14/12/15: U.S. Rates Impact on Euro: Expresso, December 12

My comments on potential impact on Euro and Euro area economy from the Fed rate hike for Portuguese Expresso (December, 12 page 03):

3/12/15: Updating that Euro Donkey of Global Growth

While Mario Draghi kept talking justifying the course of ECB policy decisions (or indecisions, as some might want to put), the ECB released staff projections for GDP growth. Here they are, in full glory:

Source: @fwred 

So, that poverty of low aspirations has now been firmly replaced by the circular forecasts: 2015: 1.5% to 1.4% to 1.5%; 2016: 1.9% to 1.7% to 17.%, 2017: 2.1% to 1.8% to 1.9%, whilst inflation expectations are now ‘anchored’ in the proverbial ditch. Meanwhile, Mr Draghi says:

Just as the Euro went through the roof on USD side and with it, Europe's 'exports-led recovery' went belly up.

Though never mind. The bigger headache (that few Europeans can even spot) is that the ECB forecasts are talking about 'growth' at below 2 percent with all this QE and with inflation at extremely low end. Which makes the whole exercise of monetary and fiscal policies activism... err... academic. For as far as I know, no donkeys are allowed to compete in Kentucky Derby. 

1/12/15: Euro area Manufacturing PMI and Forward Growth Indicators

Eurocoin for November - euro area's leading growth indicator - remained basically flat at 0.37, rising only marginally from 0.36 in October. Both months are posting readings below 3mo and 6mo averaged (0.373 and 0.392), signalling growth at around Q2-Q3 2015 average.

In summary: little evidence in growth acceleration from 3Q 2015 levels. It is worth noting that preliminary growth estimate for 3Q 2015 came in at 0.3%, joint-lowest since 2Q 2014 (3Q 2014 growth was identical to 3Q 2015). This stands contrasted to today's Markit Manufacturing PMI for Eurozone which posted a reading of 52.8 for November (moderately strong expansion) up on 52.3 in October.

It is worth noting that both PMIs and Eurocoin have posted over-estimates of actual growth conditions in recent months.

30/10/15: Eurocoin: Not so Sunny on the Growth Horizon...

Eurocoin - a leading growth indicator for Euro area economy published by CEPR and Banca d'Italia - posted second consecutive monthly decline in October, falling to 0.36 from 0.39 in September and down from the recent peak of 0.43 registered in August. This is the weakest reading for the indicator in 6 months.

For what it is worth, the ECB remains stuck in a proverbial monetary corner:

While in historical terms, growth signal of 0.36% (and annualised average over the last 12 months of 1.58%) is above long term average (annualised average growth over the last 15 years of 1.03% or over the last 5 years of 0.57%), growth remains anaemic by all possible comparatives beyond the Euro area.

You can see the less than pleasant specifics on eurocoin drivers for October here: http://eurocoin.cepr.org/index.php?q=node/243. In the nutshell, things are static across all major sectors, with households' optimism is largely flattening; and if we ignore the European Commission survey signals, things are poor for the industrial sector.

16/10/15: Euro Area Inflation, via Pictet

An interesting chart highlighting the poor prospects for inflationary expectations in both Euro area and the U.S. via Pictet:

5yr/5yr swaps are basically a measure of market expectation for 5 year average inflation starting from 5 years from today, forward (so years 6-10 from today). This is a common referencing point for the ECB technical view of inflation expectations, and as the above clearly shows, we are heading for testing January 2015 lows.

Here’s Picket analysis (comments and emphasis are mine): “In September, headline inflation in the euro area dipped back into negative territory (-0.1% y-o-y) for the first time in six months.

"This weakness must be put into context though as it is primarily due to the steep slide in energy prices. If volatile components (food and energy) are stripped out, core inflation was steady at +0.9% y-o-y. Furthermore, prices of services, which better reflect domestic conditions, rose.

"Nonetheless, falling commodity prices, coupled with the rise in the euro’s trade-weighted value, caused the inflation outlook to worsen. Long-run inflationary expectations, as measured by the break-even swap rate, have been softening steadily since early July and have now reached their lowest level (1.56%) since February this year.

…In parallel, findings from economic and business surveys (PMIs, European Commission surveys) for the third quarter showed decent resilience despite the worries about the Chinese economy. They point to GDP growth of around 0.4% q-o-q in Q3 and Q4.”

Picket projects growth of 1.5% y/y for 2015, “led by domestic demand” that is expected to “continue to benefit from normalisation of the jobs market, subdued inflation, the gradual revival in consumer confidence and an upturn in lending to the private sector.”

In short, sensible view of inflation - low inflation, per Pictet is helping, not hurting the euro economy.

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…

3/9/15: ECB Decides to Not Decide, but Reserves a Right to Decide More

ECB decision to hold rates unchanged at today's meeting was hardly of any surprise. This means there is little news in terms of actual policy actions coming from today's council. Instead, some surprises were delivered by Mario Draghi in his statement. Here is a summary.

Firstly, ECB cut GDP projections for the euro area economy. The ECB now expects euro area GDP to grow 1.4% in 2015 (down on previous forecast of 1.5%); 1.7% in 2016 (down of previous forecast of 1.9%) and 1.8% (down on previous forecast of 2.0%). The miracle of "2% growth next year or next after next" has now been abandoned. As the following tweet sums this up:

We also got revised outlook for inflation and a warning from Draghi that inflation can be low or that we might yet see deflation. ECB now projects HICP inflation at 0.1% in 2015 (previous forecast was 0.3%), 1.1% in 2016 (previous forecast at 1.5%) and 1.7% in 2017 (previous forecast was 1.8%). Which means that the ECB is still sticking to the miracle of "close to 2% inflation a year after next" target. Of course, both sets of revisions mean that declines in forecast growth in nominal incomes are going to be sharper than in real GDP. Which means euro area will get less income, more prices. That, presumably, remains the 'good side of inflation' in ECB's mind.

Draghi warned that the 'there are downside risks to September inflation projections'. Now, who could have guessed as much, given that I posted recently the 5yr/5yr swaps chart clearly showing that euro area inflation expectations in the markets have gone soft once again. Shall we repeat that again?

Source: @Schuldensuehner

Draghi's job today, however, was to talk down the euro. Which he did by simply stating that QE will be running at planned rate (EUR60bn purchases) through planned timeline (to September 2016) and can be extended and expanded if the need arises. Promptly, Euro dropped like a rock.

In a typical, by now ritualistic, referencing of the monetary policy transmission mechanism (still broken), Draghi referenced improved, but still poor credit conditions for euro area corporates. Chart illustrates:

Of course, there is little point of reminding all that growth in credit requires growth in demand. Unless, that is, you are a European policymaker who thinks (as they all seem to be required to do) that issuing loans to companies is a great idea to generate economic growth even if there is absolutely no need for new capacity creation in the economy with stalled demand.

In short, ECB has now reacted to the rot in the Emerging Markets (and in particular China). This is a reactive move with some serious wisdom behind it - the rot is not over yet, by all means and the ECB is out of the gates with signalling that it will continue priming the Government bonds markets pump to prevent any spiking in the rates or euro revaluations derailing already weak exports. With BRIC PMIs signalling ongoing and deepening deterioration in global growth conditions (link here), this is expected and wise. For now, doing nothing new, but promising to do it longer and more aggressively is the preferred response from Frankfurt. It might just be enough.

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...

13/8/15: Eurocoin: Marginal Strengthening of Euro Area Growth in July

Earlier this week I covered Ifo Institute Index of Economic Conditions for the Euro Area.  This time around, lets take a look at the leading growth indicator, Eurocoin published by CEPR and Banca D'Italia.

July 2015 reading for Eurocoin stood at 0.41, up on 0.39 in June and well ahead of 0.27 reading recorded in July 2014. This means that economic growth slightly firmed up at the start of Q3 2015 compared to the end of Q2 2015.

2Q 2015 Eurocoin average suggests growth at around 0.35-0.4% which compares to 0.4% growth recorded in actual real GDP in 1Q 2015. However, growth improvements are continuing to come against core inflation (HICP) remaining at 0.1 percent through May 2015.

This is despite the ECB rate remaining in the near-zero corner:

The reason is simple: per Eurocoin release, "the recovery in stock prices and the performance of industrial activity in several of the leading countries prevailed over the decline in confidence of households and firms." In other words, growth firming up is coming not from organic real activity on the ground, but from trade effects (weaker euro) and financial markets effects (monetary policy driving euro).

12/8/15: Ifo Index of economic conditions: Euro Area 3Q 2015

Latest Ifo Index of Economic Climate for the Euro Area fell from 129.2 for 2Q 2015 to 124.0 for 3Q 2015, running ahead of 118.9 reading in 3Q 2014 and at the second highest level since 4Q 2007.

Present Situation Index reading, however, is up at 148.3 in 3Q 2015, compared to 145.5 in 2Q 2015 and 128.7 in 3Q 2014. The index is at its highest reading since 4Q 2011. Overall, based on Present Situation assessments, 1Q 2015 - 3Q 2015 activity (average of 137.1) is running below the levels of activity during previous expansionary sub-cycle of 1Q 2011 - 3Q 2011 (average of 152.9), suggesting weaker growth conditions in the current recovery phase than 4 years ago.

Expectations for the next 6 months period Index slipped significantly in 3Q 2015 to 109.8 from 119.7 reading for 2Q 2015 and matching rather poor expectations reading recorded in 1Q 2015. The Index is down on 3Q 2014 when it stood at 113.1. Over the entire 2015 to-date, the index has averaged 113.1 against same period average of 117.5 for 2014, and identical to 113.1 average for the same period of 2011. On expectations basis, there is weak optimism among survey participants in growth conditions forward.

Expectations Index gap to Present Conditions is currently at 74% compared to 82.3% in 2Q 2015 and 93.4% in 1Q 2015. This suggests overall deepening gap between current assessment of economic situation and forward expectations to the downside on forward expectations. Still, judging by 6mo lags, current conditions continue to turn out better than previous expectations of the same would have implied, with 6 mo lagged expectations index under-shooting forward 6 months reading for actual conditions by 38.5 points.

Charts to illustrate:

As charts above show:

• Expectations Index (6mo forward) suggests weaker conditions expectations in the future and remains consistent with poor producers' expectations prevailing from around 4Q 2013 on.
• Current situation assessment, meanwhile, is improving, but remains relatively weak and only most recently (2Q-3Q 2015) reaching above historical average line.
• Current economic sentiment published by the EU Commission has now been diverging from 6mo forward expectations published by Ifo for the period starting from 4Q 2014, with expectations being reported by Ifo running more subdued (and worsening) than EU Commission reading of current conditions.
• Despite being more optimistic than Ifo Expectations, and despite running above its own historical average, the EU Commission Sentiment Index remains rather subdued by historical standards.

In simple terms, things are getting better, but these improvements appear to be more on the surprise side, rather than structural side.

27/7/15: IMF Euro Area Report: The Darker Skies of Risks

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. The third post covered IMF projections for growth.

So let's take a look at the risks to the IMF's 'growth returns to Euro zone' scenario.


Per IMF: "Risks are now more balanced than in recent years when vulnerabilities dominated. On the upside, low oil prices, QE, a weaker euro, and rising confidence could bring larger than anticipated benefits. Downside risks include lingering weakness and low inflation, a potential
slowdown in emerging markets, geopolitical tensions, and financial market volatility, whether due to asymmetric monetary policies or contagion from events in Greece."

Now, let me translate this into human language:

1) Eurozone has no real drivers for current growth uptick (which is weak to begin with). Instead, all it got to brag about are: QE (extraordinary monetary policies); QE-induced weaker euro (beggar thy neighbours trade policies), some rising confidence (hopping mad global asset markets bidding everything up on foot of global QEs - extraordinary policies); and lastly - lower oil prices (that sign of global economy on a downward slide). Congratulations to all - hard work and enterprising are not required for this sort of growth.

2) Eurozone's abysmal growth is at a risk from:

• 'lingering weakness' (aka structural non-reforms that Europe worked so hard to achieve since 2008, we are all in tears… so lots of sweat, not much of gain here) and 
• 'low inflation' (a euphemism for consumers and investors on strike in this promised Land of Plenty); and 
• 'potential slowdown in emerging markets' (that thingy that makes oil cheaper - take you pick, Euro area: get crushed by higher oil prices in presence of EMs growth or get squeezed by lack of EMs growth in presence of low oil prices), 
• 'geopolitical tensions' (aka: Russkies not playing the ball with Good Europeans by refusing to buy their apples), and 
• 'financial market volatility' (wait: what on earth have we been doing since 2007 other than fight the said financial markets volatility? Looks like lots of successes here, if the said volatility is still a risk), 'whether due to asymmetric monetary policies' (in other words, if the Fed hikes rates too early too fast) or 'contagion from events in Greece' (would that be the same Greece that has been ring fenced and repaired? most recently this month?).

You have to wonder: IMF effectively says all risks that were in the euro area in ca 2011 are still in the euro area in ca 2015…

Now, recall that some time ago I said that the next step for Europe will be a fiscal / political union with less democracy for all and more technocracy for the few? (link here). And IMF does not disappoint on this too.

"Beyond the near term, there should be a concerted effort to accelerate steps to strengthen the monetary union and European firewalls. Fully severing bank-sovereign links would require a common deposit insurance scheme with a fiscal backstop, a larger and fully funded Single Resolution Fund, and easier access to direct bank recapitalization from the ESM. The greater risk-sharing implied by these measures should be underpinned by a strengthened fiscal and structural governance framework which could require possible Treaty changes. These reforms are desirable in any case, but accelerated progress could help bolster market confidence in the face of recent events."

What have we learned from the above? Why, of course that the frequent claims by the EU officials that Europe now has fully severed contagion links between banks and taxpayers are… err… a lie. And that common claims by the European officials that we now have a genuine monetary union infrastructure is also a lie. And that to make these two claims not to be a lie we will need something/rather that requires 'possible Treaty changes'… which is of course a political and fiscal union. So kiss that national sovereignty and self-determination bye-bye… assuming you still believe such exist in the Euro Land.

Here is full IMF risks assessment matrix:

Now, do some counting: out of 7 key risks, four have either high probability of occurring or bear high impact if they should occur or both.

Now, all of the above still generates a positive outlook under the IMF forecasts - positive, meaning GDP growth over 1.2-1.4 percent, never mind GDP growth anywhere near that of the U.S.

But then the IMF goes slightly gloomier and paints a "Downside Scenario of Stagnation in the Euro Area". Here we are getting some traction with highly probable reality by the highly diplomatic Fund.

"Subdued medium-term prospects leave the euro area susceptible to negative shocks. A modest shock to confidence—for example, from lower expected future growth, or heightened geopolitical tensions—that lowers private investment could affect households via labor income and wealth. Expectations of lower inflation at the zero lower bound would keep real interest rates high. For countries with high public debt, risk premia could rise, amplifying the shock and raising the risk of a debt-deflation spiral. Policy space would be limited with short-term interest rates at the zero lower bound and public debt high in countries with large output gaps (Bullard, 2013)."

What the above really means is that, given we are already in the environment of zero policy rates and unprecedented money printing by the ECB, any further shocks will have nothing offsetting them on policy side as

• Monetary policy has fired almost all its bullets already, and
• Fiscal policy has no bullets because of already high levels of debt, whilst
• Currency devaluation policy is not an option in the monetary union dominated by Germany.

Welcome to Hope Street where things can only go as smoothly as today, forever.

"An illustrative downside scenario, assuming lower investment for all euro area countries and increased risk premia for high debt countries, suggests that euro area output could be nearly 2 percent lower by 2020." Guess what: 2020 forecast growth is 1.5% (link here) which means that IMF is saying it will be -0.5% aka another recession.

"The main channels would be through higher real interest rates depressing investment and consumption as well as lower inflation and wage growth constraining adjustment within the euro area." Which means IMF is now fully buying into the Secular Stagnation (Demand Side) scenario I wrote about here.

"The impact would vary across countries with real interest rates higher in countries with weaker balance sheets. Fragmentation progress would reverse and public debt would increase more in high debt countries due to lower fiscal balances and nominal output. “Bad” internal rebalancing would follow, as current accounts in high debt countries would rise due to import compression. Lower inflation would worsen external imbalances, by forcing countries with large output gaps and imbalances to adjust through lower prices and employment."

Yeeeks!

So projections:

Double Yeeeeks!

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.

24/6/15: Ifo Miss is Not a Biggy...

Ifo business climate index for Germany fell from 108.5 in May to 107.4 (expected 108.1) in June, while the business expectations index was down from 103 to 102 (also missing expectation for 102.5) and the current assessment index fell from 114.3 in May to 113.1 in June (missing expectations for a decline to 114.1).

For all the media chatter about missed expectations, Ifo index is trending at levels consistent with close to 3% growth and well within the range of the average for Q1 2013-Q2 2015 period.

As chart above shows, Ifo has been signalling strong growth momentum in Germany for some time now, with volatility of the index reading around period averages being less pronounced than for the euro area as a whole.

The chart also shows recent uptick in economic climate conditions in the euro area as a whole. When we look at period averages, one interesting sub-trend to watch is the step-up change in growth conditions in the euro area as opposed to highly steady growth conditions in Germany.

8/5/15: Euro Area Growth Indicator for April: Weak, but Improving

The €-coin index of growth indicators for Euro area published by Banca d'Italia and CEPR posted another rise in April, marking the fifth consecutive month of increases. Eurocoin printed 0.33 in April, up from 0.26 in March. Per Banca d'Italia, "the indicator was mainly buoyed by the increase in industrial production and rising share prices." In other words, welcome to the marvels of QE.

Forecast 3mo on 3mo growth rate is now at 0.3-0.35%, the highest since April 2014. However, April 2015 reading of 0.33 is still below April 2014 reading of 0.39.

The monetary policy remains firmly lodged in a low-growth, low-inflation corner, while rates are at their zero bound:

Growth conditions signalled by Eurocoin (not actual growth data, yet) signal 12mo growth returning to close to long-term average:

This is hardly impressive, since historical growth records for the Euro area are exceptionally anaemic and current major monetary policy push for growth should be expected to drive rates of growth much higher. This is not happening so far.

Euro area business confidence surveys indicate either weak (EU Commission) or falling (PMIs)

But actual PMIs are a more upbeat:

While Consumers continue to stay away from the shops:

24/4/15: Business Climate: Germany and Euro Area 1Q 2015

The Ifo Business Climate Index for German trade and industry rose to 108.6 points in April from 107.9 points last month based on the latest data. Using historical time series, current reading signals growth in excess of 2%.

However, Q1 2015 was relatively weak for German indicators.

Present situation index for Germany in Q1 2015 was 112.0 against 115.2 a year ago. Expectations for the next 6 months index was 103.9 in Q1 2015 against 106.3 a year ago. Economic Climate index - overall index of activity - in Q1 2015 stood at 107.9 down on 110.6 in Q1 2014.

German performance in Q1 2015 was reflective of a similar trend in the euro area. Euro area present situation index in Q1 2015 was at 117.5 - well below 120.3 recorded in Q1 2014, while 6months forward expectations index was at 109.8 against 119.7 a year ago. Overall, euro area economic climate index finished Q1 2015 at 112.7, which was below 119.9 recorded at the end of Q1 2014.

Unless April reading signals sustained uplift for Q2 2015, things are not exactly exciting.

27/3/15: Euro Area Growth Indicator up in March, but...

Latest Eurocoin (Banca d'Italia and CEPR) leading growth indicator for euro area economy came in at a slight improvement in March to 0.26 from 0.23 in February, posting the highest reading since July 2014. The average quarterly growth forecast now implied by Eurocoin is at around 0.25-0.3% q/q with the risk to the upside.

This is the first monthly reading since July 2014 that puts Eurocoin into statistically significant growth territory and also the first monthly reading for positive growth momentum based on 6mo moving average.

However, as the chart below indicates, y/y we are still in weak growth territory and, to a large extent, this growth is supported by dis-inflationary momentum, rather than by nominal growth.

Accommodative monetary policer remains the key forward and the ECB remain stuck in the proverbial 'monetary policy corner':

In March, the main factors behind the Eurocoin increase were: an improvement in household and business confidence, plus gains in share prices. In other words, there is no organic driver for growth - both confidence indicators and share prices may have only indirect link to real economic activity.

23/3/15: Deflation... Dumbflation... It's Real Purchasing Power That Matters

I have written in the recent past about the bogus debate surrounding the 'threat of deflation' in the euro area. You can see my view on this here in the context of Ireland: http://trueeconomics.blogspot.ie/2015/02/27215-deflation-and-retail-sales.html and here in the broader context: http://trueeconomics.blogspot.ie/2015/02/18215-inflation-expectations-and.html.

And now Bloomberg weighs in with the similar: http://www.bloomberg.com/professional/kc-post/ecbs-failure-reach-inflation-target-blessing/

To quote: "The strengthening recovery [in the euro area] should add some inflationary pressure — although readings are likely to remain in negative territory for some months, with lower energy prices still feeding through the production pipeline. This month, the ECB revised down its 2015 inflation forecast to zero. Assuming nominal earnings grow at the same pace seen over the last few quarters, the upward trend in real pay should persist in 2015.

Households are likely to react — even if with some lag — to the purchasing-power bonus. Household consumption, which makes up about 55 percent of GDP, has been somewhat muted lately, only contributing to growth by an average 0.1 percentage point over the last seven quarters. That’s less than half what it used to bring in during the pre-crisis years. The re-emergence of this large growth driver should help to strengthen the 2015 recovery. Negative inflation is a welcome shortcut, meaning the region doesn’t have to wait for a decline in unemployment to see a revival in domestic consumption."

Bingo!

23/3/15: Credit, Domestic Demand and Investment: Euro Area in Three Charts

Three interesting charts outlining the big themes in Euro area economy:

First the 'limping leg' of the euro recovery: credit. Chart below shows decomposition and dynamics in corporate credit, with Q1 2015 reading so far pointing to a very robust demand for credit, and (even more importantly) credit driven by fixed investment. This should provide some support for Domestic Demand, albeit at the expense of re-leveraging the economy via bank channel (as opposed to leverage-neutral equity or non-bank credit, such as direct debt issuance):

Source: @FGoria

The importance of investment uplift is hard to underestimate in the case of the euro area, as the next chart clearly illustrates:

 Source: @FGoria

And this translates into depressed Domestic Demand (C+G+I bit of the national accounts):

Source: @FGoria

The gap between U.S. and the euro area is understandable. But the gap between Japan and the euro area is truly shocking, once one considers the state of the Japanese economy and the sheer magnitude of monetary stimulus that Japan had to deploy to push its Domestic Demand up from 2011.

In simple terms, the above charts show some revival in the euro area fortunes. In more complex terms, one has to wonder what this revival hinges on. In my opinion, we are seeing a bounce in credit creation that is not sustainable given the state of the global economy (with global trade flows remaining weak) and the conditions of households across the euro area (with domestic consumption and household investment still weak).