12/8/20: Post-Covid Economy: The Winds of Change

 

Yesterday, I gave a talk about the state of the global, European and Irish economies at the Omnipro event in Dublin. Here are my slides from that talk:

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...'

5/3/2013: Charts to Keep You Awake at Night

Bragging rights alert...

Business Insider published their slide deck of charts that keep investment community awake at night... The full 'horror show' is on here: http://www.businessinsider.com/wall-streets-most-worrying-charts-2013-3#

I have contributed the following chart: http://www.businessinsider.com/wall-streets-most-worrying-charts-2013-3#constantin-gurdgiev-trinity-college-dublin-37

25/2/2013: When 8 out of 10 economists agree?

Eurointelligence today published a neat summary of some of the prominent economists' opinions about the Euro area macroeconomic policies:


"Motivated by the recent controversy between Olli Rehn and economic analysists critical of austerity (including from the IMF), El Pais garners the opinions of 10 prominent economists on whether the European Commission is to blame for Europe's poor economic prospects. ... Some quotes:

• Paul de Grauwe says: "the EU authorities are responsible for the recession … the Eurozone's macroeconomic policy is a disaster"
• James Galbraith says: "the Commission's leadership seems to work in an alternate reality, indifferent to the consequences of its policies"
• Luis Garicano says: "Brussels is incomprehensibly dogmatic [and] neglects the probability of a serious accident"
• José Manuel González-Páramo says: "in a way we're all responsible for the recession … The Commission's proposals are advanced and forward-looking"
• Paul Krugman blogged "these people have done terrible damage and stll have the power to continue"
• Desmond Lachman says: "The Commission was very slow to draw the conclusion that the IMF did: excessive austerity with the Euro as straitjacket is counterproductive"
• Jonathan Portes says: "The optimistic conclusion is that [Rehn] is admitting the justifications for austerity are crumbling"
• Dani Rodrik says: "The Commission has been fooling itself with the illusion that the structural reforms it spouses can stimulate the economy in the middle of an activity plunge made worse by austerity measures"
• Guntram Wolff says: "Considering all the constraints the Commission is subject to, it's adopted generally adequate policies, trying to strike a balance between fiscal consolidation and supporting the economy"
• Charles Wyplosz says: "The Commission makes politically correct forecasts knowing full well they will have to appear surprised when they are not fulfilled."

Paul Krugman also labeled Olli Rehn “the face of denialism”. According to Kurgman, the recent declines in sovereign spreads was due to the LTRO and OMT, and "while unit labour costs have converged a little, they have only converged by a fraction of what needs to be done".

Kevin O’Rourke via the Irish economy blog: “You might have thought that the disastrous but wholly unsurprising eurozone GDP numbers indicate that the bloc is in a bad way, and will continue to be so until the current macroeconomic policy mix is jettisoned. Happily, Olli “Don’t mention the multiplier” Rehn has good news for us: The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future. Thank goodness for that.”

I find it very interesting that virtually not a single of the above quotes, save for Krugman's passing reference to labor costs, distinguishes between the necessary structural reforms and pure, brutish, line-across-the-sky cuts that have been adopted by the EU. And even Krugman's references is hardly sufficient - labor costs in and by themselves are not and should not be the target for structural reforms. Instead, market structure, institutional competitiveness, cartel-like structure of some protected sectors, legal systems, moral hazard and other aspects of the crisis should be.

Oh, and lets face it - the drive toward 'austerity' is not only the job of the EU Commission, but also of the EU Parliamentarians (link here), plus all the nation states that adopted the Fiscal Compact.

Olli is nothing more than a mouthpiece for the consensus policies that are continuing to transfer economic crisis burden from the elites to the real economy.

30/1/2013: German Economy: Returning to zero growth in January 2013

Germany's CESIfo published the latests (January 2013) assessment of the state of the German economy in Manufacturing and these are slightly more upbeat than at the end of Q4 2012, albeit with some clear seasonal supports.

"In manufacturing the business climate indicator continued to rise. Manufacturers are more satisfied with their current business situation than last month. The improvement in expectations with regard to future business developments continued into the New Year. Optimism is returning. After three successive declines, capacity utilisation rates also rose."

As per data below, in manufacturing 'optimism' is not exactly 'returning', but rather 'pessimism is receding', as business expectations remain below 0 on balances:

"In wholesaling, on the other hand, the business climate clouded over. Wholesalers are less satisfied with their current business situation and slightly more pessimistic about future business developments. In retailing the business climate indicator rose somewhat. This was due to a slightly more positive assessment of the business situation, while retailers’ business expectations remained unchanged.

In construction the business climate index rose sharply. This was primarily due to far more optimistic expectations, which last reached such a high level in March 2012. Assessments of the current business situation also improved."

It is worth noting that in Construction sector, it was business expectations that drove overall index up sharply and these are exceptionally seasonally-driven:

 However, as balances data below shows clearly, three of five sub-sectors continue showing weaknesses:

Overall, the three core aggregate series are above 100 for the first time since May 2012 (good news), but at levels that are signalling stagnant or very weak growth.

• Climate indicator reading is at 104.2 - only sixth highest reading in last 12 months, and substantially below 108.2 reading in January 2012;
• Situation indicator is at 108.0, which is only 10th highest reading in last 12 months, and well below 116.3 recorded a year ago.
• Expectations are at 100.5, marking 5th highest reading in 12 months, down marginally on 100.7 in January 2012.

In terms of overall impact on the euro area, the above figures suggest that the January 2013 eurocoin indicator-based forecast (see details here) of -0.4% growth in January 2013 should be more moderate. Not enough data yet to recompute the actual forecast figure from -0.4%, but I believe it can be closer to -0.2-0.1%.

16/7/2012: IMF downgrades growth prospects for 2012-2013

A notably interesting, if worrying, World Economic Outlook update from the IMF today. Titled “New Setbacks, Further Policy Action Needed” the document sounds several key warnings:

• In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness.
• Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels.
• Growth in a number of major emerging market economies has been lower than forecast. …these developments will only result in a minor setback to the global outlook, with global growth at 3.5 percent in 2012 and 3.9 percent in 2013, marginally lower than in the April 2012 World Economic Outlook.
• These forecasts, however, are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction.
• Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action. In Europe, the measures announced at the European Union (EU) leaders’ summit in June are steps in the right direction.
•  The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority.
•  In the United States, avoiding the fiscal cliff, promptly raising the debt ceiling, and developing a medium-term fiscal plan are of the essence. In emerging market economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows.

Some growth forecasts snapshots of the IMF update for 2012 and 2013:

• US gets downgraded on growth for both years by 0.1% from 2.1% in April 2012 to 2.0 in July 2012, and for 2013 from 2.4% to 2.3%.
• Meanwhile, Euro zone gets no change in 2012 forecast (at -0.3%) and a downgrade by -0.2% to 0.7% for 2013 forecast.
•  Let’s recall that Eurozone is Ireland’s ‘hope’ and ‘engine for growth’ according to our Government. And it is expected to perform markedly worse than any other advanced region in both 2012 and 2013. 
•  Note that the most ‘dynamic’ large euro zone economy – Germany – is now expected to grow by a ridiculously low 1.4% in 2013 on top of an absurdly low 1.0% in 2012.
• Elsewhere, China and India both got seriously downgraded in terms of growth prospects for 2012 and 2013 compared to IMF forecasts 3 months ago.

Chart below shows some monetary and banking sides of the euro crisis.

“Overall, global growth is projected to moderate to 3.5 percent in 2012 and 3.9 percent in 2013, some 0.1 and 0.2 percentage point, respectively, lower than forecast in the April 2012 WEO…

Growth in advanced economies is projected to expand by 1.4 percent in 2012 and 1.9 percent in 2013, a downward revision of 0.2 percentage point for 2013 relative to the April 2012 WEO. The downward revision mostly reflects weaker activity in the euro area, especially in the periphery economies, where the dampening effects from uncertainty and tighter financial conditions will be strongest.”

“Growth in emerging and developing economies will moderate to 5.6 percent in 2012 before picking up to 5.9 percent in 2013, a downward revision of 0.1 and 0.2 percentage point in 2012 and 2013, respectively, relative to the April 2012 WEO… Growth is projected to remain relatively weaker than in 2011 in regions connected more closely with the euro area (Central and Eastern Europe in particular).”

2/1/2012: Sunday Times January 1 - 2012 Economy Forecast

This is an unedited version of my Sunday Times article for January 1, 2012.

Happy New Year and the best wishes to all of you fond of reading up on economics this morning.

Having just closed the book on the fourth year of the crisis, one can only hope that 2012 will be the year of the return of the global and Irish economic fortunes.

I wish I could tell you that this will be so with some sort of certainty. That ‘exports-led growth’ will open the way for reduced unemployment and that ‘real reforms’ will take place to the benefit of those of us living here and restore the confidence of the proverbial international investors. Alas, the only reality we can glimpse from the road we travelled since 2008 is that this year will be marked by the same fiscal uncertainty, growth volatility and markets psychosis that were the hallmarks of the years past.

So in line with the New Year’s Day tradition for forecasts, lets take a look at the crystal ball and ask two questions.

Question number one: Where are we today on the road of the global economic and financial crises resolution?

At the macroeconomy level, the US has completed some two-thirds of the required private sector deleveraging. This means that by the very end of 2012 we might see some signs of life in the US consumer demand and household investment, assuming the credit system globally does not experience another seizure. Until this takes place, corporate balance sheets will remain focused on hoarding cash and capex is unlikely to re-start. The US economy is likely to bounce around the growth rates just above zero, with moderate risk of a recession in the first half of 2012.

The three black swans for the global economy are: the risk of the deficit blowout and the lack of Congressional consensus on dealing with the US debt mountain that can destabilize the Treasury market; China’s economy teetering on the brink of an asset crisis and growth slowdown; and the euro area hurtling toward a disorderly collapse. Should any one of these materialising, there will be an unprecedented shift in global investment portfolia with gold and a handful of international blue chip corporates becoming the only stores of value. Unlikely as it might seem, such a scenario will cause a new Great Depression worldwide.

Barring the catastrophe identified above, global demand will most likely remain subdued in 2012, with previous pockets of growth – e.g. the emerging markets, the beneficiaries of exceptionally low cost of carry-trade finance from QE funds in the US in 2009-2010 – becoming mired in a significant growth slowdown.

Europe is likely to be on the receiving end of the poor global growth newsflows.

Germany was the driver of European growth in 2011 and its exports performance (up 13.4% in 2010 and 8.5% in 2011) looks set for a severe test in 2012. In months ahead, the ECB will drive down key interest rates to 0.5-0.25 percent from the current 1.0 percent to accommodate the default-bound euro area sovereigns. However, in the climate of deleveraging banking sector, this move will fail to stimulate private demand. Government spending in Germany is also set to fall in 2012, by 0.4-0.5 percent. As the result, we can expect German GDP to contract in Q4 2011 and Q1 2012. Annual rate of growth is likely to fall from 2.9% in 2011 to 0.2-0.4% in 2012.

France is now forecast to enter a shallow recession between Q4 2011 and Q1 2012 with annual growth falling from 1.6% in 2011 to zero percent in 2012. The downside risk for the second largest euro area economy is that fiscal adjustments planned to-date can be derailed by lower growth. In this case, France can remain in a shallow recession through 2012.

Overall, euro area growth looks set for some negative downgrades in months ahead. We can expect GDP to remain flat in 2012, having shown expansion of 1.5 percent in 2011. Personal consumption will be static, investment will shrink by 1.2 percent and Government spending will contract 0.3 percent. Exports growth will fall 10-fold, from 2011 annual rate of 6.3 percent.

This provides the backdrop to the second question of the day: What will 2012 bring to Ireland?

We are all familiar with the fact that Irish economy is highly volatile and subject to a number of push and pull factors ranging from global demand for Irish exports, to foreign conditions for debt crisis resolution in the common currency area.

Assuming no major disruptions to the current global environment, we can look at two possible scenarios.

Scenario 1 involves benign assumptions of continued growth in agricultural output, modest resilience in exports, moderating contraction in construction sector, and only slightly deeper reduction in public spending compared to 2011. Crucially, this scenario assumes virtually no nominal change in the services sector activity, a moderate rise in net taxes and a slight decrease in profits by the multinational enterprises expatriated abroad. All in, Scenario 1 yields estimated rate of growth in real GDP of 0.8% and GNP growth of 0.7%.

Less benign Scenario 2 with shallower growth in agricultural and exporting sectors activity, as well as services sectors contraction, yields growth forecast of -0.6% for real GDP and -0.9% for GNP. In this adverse scenario, Irish economy is likely to end 2012 with real GNP 13% below the peak 2007 levels.

These small differences in forecasts are, however, compounded year on year, as illustrated by the historical divergences between previous Department of Finance forecasts and realised rates of growth in the chart.

The range of risks we face is a daunting one, but there is also a narrow range of potential outcomes that present an upside for the battered economy.

In terms of the sovereign risk, recent discontent with the Budget 2012 has translated into dramatically reduced approval ratings for both Fine Gael and Labor. These are likely to persist on the back of higher taxes and a potential increases in unemployment in the retail sector and other services, post-January sales. By mid-2012, lower growth and overly optimistic projections on tax revenues and expenditure reductions will mean that the Coalition will face a stark choice of either further reducing capital expenditure, or levying some sort of a new revenue raising measure. Discontent of the backbenchers will only increase as time moves closer to the Budget 2013, possibly forcing the Government to adopt some structural reforms on the expenditure side and rethink its policy on future tax increases.

The latest projections by the Economist Intelligence Unit put peak Government debt/GDP ratio at 120-125% in 2013. At this stage, there will be a belated restructuring deal struck with EU that will see debt/GDP ratio falling to below 100%. The pressure for such a deal will be building up throughout 2012 and we might see some positive moves during the year.

Banks will be nursing continued losses, with mortgages showing a more visible trend toward deterioration, while business insolvencies will continue driving significant losses behind the façade. Again, pressure of these losses will become more apparent in late 2012, just around the time banks capital buffers begin to dwindle once again.

With economy bouncing up and down along the generally stagnant growth trend, the Government will continue its search for excuses for avoiding deep reforms. Thus, 2012 will be the year of silent risks build up in Irish economy, culminating in a major blow-out in late 2012 or early 2013. Welcome to the Groundhog Year Number Five.

Box-out:

Most recent data for Ireland’s external accounts shows that in Q3 2011 our balance of payments stood at a surplus of €838 million, comprising a current account surplus of €850 million and a capital account deficit of €12 million. For the nine months of 2011, the current account has registered a deficit of €669 million, an improvement of just €125 million on the deficit in the same period of 2010. Over the same time, balance of payments deficit fell from €771 million in the nine months through September 2010 to €675 million for the first nine months of 2011. Which raises the following question: given that we continue running current account and balance of payments deficits, what external surpluses does the Government foresee for the near future that can possibly make a dent in our public debt overhang? Since the onset of the current exports boom in the beginning of 2010, Ireland’s average quarterly current account surplus has been a meagre €13 million. At this rate, it will take Ireland Inc some 190 years to pay down just €10 billion of debts, even if these debts were costing us nothing to finance.