3/10/20: Eurocoin Leading Growth Indicator 3Q 2020

 

Eurocoin, a leading growth indicator for the euro area published by CEPR and Banca d'Italia posted another negative (recessionary) reading in September (-0.31) after marking peak growth contraction of COVID19 pandemic period in August (-0.64). This puts Eurocoin in negative territory for the 6th consecutive month since March 2020. 

Current forecast for 3Q 2020 growth remains at -3.5 percent q/q. Deflationary pressures are also building up. Euro area's 12 months average HICP forecast for 3Q 2020 stands at around 0.6 to 0.5.

As the chart above shows, Eurozone remains deeply in a recessionary territory based on Eurocoin forecasts and inflation dynamics. Longer term growth averages are shown in the chart below:

Overall, as noted above, one must take all leading indicators and forecasts with some serious warnings attached: we are in an environment where past models for forecasting economic aggregates become severely challenged.

17/9/20: Eurocoin Leading Growth Indicator 3Q 2020

 

Eurocoin, CEPR & Banca d'Italia leading growth indicator for Euro Area economy is pointing to renewed weaknesses in the Eurozone economy in August, falling to its lowest levels in the COVID19 pandemic period:

As the chart above shows, Eurocoin fell from -0.5 in July to -0.64 in August, its lowest reading since June 2009. The forecast September indicator is at -0.30. Through August, we now have five consecutive months of sub-zero readings. Based on July-August data and September forecast, we are looking at a GDP contraction of 3.5 percentage points in 3Q 2020. This is mapped out in the chart below:

As the chart above shows, average annual growth rate in the Eurozone for 2020 is now sitting at -6,33 percent, far worse than the previous low of -0.575 in 2009. In quarterly readings, we now have two actual and one forecast quarters of 2020 all performing worse than the peak of the Global Financial Crisis / Great Recession contraction (see green entry in the chart above).

As before the COVID19 crisis, Eeurozone economy is performing woefully. On no time horizon did Euro area manage to achieve average annual growth of 2% (chart above).

29/6/20: Eurocoin Growth Indicator June 2020

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

Currently, we have two data points to deal with:

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

Here are the charts:

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

10/7/19: Financialising Stagnant Growth: From Japanified Economy to Christine Lagarde

Monetary policy since the GFC of 2008 has been characterised by the near-zero (and even negative) policy rates, negative bank rates, negative Government debt yields and rampant asset price inflation. The result has been zombification of the advanced economies.

Here is the latest advanced estimate of the Eurozone real GDP growth based on the CEPR/Banca d'Italia Eurocoin indicator:

Current forecast for 2Q 2019 growth in the Eurozone, based on Eurocoin indicator is for 0.17% q/q expansion. June Eurocoin sits at 0.14%, the lowest since September 2013. The growth rate forecast has now been sub-0.25% (below 1% annual) in five months (through June 2019) and counting. Meanwhile, the link between growth and inflation has been weakening, as shown in the chart below:

Both, from the point of view of view of the current data relative to 1Q 2019 and to 2Q 2018 and to Q1 2018, growth rates are shrinking, per above. The ECB, however, remains stuck in the proverbial hard corner (chart next):

 Five years into zero policy rates, inflation is gradually creeping up (chart above), but growth is nowhere to be seen (chart next):

Worse, tangible fundamentals (captured by the models, like Eurocoin) of economic growth are becoming less and less consistent with actual growth outruns - a feature of the economy that is becoming dependent on things other than real investment and real demand for generating expansion in GDP. Both, the chart above and the chart below, highlight this troubling fact.

All of this suggests that we are in the period in economic development that is fully consistent with the secular stagnation thesis: traditional tools of monetary and fiscal policies are no longer sufficient in generating real economic growth. Instead, these tools help sustain economies overloaded with debt. It is an extend-and-pretend model of economic development: as long as corporates and households can be supported in carrying existent debt loads through monetary accommodation, the economy remains afloat (no recession, nor crisis blowout), but the levels of debt are so prohibitively high that no new debt can be accumulated to generate economic expansion.

The markets know as much. Investors know that zombie loans (loans with no capacity of servicing them should interest rates rise) mean zombie banks. Zombie banks mean zombie new borrowing markets. Zombie new borrowing markets mean zombie real investment by households and companies. Zombie investment means zombie demand. Zombie demand means deflationary supply. Rinse and repeat.

This knowledge in the markets is tangible. It takes a change in investors expectations (as in recent changes in outlook toward the reversal of the monetary tightening in the U.S. and Europe) to reprice assets. No actual value added growth enters the equation. Assets are no longer being priced on their productive capacity. And the markets are now fully finacialised. Which is to say, they are now fully monetary policy-driven.

Enter Christine Lagarde, the new head of the ECB. Lagarde's appointment is hardly an accident or a politically correct nod to women in leadership. It is the only logical choice of the financialised zombie economics of the monetary policy. To re-start borrowing or debt cycle, the EU is hoping for mutualisation of the sovereign debt markets. In other words, it is hoping to leverage the only unencumbered asset the EU still has: surplus countries' bonds. Lagarde's job at the ECB will be to run the creation of the eurobonds, bonds that will proportionally link euro area members' bonds into a single product to be monetised by the ECB as a support for market pricing. There is probably EUR 2-3 trillion worth of the international and monetary demand for these, opening up the room for more borrowing and more fiscal spending.

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

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

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

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

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

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

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

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

17/1/19: Eurocoin December 2018 Reading Indicates a Structural Problem in the Euro Area Economy

December 2018 reading for Eurocoin, a lead growth indicator for euro area posted a second consecutive monthly decline, falling from 0.47 in November to 0.42 in December. December reading now puts Eurocoin at its lowest levels since October 2016.

Charts below show dynamics of Eurocoin, set against actual and forecast growth rates in the euro area GDP and  inflation:

Per last chart above, the pick up in inflation, measured by the ECB’s target rate of HICP, from 1.4% at the end of 3Q 2017 to 1.7% in 3Q 2018 has been associated with decreasing growth momentum (Eurocoin falling from 0.67 q/q to 0.48, and growth falling from the recorded 0.7% q/q in 3Q 2017 to 0.2% q/q in 3Q 2018).

With this significant downward pressure on growth happening even before any material monetary tightening by the ECB, Which suggests that euro area growth problem is structural, rather than policy-induced. While QE did boost growth from the crisis period-lows, it failed to provide a sustainable momentum for significantly expanding potential growth. Thus, even a gradual slowdown in monetary easing has been associated with a combination of subdued, but accelerating inflation and falling growth.

21/6/18: Weaker growth signals for the euro area

I have not updated Eurocoin dynamics and euro area growth forecasts for some time now, so here is the latests, from May data:

• Eurocoin, leading growth indicator for the euro area, has fallen significantly from the local high of 0.96 in February (the highest growth forecast since June 2000) to 0.89 in March, followed by continued decline to 0.76 for April and 0.55 in May
• May reading is the lowest since December 2016
• Growth forecasts consistent with Eurocoin dynamics indicate that, assuming revised 1Q growth remains at 0.4 percent, 2Q 2018 growth is likely to come in somewhere in the range of 0.35-0.55 percent

Chart below shows improving outlook for HICP (inflation) over the last 12 months through May 2018, just as the economy beginning to slow down:

On balance, we now have three consecutive months of declining Eurocoin-implied forecasts for euro area growth. It will be interesting to see eurocoin print for June, coming up in about a week, as well as July (coming out prior to the Eurostat growth estimates for 2Q 2018).

29/9/17: Eurocoin: Eurozone growth is still on the upside trend

The latest data from Eurocoin - an early growth indicator published by Banca d’Italia and CEPR - shows robust continued growth dynamics for the common currency GDP through August-September 2017. Rising from 0.67 in August to 0.71 in September, Eurocoin posted the highest reading since March 2017 and matched the 3Q 2017 GDP growth projection of 0,67.

The charts below show both the trends in Eurocoin and underlying GDP growth, as well as key policy constraints for the monetary policy forward.

The last chart above shows significant gains in both growth and inflation over the last 12 months, with the euro area economy moving closer to the ECB target zone for higher rates. In fact, current state of unemployment and growth suggests policy rates at around 2.4-3 percent, while inflation is implying ECB rate in the regions of 1.25-1.5 percent.

In summary, euro area recovery continues at relative strength, with growth trending above the post-crisis period average since January 2017, and rising. Inflationary expectations are starting to edge toward the ECB target / tolerance zone, so October ECB meeting should be critical. Signals so far suggests that the ECB will outline core modalities of monetary policy normalisation, which will be further expanded upon before the end of 2017, setting the stage for QE unwinding and some cautious policy rates uplift from the start of 2018.

23/5/17: Eurocoin: Growth Momentum Slips Marginally in April

A quick update to the old-running series: Eurocoin, the leading economic growth indicator for the euro area, published by CEPR and Banca d'Italia posted another (second in a row) moderation, falling from 0.7 in March 2017 to 0.67 in April. The indicator remains at the upper range of growth for the current upside cycle, and within lower range of growth compared to previous upside cycle:

On the drivers side, stock markets valuations helped to push growth forecast higher, while a slowdown in industrial activity pushed growth expectations lower. In other words, absent the financial assets impact, growth indicator would be much lower.

While euro area overall HICP was at 1.9% in April (bang at the upper range of ECB's target), 12mo trailing average inflation rose to 0.8% from 0.7% in March. Which means the ECB has moved out of the 'policy corner' and is now positioned to start unwinding assets purchasing programs. It will proceed gradually and at a later date, due to political, not monetary reasons.

Meanwhile, although Eurocoin averaged 0.72 in 1Q 2017, actual growth came in at (first estimate) 0.5%. This marks the largest gap between Eurocoin and actual growth since 2Q 2014. This is hardly surprising. In general, the gap between leading indicator-implied growth forecast and actual growth outrun is usually wider during periods of elevated uncertainty about the economy, and especially when financial economy takes over as a major contributor to overall economic growth outlook.

11/4/17: Euro Area Growth Conditions Remain Robust in 1Q 17

Eurocoin, Banca d'Italia and CEPR's leading indicator of economic growth in the euro area has slipped in March to 0.72 from 0.75 in February, with indicator remaining at its second highest reading since 2Q 2010.

Combined 1Q 2017 growth indictor is now signalling approximately 0.7% quarterly GDP growth rates, carrying the breakout momentum from previous quarters (see chart above). This brings most recent growth forecast over the 2001-2007 average.

From growth dynamics perspective, the pressure is now on ECB to start tightening monetary policy:

Inflationary pressures are still relatively moderate, but rising:

25/2/17: Eurocoin February 2017: Another Acceleration in Growth

A quick update on Eurocoin, the lead indicator for economic growth in the Euro area. In February, Eurocoin rose from 0.68 in January to 0.75 - hitting the highest level in 83 months and marking 10th consecutive monthly rise. The index has been now in a statistically positive growth territory every month since March 2015.

Implied 1Q 2017 GDP growth, as signalled by Eurocoin indicator is now at around 0.7 percent, which, if confirmed, will be the fastest pace of economic expansion since 1Q 2011.

The above chart shows that there is now a mounting pressure on the ECB to taper off its QE programme.

27/1/17: Eurocoin Signals Accelerating Growth in January

Eurocoin, leading growth indicator for euro area growth published by Banca d'Italia and CEPR has risen to 0.69 in January 2017 from 0.59 in December 2016, signalling stronger growth conditions in the common currency block. This is the strongest reading for the indicator since March 2010 and comes on foot of some firming up in inflation.

Two charts to illustrate the trends:

Eurocoin has been signalling statistically positive growth since March 2015 and has been exhibiting strong upward trend since the start of 2Q 2016. The latest rise in the indicator was down to improved consumer and business confidence, as well as higher inflationary pressures. Although un-mentioned by CEPR, higher stock markets valuations also helped.

5/5/16: Eurocoin signals significant euro area growth slowdown in April

Updating time series analysis for Eurocoin, a leading growth indicator for the Euro area economy issued by CEPR and Banca d’Italia.

In April 2016, Eurocoin reading stood at 0.28, down from 0.34 in March 2016 and marking the lowest reading since March 2015. In other words, leading growth indicator for the euro area is now at its lowest reading in 12 months. Given previous 1Q preliminary growth estimate at 0.6% (q/q growth) from the Eurostat, current level of Eurocoin suggest quarterly growth slowdown to around 0.4%. Since April 2013 (when Eurocoin turned positive for the first time in the recovery cycle), the indicator has been averaging 0.319, which implies April reading is substantially lower than average growth activity over the last 36 months.

Charts:

Charts below highlight impotency of the ECB's traditional policy framework:

4/1/16: Eurocoin signals flat 4Q 2015 growth in the Euro area

Euro area leading growth indicator Eurocoin, released by Banca d'Italia and CEPR, posted a reading of 0.45 in December, marking a rise from 0.37 in November and signalling some improvement in growth conditions. However, on 3mo average basis, 4Q 2015 reading came in at 0.393 against 3Q 2015 reading of 0.402. Given 3Q reading coincided with preliminary real GDP expansion of 0.3 percent, this suggests that actual growth did not tick up significantly from 3Q.

Overall, from both growth and inflation points of view, the ECB policies remain ineffective:

Overall, per Eurocoin release, the upside to the indicator in December was provided by  household consumption, labour market performance and the upturn in industrial production. In other words, we have domestic demand-driven growth, which is a net positive compared to the first half of 2015 when growth still relied predominantly on financial markets valuations and exports.

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.

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).