January 2019.

Euro area is heading backward when it comes to economic activity, fast.

Germany just narrowly escaped an official recession, with 4Q growth at zero, and 3Q growth at -0.2%

Italy is in official recession, with 3Q 2018 GDP growth of -0.1% followed by 4Q 2018 growth of -0.2%.

Industrial goods production is now down two consecutive months in the Euro area as a whole, with latest print for December 2018 sitting at - 4.2% decline, following a -3.0% y/y fall in November 2018.

Worse, capital goods industrial production - a signal of forward capacity investment, is now down even more sharply: from -4.4% in November 2018 to -5.5% in December 2018.