15/5/18: Beware of the Myth of Europe's Renaissance

My article for last Sunday's Business Post on why the Euro area growth Renaissance is more of a fizzle than a sizzle, and what Ireland needs to do to decouple from the Go Slow Europe: https://www.businesspost.ie/business/beware-myth-europes-renaissance-416318. Hint: not an Irexit... and not more Tax Avoidance Boxes...

9/9/15: That poverty of low [Euro area GDP growth] expectations…

So, apparently, "strong eurozone growth" for 2Q 2015 is fuelling hopes for economic recovery and pushing markets up. Which makes for some funny reading, considering the following:
1) Eurozone GDP grew by a mind-blowing… 0.4% in 2Q 2015 in q/q terms. Which, hold your breath there, matey… was a decline on 0.52% (revised) growth in 1Q 2015.
2) It gets better, yet: growth 'improvement' was down to a rise in exports due to devalued euro (err.. now, who would have thought that to be a reason to cheer?). Exports increase accounted for 0.3% of the total 0.4% of 2Q growth. Full details are here.

The glorious achievement of the Great Patriotic Eurozone Economy under the wise stewardship of [insert a name of a Brussels Directorate or one of the EU Presidents here] was so blindingly obvious that one can't miss it using a mapping of historical past growth rates.

Yes, yes… that is right - the "strong" rate of eurozone growth in 2Q 2015 was exactly the same as that attained in Q4 2014 and identical to Q3 2010 (remember, that was 'blistering' too). 1Q 1999 - 1Q 2008 average quarterly growth rate in the eurozone was 0.56% and that was the period when the euro area was actually showing structural weaknesses compared to other advanced economies. Over the period of 12 months through 2Q 2015, average growth is 0.4% and we call this… err… "strong".

That poverty of low expectations…

17/8/15: Euro: The Land Where Growth Goes to Die

So we have had a massive QE - even prior the current one - by the ECB. And we are having a massive QE again, courtesy again, of the ECB. And the bond markets are running out of paper to shove into the… you've guessed it… the ECB. And the banks have been repaired. And we are being fed our daily soup of alphabet permutations (under the disguise of the European Union 'reforms' and policy initiatives): ESM, EFSF, EFS, OMT, EBU, CMU, GMU, TSCG, LTRO, TLTRO, MRO, you can keep going… And what we have to show for all of this?

2Q 2015 growth is at 0.3% q/q having previously posted 0.4% growth in both 4Q 2014 and 1Q 2015. This is, supposedly, the fabled 'accelerating recovery'.

So what do we have? Look at the grey lines in the chart above that mark period averages. Pre-euro period, GDP growth averaged 0.9% in quarterly terms. From 1Q 2001 through 4Q 2007 it averaged 0.5%. Toss out the period of the crisis when GDP was shrinking on average at a quarterly rate of 0.1% between 1Q 2008 and through 1Q 2013 and look at the recovery: from 2Q 2013 through 2Q 2015 Euro area economy was growing at an average quarterly rate of less than 0.27%.

Meanwhile, monetary policy is now stuck firmly in the proverbial sh*t corner since 2012:

You'd call it a total disaster, were it not for Japan being one even worse than the Euro area… and were it not for the nagging suspicion that all we are going to get out of this debacle is more alphabet soups of various 'harmonising solutions' to the crisis... which will get us to becoming a total disaster pretty soon. Keep soldering on...

27/7/15: IMF Euro Area Report: Growth, of European Standards

The IMF today released its Article IV assessment of the Euro area, so as usual, I will be blogging on the issues raised in the latest report throughout the day. The first post looked at debt overhang while the second post presented IMF views and data on the euro area banking sector woes.

Here, let's take a look at headline growth outlook.

Based on the IMF view: in the Euro area, "the recovery continues. After weakness through mid-2014, growth picked up late last year and has continued in 2015, driven by domestic demand. Private consumption remained robust, reflecting rising employment and real wages, while fixed investment has expanded moderately. Among the large economies, Germany continues to grow slightly above 1½ percent, while Spain is rebounding strongly. Italy is emerging from three years of recession, and activity in France picked up at the beginning of this year."

This sounds good. Until it ain't. Chart below shows that growth drivers remained in 1Q 2015 the same as in 4Q 2015:

And more: stripping the uplift in inventories, headline GDP growth in 1Q 2015 would have been worse than in 4Q 2014. And, despite collapse in oil (energy) prices and increase in consumption, imports have increased their drag on GDP growth.

Meanwhile, Industrial Production is virtually flat, as is Construction activity:

So the net medium-term result is bleak: "Despite the cyclical upturn, growth of only about 1.6 percent is expected over the medium term, with potential growth averaging around 1 percent. The output gap would close around 2020 with unemployment still near nine percent and inflation reaching 1.7 percent, somewhat below the ECB’s medium-term price stability objective. The picture is more disappointing in comparison to the U.S. with the per capita income gap now the largest since the start of EMU, and projected to widen further."

How much further? Oh, take a look at these:

A positive scenario uplift can only be expected from long-term and painful reforms. IMF lists them here:

"A scenario combining monetary easing, fiscal support under the SGP, and comprehensive structural
reforms would include:

• Monetary easing. Current interest rate policy continues through 2020 and QE through September 2016.
• Fiscal space within the SGP. For the eurozone, fiscal space available within the SGP could amount to 0.6 percent of euro area GDP. This includes (i) room under countries’ Medium-Term Objectives (MTOs) (0.3 percent of euro area GDP); (ii) SGP flexiblity that a few qualifying countries could use for structural reforms (0.2 percent of euro area GDP); (iii) windfalls from lower interest payments due to QE (0.1 percent of euro area GDP) for one-off investments or structural reforms for a few countries already meeting their MTOs; and (iv) growth-friendly fiscal rebalancing for countries with limited fiscal space to lower the labor tax wedge by two percentage points, financed by base-broadening measures.
• Centralized investment. An increase in private investment of 0.2 and 0.8 percent of euro area GDP in 2015 and 2016 is assumed, which is equivalent to 1/3 of the targeted amount of European Fund for Strategic Investments (EFSI) projects.
• Clean-up of bank and corporate balance sheets A fully functioning credit channel is simulated as a decline in corporate borrowing rates, by 80 basis points in Italy, 25 basis points in Germany and France, and 50 basis points in the rest of the euro area. This would bring the spread between selected and core countries roughly to pre-crisis levels.
• Structural reforms. Gradual implementation of product and labor market-related reforms in the 2014 G20 Comprehensive Growth Strategy could increase total factor productivity (TFP) by about 0.1 percent in 2015, 0.5 percent in 2017, and 0.9 percent in 2020. The implied TFP changes would differ substantially among member countries, with France, Italy, and Spain enjoying the largest gains."

So combined effect of the above over the longer term: "The growth dividend of a balanced policy mix can be large. The EUROMOD module of the IMF’s Flexible System of Global Models (FSGM) points to a substantial growth dividend, particularly from fiscal policies and the improvement of the credit channel. Real growth for the euro area would increase by 1.3 and 1.4 percentage points to 2.7 and 3.0 percent for 2015 and 2016, and HICP inflation rate in these two years would rise to 0.6 and 2.1 percent. The output gap would close by the end of 2016, about four years faster than in the baseline, and unemployment would be 0.8 percentage point lower than in the baseline by 2016."

Which is, honestly speaking, laughable because of two points worth noting:
1) There is an ongoing and deepening reforms fatigue which is pushing the reforms horizon out toward the next downturn cycle (in other words, we are unlikely to see majority of real reforms to be enacted before the next recession strikes); and
2) Even with all things going the IMF way, unemployment will remain atrociously high. In other words, growth uptick even in the best case scenario is likely to be largely jobless.

So summary of growth uplift drivers is in the chart below:

Expect the expected: looser fiscal policy being the largest new contributor to growth in 2016; labour markets and product markets reforms being marginal - adding at most 0.25-0.3 percentage points to annual growth rates. The fabled 'credit conditions improvements' (banks doing their bit for growth) is expected to be minuscule (despite all the hopes attached to them by the likes of Irish authorities and all the resources of the state devoted in 2008-2011 to repairing them). And headline growth expectations for baseline scenario still resting at 1.7% and 1.6% GDP growth in 2016-2017.

Here is the summary of IMF projections out to 2020:

Yep, the first line of projections above shows perfectly well the poverty of low aspirations that Euro area has become, while the unemployment rate projections confirm the same. Everything else - all the talk about structural reforms, growth drivers and the rest - is pure unadulterated bull. Even in the age of massive QE, collapsed oil / energy costs, and improvements in [sliding back on] fiscal 'reforms', the euro area remains the sickest economy in the advanced world.

26/9/2014: Eurocoin Signals Accelerating Fall in Economic Activity

Eurocoin, euro area leading growth indicator compiled by Banca d'Italia and CEPR has fallen again in September, indicating further slowdown in growth conditions:

• In August 2014 Eurocoin indicator stood at 0.19. In September, the indicator fell to 0.13 - its lowest reading in 12 months.
• Growth forecast consistent with current readings for Q3 2014 are in line with y/y euro area GDP growth of 0% (range between +0.1% and -0.1%).

As usual, updating my ECB Monetary Policy Dilemma chart:

The above shows the proverbial 'growth corner' for ECB: historically low interest rates and virtually zero growth signalled by the leading indicator.

Annualised growth rates are abysmal:

Per release: the latest decline reflects continued losses in consumer and business confidence, slowdown in exports and weakening of industrial production conditions. Those tracking my analysis for previous months would note that in the past Eurocoin was supported to the upside primarily by equity markets valuations. As predicted, these effects are now becoming exhausted and as the result we are witnessing rapid declines in the leading indicator.

6/9/2014: Euro Area Current Account and Growth Dynamics

Eurostat released Current Account statistics for the euro area for Q2 2014 and the numbers are not exactly pretty. Based on seasonally-adjusted data, Q2 2014 current account surplus was EUR54.5 billion, which is down on EUR55.6 billion in Q1 2014 and down on EUR61.8 billion in Q2 2013. Of the mani components:

• Trade in goods balance slipped from EUR46.9 billion to EUR40.3 billion in Q1-Q2 2014 and is lower than EUR45.5 billion surplus delivered in Q2 2013.
• Balance of trade in services improved significantly, rising to a surplus of EUR31.6 billion in Q2 2014 from EUR25.9 billion in Q1 2014 and compared to EUR27.1 billion in Q2 2014.
• There was a significant drop in the balance of income from abroad, year-on-year down EUR7.9 billion, somewhat moderated by the reduction in the current transfers deficit

Table below summarises:

It is worth noting that the above trade in good statistics are coming in at a balance of EUR87.2 billion for H1 2014, while the estimates just a half a month ago (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18082014-AP/EN/6-18082014-AP-EN.PDF) came in with a balance of EUR79 billion balance on goods trade side for extra-EU trade. That is a massive swing that is hard to explain by ordinary revisions.

Overall, Q2 figures show some serious weakness on the trade side. Overall trade balance (goods and services) at the end of Q2 2014 stood at EUR71.9 billion, which is down on EUR72.8 billion in Q1 2014 and on EUR72.6 in Q2 2013. This means that y/y net exports made a negative contribution to the GDP (gross of factor payments), although excluding factor payments, the latest breakdown of Q2 GDP shows (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-05092014-AP/EN/2-05092014-AP-EN.PDF see Tables T1 and T2) that net exports contributed positively to y/y growth in GDP in Q2 2014. In other words, at least 0.1% of growth registered in Q2 2014 in the euro area economy seems to be attributable to factor payments swings (delays) which presents a potential problem forward for Q3 - Q4 2014 GDP growth. If lagged factor payments come due in Q3-Q4 2014, these will act to depress any potential uplift from rebuilding of inventories (much of the Q2 2014 drop to 0% is accounted for by depletion of inventories by the firms).

29/8/2014: Eurocoin Signals Further Slowdown in Growth in August

August the €-coin - a lead growth indicator for euro area GDP - fell to 0.19 from 0.27 in July, continuing the trend that began last spring.

Last month Eurocoin coverage is here: http://trueeconomics.blogspot.ie/2014/08/1482014-yugo-area-economy.html

Per CEPR and Banca d'Italia release, "The decline of the indicator reflects the weakening of economic activity in the second quarter and the recent worsening of consumer and business confidence, although the flattening of the interest rate curve made a slightly positive contribution."

This comes as further bad news for the euro area that has been posting some pretty awful macro data for some months now.

Eurocoin latest decline is marks the fourth consecutive month of no growth in the indicator. The stock market performance component of the indicator is holding it above the zero line, but August reading is no longer statistically distinguishable from zero growth. Once stock markets effects fizzle out, there will be little left to support indicator.

In Q1 2014, the eurocoin indicator averaged 0.35 against actual GDP growth coming at 0.2%, in Q2 2014, the indicator averaged 0.34 and actual growth came in at 0.0%. So far in Q3 2014 we have two months-average of 0.23, suggesting that factoring out stock and bonds markets / interest rates performance from the indicator we have negative growth closer to -0.05-0.1%.

Bond markets are currently out of touch with reality. Take Italian auction this week. EUR2.5 billion of 2019 BTPs sold at a yield of 1.1% - down from 1.2% in July 30 auction, EUR4 billion worth of 2024 BTPs sold at 2.39%. This has nothing to do with the country fundamentals that are all flashing red. Italian unemployment is now up 0.3% m/m to 12.6% in July with youth unemployment down 0.8% on June at a massive 42.9%. Retail sales fell 0.1% in June, compared to May, for non-food items and Q2 average was down 0.2% on Q1 average. Business confidence is tanking, having fallen from 90.8 in July to 88.2 in August. Inflation is (flash estimate for August) at -0.2% m/m and y/y, worse than -0.1% consensus expectations. And so on...

Inflationary signals are also weak: August data we have so far shows German inflation at 0.8%, Spanish at -0.5%, Belgian at 0% and Slovenian at 0%. Update: Euro area flash estimate for inflation is now down to 0.3% from 0.4% in August weighted down by energy costs and food.

Some charts to illustrate the Eurocoin performance:

You can see the weakening growth trend in the above, incorporating the latest growth forecast for Q3 2014. This puts even more pressure on the eCB which has already used up all conventional (rates policy) tools without much of a positive effect on growth:

And to remind you all - euro area growth record is abysmal to begin with, even with 'good years' factored in:

16/8/2014: Three Charts of Euro Area's Abysmal Growth Performance

Few charts to summarise the continued problems with growth in euro area and the 'peripheral' states:

First, consider changes in real GDP on pre-crisis peak:

Next, the weakest link in the euro area: Italy. This is really woeful - since hitting absolute lows, Italian economy continued to decline, steadily and with little sign of improvement.

The above also shows the miserable state of the euro area as a whole.

Another chart, to show changes on crisis-period absolute lows:

Note: the first 2 charts reference index to 2005=100, the last one references index to Q4 2006=100.

14/8/2014: The Yugo Area Economy

Much has been already said about the disastrous GDP data for Q2 2014 posted today by the Eurostat.

Here is to add to the pile... Starting with the Eurostat grotesque or pathetic - or as I put it EUrwellian - language headlining zero growth as 'stable' performance:

Link here: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14082014-AP/EN/2-14082014-AP-EN.PDF

I covered slowdown in the industrial production in the EU here: http://trueeconomics.blogspot.it/2014/08/1482014-euro-area-industrial-production.html

And as far as leading economic indicators go, today's miss on expectations is largely driven by the fact that said expectations for positive growth were based on superficially-optimistic data: PMIs, investors' surveys and asset markets performance (see here: http://trueeconomics.blogspot.it/2014/07/3172014-deflationary-trap-eurocoin.html).

But here's a much more worrying bit: there is preciously little in the data to be surprised about. Euro area has been sick - when it comes to growth - not for a quarter, nor for a year, not even for a decade. Here is a chart showing average annualised rates of growth over longer periods of time:

In no period (and I computed the above series for every 12 month period average from 1 year through 15 years) did the euro area average longer-term growth reached above 1% per annum.

The main point of this can be best seen by removing the extreme underperformance during the peak of the crisis and taking a trend, as shown in the chart below:

 As the red line clearly shows:

• Over the last 12 months, as dismal as its performance has been, growth in the euro area has outperformed its long term trend.
• Long-term trend growth in the euro area should be where it is: near/below zero.

There is a structural or a very-long-run recession/stagnation in the euro area and it coincides with two other factors:

1. Low cost of credit over the last 15 years, and
2. Low inflation over the lats 15 years

We are all sick and tired of hearing the words 'structural reforms', but it is painfully clear at this stage that the entire history of the euro area to-date is that of sustained weakness. The ECB has now firmly run out of any conventional tools for dealing with it. And this brings us back to where Jean Claude Trichet left us some years ago, before the crisis hit in 2008: the simple truth about Europe is that it has no real drivers for growth. Forget q/q starts-and-fails of the engine, this diesel can't take you to a grocery store, with kids on board or without...

Time to call it what it is: the Yugo Area Economy...

15/5/2014: Flapping at the zero line: euro area GDP growth Q1 2014

Flash estimates of euro area GDP growth for Q1 2014 were out today. Here are few charts (via Markit Economics) of the disaster:

Yep: Netherlands down 1.4%, Portugal down 0.7%, Italy down 0.1%, France flat. Overall euro area at +0.2% which you might as well call 'flat as a pancake'...

The hope or rather 'expectation' was for 0.4% growth. I covered that earlier: http://trueeconomics.blogspot.ie/2014/05/752014-eurocoin-leading-indicator-april.html

Surprise to the downside is huge. It seems that all the hopium injections into expectations - based primarily on firm financial markets and business and consumer sentiment readings, and not on firm actual data have put a bit of bender into the blender... PMIs booming, GDP flapping powerlessly on the zero line.

One would be embarrassed, if one wasn't working in Financial Services...

4/7/2013: Ifo Forecast for euro Area Growth Q2-Q4 2013

Ifo Institute latest forecast for Eurozone:

-- "Activity contracted by 0.3% in Q1 2013, falling for the sixth consecutive quarter."
-- "GDP growth is expected to turn slightly positive in Q2 2013 (+0.1%), with a mild acceleration over the following quarters (+0.2% in Q3 and +0.3% in Q4)."
Core drivers:
-- "...progressive improvement in exports and a marginal recovery of domestic demand in the second half of the year."
-- "…fiscal consolidation and ongoing deleveraging in corporate and banking sectors of several Eurozone economies will continue to weigh on economic growth."
-- "Labor market conditions will remain unfavorable, placing an additional burden on disposable income and private consumption."
-- "Due to tight credit conditions and weak prospects for internal demand, gross fixed investment is also expected to remain weak."
-- "Exports growth and the need to replace an ageing capital stock will lead to a modest investment recovery in Q3 and Q4 2013 (+0.1% and +0.4% respectively)."
-- "Under the assumption that Brent oil price remains stable at USD 103 per barrel in Q3 and Q4 and the euro/dollar exchange rate fluctuates around 1.30, inflation is projected to 1,3% in Q4."

Core caveat: "This forecast assumes that financial tensions in Europe do not escalate and a gradual unwinding of the monetary policy stimulus in the United States."

Full note: http://www.cesifo-group.de/ifoHome/facts/Forecasts/Euro-zone-Economic-Outlook/Archive/2013/eeo-20130704.html

My view: optimistic assumption on inflation and EURUSD rate, but generally, agree with Q2-Q3 outlook as a central scenario. Risks are rising, however, by the day.

Core charts:

15/11/2011: Q3 2011 Growth in Euro area

Latest data on euro area economies:

• France posted a quarter-on-quarter +0.4% in GDP in Q3 2011 after -0.1% contraction in Q2. Household spending +0.3% in Q3 from -0.8% decline in Q2. Domestic demand +0.3% from -0.3% fall in Q2. Production in goods and services +0.4% in Q3 compared to -0.1% drop in Q1.
• Germany GDP +2.6% y/y in Q3, 0.5% qoq and Q2 is revised up to +0.3% from +0.1% in preliminary release.
• Spain posted 0.0% growth qoq and 0.8% yoy growth in Q3 2011 against 0.2% qoq and 0.8% yoy growth in Q2 2011.
• Italy is yet to report data
• Overall, Euro area 17 posted 0.2% growth qoq in Q3 2011, same as in Q2 2011, with yearly growth of 1.4% in Q3 2011 down from 1.6% in Q2 2011. The slowdown is now evident in the yearly growth terms with Q4 2010 coming at 1.9%, rising to 2.4% in Q1 2011 and falling to 1.6% in Q2 2011 followed by the latest preliminary growth estimate of 1.4% for Q3 2011
• EU 27 also posted a slowdown in Q3 2011: Q4 2010 annualized growth was 2.1%, rising to 2.4% in Q1 2011, and falling back to 1.7% in Q2 2011 and 1.4% in Q3 2011. Quarterly growth rates in EU27 were 0.2% in Q3 2011 against 0.2% in Q2 2011, down from 0.7% in Q1 2011.

The above compares against:

• Q3 2011 growth of 0.6% qoq against Q2 2011 growth of 0.3% in the US. Yoy growth in the US was 1.6% unchanged from Q2 2011.
• Q3 2011 growth of +1.5% qoq against contraction of -0.3% in Q2 2011 in Japan. Yoy growth in Japan in Q3 2011 was -0.2% against -1.0% growth in Q2 2011.

Updated:


NY Fed manufacturing index reached back into positive territory, albeit barely, in November following five consecutive months of negative readings. Index rose to 0.6 in November from negative 8.5 in October. However, underlying conditions remained generally poor: new orders index fell to negative 2.1 in November from 0.2 in October and inventories fell to negative 12.2 in November from negative 9.0 in October. The employment index fell to negative 3.7 in November from 3.4 in October while the average workweek rose for the first time in six months. The prices paid index fell to its lowest level in nearly two years and this pressured margins.


U.S. retail sales were up 0.5% in October, driven by higher purchases online and higher spending on electronics and appliance. Sales of autos rose just 0.4% after a big surge in September while gasoline sales fell. Ex-auto sector, retail sales increased 0.6%. Retail sales for September were up 1.1%, were unchanged. Yoy through October retail sales are up 7.2%.