14/2/16: Ifo WorldEconomic Climate Index: 1Q 2016

Global growth leading indicators are screaming it, Baltic Dry Index is screaming it, PMIs are screaming it, BRICS are living it, and now Ifo surveys are showing it: global economy is heading into a storm.

The latest warning is from the Ifo World Economic Climate Index.

Per Ifo release: “The Ifo Index for the world economy dropped from 89.6 points to 87.8 points this quarter, drifting further from its long-term average (96.1 points). While assessments of the current economic situation brightened marginally, expectations were less positive than last quarter. The sharp decline in oil prices seems to be having no overall positive economic impact. Growth in the world economy continues to lack impetus.”

In numbers, thus:

• Headline World Economic Climate Index is now averaging 88.7 over the two quarters through 1Q 2016, which is statistically below 97.7 average for the 2 quarters through 3Q 2015 and 93.2 average for 4 quarters through 1Q 2016. Current 2 quarters average is way lower than 8 quarters average of 98.4. Historical average is 94.9, but when one considers only periods of robust economic growth, the index average is 98.9. Again, current 2 quarters average is significantly below that.
• Present Situation sub-index 2 quarters average is at 87.0, which is woefully lower than 2 quarters average through 3Q 2015 at 91.6 and is well below 96.0 average for the historical series covering periods of robust economic expansions.
• Expectations for the next 6 months sub-index is at 90.4 on the 2 quarters average basis, down from 103.5 2 quarters average through 3Q 2015 and below historical (expansion periods only) average of 101.5.


Geographically, per Ifo release: “The economic climate deteriorated in all regions, except in Oceania, Asia and Latin America. In Oceania the climate index stabilised at a low level, and in Asia and Latin America it edged upwards. The indicator is now below its long-term average in all regions, with the exception of Europe. The climate in the CIS states and the Middle East clouded over, especially due to poorer economic expectations. In Europe WES experts are slightly less positive about future economic developments than in October 2015. In North America and Africa, by contrast, the slightly less favourable economic situation led to a deterioration in the economic climate.”

You can see my analysis of the European index data here: http://trueeconomics.blogspot.com/2016/02/5216-ifo-economic-climate-index-for.html.



5/2/16: Ifo Economic Climate Index for Euro area: 1Q 2016

Ifo Economic Climate Index in the Euro Area has posted another contraction at the start of 1Q 2016 marking the third consecutive quarter of declines and reaching the lowest level since 1Q 2015. IFO Economic Climate Index (the headline index for the series) for the Euro area fell to 118.9 in 1Q 2016 from 122.0 in 4Q 2015. Activity signalled by the index, however, remains above the historical average at 107.5 an well above downturns-consistent average of 84.8.

The chart below shows index trends:

As highlighted in the chart above, EU Commission own sentiment index for economic activity is also pointing to weakening growth conditions in 1Q 2015. The EU Commission Sentiment Index was un a divergence to the Ifo index since the start of 2015.

Two core components of the Index also moderated in 1Q 2016. Present Situation sub-index fell from 153.8 for 4Q 2015 to 151.0 in 1Q 2016, marking the first quarter of contraction after four consecutive quarters of increases. The sub-index remains firmly ahead of the historical average of 127.5.

Perhaps the most worrying is the decline in Expectations for the next 6 months sub-index which fell from 103.3 in 4Q 2015 to 100.0 in 1Q 2016. This marks third consecutive quarter of declines in expectations and the index level currently is closer to the historical average of 95.8.

Overall, the gap between expectations forward and present conditions assessment has declined. Gap index (my own calculation) is now at 66.2 for 1Q 2016 against 67.2 in 4Q 2015. This suggests that weaker expectations are now starting to feed through to weaker present assessments.

A chart below illustrates the trends for sub-indices:

Per Ifo release: “Assessments of the current economic situation were most negative in Greece and Finland, but the current economic situation also remains strained in France, Italy and Cyprus. The situation was only slightly better in Spain, Portugal and Austria; but assessments for Austria were far less negative than last quarter. The sharpest recovery was seen in Ireland, where survey participants assessed the current economic situation as very good. In Germany the economic situation is considered to be good, although assessments were somewhat less favourable than last quarter.

The six-month economic outlook remains positive nearly everywhere. Economic expectations brightened in Austria, France, the Netherlands, Estonia and Latvia. In the other countries the outlook either remains unchanged, or is somewhat less positive. WES experts were only slight pessimistic about Greece, Portugal and Spain.”

15/9/2014: OECD Economic Outlook: It's Worse than the Cover Says...

Keeping in mind that the OECD is a cooperative international body (aka not known for taking strong positions on anything, save lunch menu), here's Paris-based boffins' latest outlook for the global economy in 2014:

Everyone is downgraded, save India. Poor Italy got blasted - forecast for 2014 growth is now 0.9 percentage points lower than back in May and the 'powerhouse' of the euro area, Germany, is expected to grow by just 1.5% this year despite booming current account.

2015 is not going to be much better either:

OECD expects euro area to grow at 1.1% in 2015, which is slower than its forecast for the common currency area for 2014 produced back in May 2014. In other words, the expected 'new' recovery is worse than expected 'old' current outlook.

And world trade slowdown is now pretty much structural:

Domestic demand is likely to stagnate just as external demand, especially in the euro area as jobs creation remains anaemic and wages growth is nowhere to be seen, even at low inflation rates:

What the OECD has to say on the euro area reads like a description of a full-blow Japanization:
"The recovery in the euro area has remained disappointing, notably in the largest countries:  Germany, France and Italy. Confidence is again weakening, and the anaemic state of demand is reflected in the decline in inflation, which is near zero in the zone as a whole and negative in several countries. While the resumption in growth in some periphery economies is encouraging, a number of these countries still face significant structural and fiscal challenges, together with a legacy of high debt. "

Meanwhile, door knobs of European policymaking are calling for raising domestic demand to combat debt overhang. Now, definition of Domestic Demand is: Personal Consumption of Goods & Services + Net Expenditure by Local & Central Government on Current Goods & Services + Gross Domestic Fixed Capital Formation = Final Demand. Add to Final Demand Value of Physical Changes in Stocks and you have Total Domestic Demand.

Take a look at the above components:

• Personal Consumption of Goods & Services is subject to significant downward pressures due to tax increases, cost of government-supplied / controlled goods & services increases and household debt overhang. To increase this without increasing debt overhang for households requires shifting some of the Government burden off shoulders of the households. Which will only add to Government debt pile.
• Net Expenditure by Local & Central Government on Current Goods & Services is held back by Government debt overhang and large deficits. To stimulate this will require heavier debt overhang or more taxation of households, which will only increase their debt overhang and depress their demand. 
• Gross Domestic Fixed Capital Formation is held back by corporate debt overhang and broken credit system (down to banks debt overhang). Stimulating investment - aka fixed capital formation - will either require companies to increase their debt overhang (more credit issuance) or increase Government spending (see above) or dilute equity in companies.

In short, there is not such thing as a debt-neutral 'stimulus' when debt overhang is present across all sectors of the economy, as in euro area periphery, and in a number of other euro area states.

Boffins from the OECD have this to say on euro area's alleged malaise Numero Uno: low inflation. "Inflation has been falling steadily in the euro area for nearly three years. As demand strengthens, inflation is expected to turn back up and gradually converge on the EBC’s target range. But the succession of downward surprises has increased the risk that inflation remains far below the ECB’s target for a more extended period or declines further. Excessively low inflation makes it more difficult to achieve the relative price adjustments that remain necessary to rebalance euro area demand without having to endure a prolonged period of slow growth and high unemployment. Inflation near zero also clearly raises the risk of slipping into deflation, which could perpetuate stagnation and aggravate debt burdens."

In my view, this is just plain bollocks, pardon my language. Why? 

Because low inflation only exacerbates debt burden in ratios to GDP, not in real terms and even then  only for the Governments. Low inflation means low interest rates, which reduce cost of debt servicing for all actors in the economy: households, governments and corporates. Higher inflation equals higher interest rates, which means that you are killing households and companies in order to drive that debt/GDP ratio down for the Government. Meanwhile, economy's cost of servicing the debt levels, not ratios, is rising. This is why deflation with low growth are unpleasant but bearable in debt overhang scenarios (see Japan) while stagflation (low growth and high inflation) is a disaster. 

Need more convincing? Suppose inflation reaches ECB target of 2%. Suppose we post real growth of 3% pa. Which makes our nominal growth in the economy around 5% (simplifying things, but only marginally). What happens to interest rates? Why, they go toward historical averages. Say benign 2.5%. What happens to legacy mortgages rates? They more than double for trackers and rise by at least 2.5 percentage points for ARMs. What happens to mortgages arrears? What happens to household consumption? What happens to household investment? If growth of 5% is driven, as currently, predominantly by external sectors (exports and foreign investment, including in property markets), what happens to earnings and wages that are supposed to pay for the household debts and purchase domestic companies' goods and services? And what happens to Government yields and with them debt-servicing costs?.. 

OECD rather cheerfully presents the following outlook for inflation:

Which suggests we are heading for mean reversion (increases) in interest rates on 5-10 year horizon. Fingers crossed by then foreign investors will be snapping homes in Ireland at prices close to 2005-2006 peak so we can at least foreclose on them without much of negative equity overhang...

7/10/2013: Ifo publishes updated forecast for Euro area growth: Q3 2013-Q1 2014

CESIfo issued an update to its Q3-Q4 2013 forecasts for the euro area today.

Per release:

"After six consecutive quarters of decline, GDP in the Eurozone increased by 0.3% in Q2 2013. Economic activity is projected to expand further over the forecast horizon (+0.1% in Q3, +0.3% in Q4 2013 and +0.4% in Q1 2014) mainly on the back of the expected pick-up in external demand as well as fiscal policy gradually becoming less contractionary."

"However, the recovery is likely to be very modest, as fiscal austerity measures and structural reforms currently undertaken by member states will continue to hamper the expansion of domestic demand."

Specifically:
-- "The unfavourable labour market conditions will keep on weighing on the development of real disposable income and private consumption will therefore recover only slowly."
-- "Aggregate investment is forecast to expand, albeit still at a rather low rate over the forecast horizon. This profile will be mainly driven by the increasing needs to replace depreciated capital as well as the robust foreign-demand growth."
-- "Under the assumptions that the oil price stabilizes at USD 111 per barrel and that the euro/dollar exchange rate fluctuates around 1.35, inflation is expected to remain well below 2% (1.5% in Q4 2013 and 1.4% in Q1 2014)."
-- "The major downside risks to this scenario arise from possible renewed escalations of the debt crisis and from a stronger than expected deceleration in some emerging markets."

Note: my work on positive euro area growth signals based on CESIfo data will be featuring in monthly economics slide deck on Business Insider - stay tuned. Meanwhile, two previous post covering advanced pre-conditions for the above forecasts:
http://trueeconomics.blogspot.ie/2013/10/4102013-eurocoin-cautious-return-of.html (note eurocoin-consisted forecast for Q3 2013 set by me at 0.1% which is in line with CESIfo forecast above).

Also, note my Sunday Times article from September 29, 2013 covering Ifo data on euro area economic conditions.

Stay tuned for the Sunday Times article posting here and for BusinessInsider slide link.

21/6/2013: McKinsey Economic conditions Survey for H2 2013

Couple of interesting charts from the McKinsey Survey on global economic conditions (see full set of results here: http://www.mckinsey.com/Insights/Economic_Studies/Economic_Conditions_Snapshot_June_2013_McKinsey_Global_Survey_results?cid=other-eml-alt-mip-mck-oth-1306)

So the percentage of those who are saying the global economy is performing substantially better at the end of Q2 2013 is 36%, which is down on 43% in Q1 2013, signalling deterioration in the conditions. Percent of those who see any improvement in the global economy is down from 79% to 75% q/q. In terms of expectations forward:

Things are not going all too well in expectations 6mo forward either. 41% of all respondents are upbeat in expecting an improvement in global growth of H2 2013. Now, keep in mind, most of the official forecasts factor in significant uplifts in economic conditions in H2 2013 to deliver on annual targets set for 2013 at the end of 2012. Let's take a look at regions where H2 expectations were the most optimistic on the official side: 49% Eurozone executives expect things to improve, Asia-Pacific (especially China) 38% and North America 32%. Hmmm... nowhere over 50%. Sample biases are probably working toward reporting firms having more robust expectations, as the survey covers larger companies, with bigger investment pipelines, usually consistent with upside to expectations.

For their own countries:

Better vs Same/Worse percentages:

• Asia-Pacific: 42% vs 59% in Q2 2012, against 38% vs 61% in Q1 2012. Own-country conditions confirm a 'no expansion' expectation in H2 2013
• Developing markets: 35% vs 64% in Q2 against 47% vs 53% in Q1. Own-country conditions confirm a 'no expansion' expectation in H2 2013
• Eurozone: 32% vs 68% in Q2 against 34% vs 66% in Q1. Own-country conditions confirm a 'no expansion' expectation in H2 2013
• India: 45% vs 55% in Q2 against 60% vs 40% in Q1. Own-country conditions confirm a 'no expansion' expectation in H2 2013
• North America: 54% vs 46% in Q2 against 43% vs 57% in Q1. Own-country conditions confirm a 'expansion' expectation in H2 2013

So of all regions, with exception of North America, own-executives signal no gains in growth in Q3-Q4 that is assumed ex ante in the official forecasts... time to go 'hmmmm...'

8/5/2013: Blackrock Institute Survey: N. America and W. Europe, May 2013

Just as I published April update from Blackrock Investment Institute Economic Cycle surveys, here comes May one for North America and Western Europe:

 Now, note change in Ireland's position compared to April:

May summary:

And conclusions (italics are mine):
"This month’s North America and Western Europe Economic Cycle Survey presented a large shift on the outlook for global growth over the next 12 months – although a net proportion of respondents remains positive, this is now a figure of 41%, compared with a net 71% last month. [In other words, things are turning gloomier for global growth outlook]

With regards to the US, the proportion of respondents expecting recession over the next 6 months remains low, with the consensus view firmly that North America as whole is in mid-cycle expansion. [In other words, current growth rates are not expected to rise much as would have been consistent with early-cycle expansion]

In Europe, the view continues to be more disparate, with a generally stronger northern Europe contrasted by continuing weakness in Eurozone as a whole. Belgium, France, Greece, Italy, the Netherlands, Portugal and Spain in particular are described in a recessionary state, with the consensus view remaining in this phase at the 6 month horizon in each case."

7/5/2013: Blackrock Institute: April 2013 Global Economic Conditions - 1

A number of updates from the Blackrock Investment Institute Economic Cycle surveys for April 2013. Here are core charts.

Note of caution: some of the countries coverage in responses is thin, so data should be treated as only indicative. And the surveys are based on opinion of external experts, not Blackrock internal views.

Global outlook: 

"...a positive outlook on global growth, with a net 71% of 127 economists expecting the global economy will get stronger over the next year, (2% higher from the March report), based on North America and Western Europe panel."

For the EMEA panel, "Respondents remain positive on the global growth cycle, with a net 57% of 64 respondents expecting a strengthening world economy over the next 12 months – however this is large downward shift from the net 74% figure last month."

Asia Pacific panel: "The global growth outlook remains positive, with a net of 71% of participants expecting a stronger global economy over the next 12 months; however this is a large step down from the net 84% figure in last month’s report."

Latin American panel: "The global growth outlook remains positive, with a net 47% of 49 participants expecting a stronger global economy over the next 12 months; however this is a large step down from the net 62% in last month’s report."

North America and Western Europe:

"With regards to the US, the proportion of respondents expecting recession over the next 6 months remains low, with the consensus view firmly that North America as whole is in mid-cycle expansion. 

In Europe, the view continues to be more disparate, with the UK and Eurozone as a whole described in a recessionary state. With caveat that the depth of country coverage varies significantly, the consensus view remains recessionary at the 6 month horizon for France, Greece, Italy, the Netherlands, Portugal, Spain and Belgium."

Note: Ireland results are based on very 'thin' data. 

More regions to follow in the next post.