06/09/2011: Euro area 2Q 2011 GDP analysis

Euro area GDP increased by 0.2% qoq in 2Q 2011, same rate as GDP growth in EU27, according to second estimates released by Eurostat. 1Q 2011 respective growth rates were +0.8% in the euro area and +0.7% in the EU27. Year-on-year, GDP was up 1.6% in the euro area and 1.7% in EU27 in 2Q 2011, down from annual growth rates of 2.4% (both EU27 and euro area) for 1Q 2011.

US GDP also grew 0.2% qoq in 2Q 2011 up from +0.1% in 1Q 2011. Year-on-year US GDP expanded by 1.5% in 2Q 2011 and 2.2% in 1Q 2011. Japan's GDP contracted 0.3% in 2Q 2011, following -0.9% contraction in 1Q 2011. Year-on-year Japan's GDP fell 0.9% in 2Q 2011 and fell 0.7% in 1Q 2011.

Components of GDP:

• In 2Q 2011, household consumption fell 0.2% in the euro area and 0.1% in EU27. In 1Q 2011, the respective numbers were +0.2% and +0.0%.
• Gross fixed capital formation was up 0.2% in 2Q 2011 in the euro area (+1.8% in 1Q 2011) and up 0.4% in EU27 (+1.2% in 1Q 2011).
• Exports were up 1.0% (+2.0% in 1Q 2011) in the euro area and +0.6% (+2.2% in 1Q 2011) in the EU27 (after +2.0% and +2.2%). Imports rose by 0.5% in the euro area (+1.5% in 1Q 2011) and by 0.4% in the EU27 (+1.4% in 1Q 2011).
  

Table below summarizes some of the results.

In terms of Gross Value Added in q/q terms:

• Agriculture, hunting & fishing contracted by -0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and contracted -0.5% in EU27 (+0.9% in 1Q 2011)
• Industry, including energy expanded by 0.4% in 2Q 2011 (against +1.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.4% in 1Q 2011)
• Construction expanded by 0.0% in 2Q 2011 (against +2.5% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.5% in 1Q 2011)
• Trade, transport and communication services expanded by 0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and +0.4% in EU27 (+0.7% in 1Q 2011)
• Financial and business services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.2% in 1Q 2011)
• Other services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.2% in EU27 (+0.4% in 1Q 2011)
• Total gross value added expanded by 0.2% in 2Q 2011 (against +0.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.7% in 1Q 2011). In annualized terms, total GVA expanded 1.6% in 2Q 2011 (against 2.2% in 1Q 2011) in the euro area and by +1.7% (against 2.2%) in the EU27.
  

If you think we are in the age of austerity, think again. Government expenditure contributions to GDP, seasonally adjusted series, stood flat in 2Q 2011 at +0.0% growth (against +0.1% in 1Q 2011) in the euro area and in the EU27. Annualized rate of increase for Government spending was +0.1% in 2Q 2011 (+0.2% in 1Q 2011) in both the euro area and the EU27.

Now, on to forecasts forward. Chart below plots updated series for GDP growth against the leading economic activity indicator eurocoin. The series suggest that Euro area GDP for 3Q 2011 consistent with July-August readings of eurocoin is 0.3% (unadjusted for 2Q realization) and adjusting for 2Q 2011 realized rates of growth, the forecast is in the range of -0.1% to +0.1% GDP change.

Economics 26/02/2010: Euro area growth - leading indicators

Eurocoin - leading indicator for growth in the euro area is out today, so it is time to update the forecasts:
Last month, my forecast for Eurocoin indicator was to decline from 0.78 to 0.74 over February-March. The actual outrun was the decline to 0.77. So I stick to my forecast for further deterioration. All signs are pointing in the direction of the recovery being reversed - from exports to industrial production, to consumer confidence. And the global economy is starting to feel the pressures of fiscal unwinding. Ditto for the Euro area countries, where Greece and Spain are now at the forefront of fiscal pressures, while France and Germany are also feeling the heat.

This is consistent with low rates of growth, if not an outright double dip in economic activity. For now, I am still happy to stick to 0.6-0.7% annual growth rate for the Euro area as a whole for 2010.


On a related tone, but different geography, UK house prices are down 1% in February per Nationwide Building Society, reversing 9 consecutive months of growth. The end of stamp duty holiday is to be blamed, as well as poor weather. But in my view, the reversal is a sign that absent stimulus (tax or spending) there is simply no fundamentals-justified demand in the market.

Economics 25/02/2010: European economy and EU Commission

"Curiously enough, the only thing that went through the mind of the bowl of petunias as it fell was Oh no, not again. Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the Universe than we do now." The Hitchhiker's Guide to the Galaxy.

Indeed. Today's ECFIN weekly newsletter said it all. Titled cheerfully "ECFIN e-news 8 - EU interim economic forecast: fragile recovery has begun" it featured the revised interim forecast for EU economy from the EU Commission. It turns out, per forecast that (unbeknown to most of us in the real world) "the longest and deepest recession in EU history came to an end as real GDP in the EU started to grow again in the third quarter of 2009." This comes despite the fact that growth actually fell (and almost reached back into negative territory) in Q4 2009. Thus, in line with Commission optimism, Brussels now expects "seven largest EU Member States, ...to expand by an anaemic 0.7%".

"Weaker housing investments and continuing balance-sheet adjustment across sectors are expected to restrain EU growth in 2010. Unemployment remains on the rise and would thus dampen private consumption as well. Inflation projections remain largely unchanged at 1.4% and 1.1% in the EU and the euro area respectively".

I am not sure if this rather gloomy prospect matches the headline, but the same issue of the newsletter contains another piece titled "Rebound in economic sentiment slows in February". So can someone explain to me, please - is it that the recovery has begun, or is that the recovery is running out of steam? Clearly, I would tend to believe the second one, since it is based not on projections by the Commission (which famously predicted, and actually planned for overtaking the US in terms of productivity, economic growth and economic wellbeing by 2010, moved to 2012 and later to 2015), but on hard data.


In February 2010, the EU's Economic Sentiment Indicator (ESI) rose by statistically insignificant 0.2% to a still-recessionary 97.4. ESI was down to 95.9 (-0.1% on January) in the euro area. The latter correction follows an unterrupted climb up over 10 months, suggesting that the growth momentum might have been exhausted.

February reading of the Business Climate Indicator (BCI) for the euro area rose for the eleventh month in a row. Happy times? Not really - the relatively low level of the indicator suggests that year-on-year industrial production in January 2010 was still contracting, not expanding.

Drilling deeper into data: all sub-components of the confidence indicators remained below growth levels in January and February 2010. And one - retail trade confidence indicator actually reversed back into contraction territory after December when it crossed over the growth line. Employment conditions in services have turned negative again in January, as did construction confidence indicator.

Which part is showing that the recovery has begun, I wonder?

May be, just may be - the business climate is improving somehow? Well, not really:
EU Commission own BCI is still stuck at -1 - below expansion levels.

Consumers picking up, then? Nope: "In February 2010, the DG ECFIN flash estimate1 of the consumer confidence indicator2 for the euro area signals the first fall after 10 months of improvement (down to -17.4 from -15.8 in January). Confidence declined also among EU consumers, but to a lesser extent (down to -13.6 from -13.1 in January)."


So: consumers are down, producers are in the red and overall economic indicators are turning South again... yet 'recovery has begun'.

A bowl of petunias signalling the nature of the Universe from its Brussels windowsill.

Economics 11/11/2009: Lagging indicators and leading signals

McKinsey have published their review of the global economic conditions survey for November. Good read as always (here). Few snapshots of main results first:

"For the first time in a year, a majority of respondents—51 percent—say economic conditions
in their countries are better now than they were in September 2008.... [but] only 19 percent say an upturn has begun. This figure rises to a remarkable 33 percent, however, among respondents in Asia’s developed countries."

Cool, but... 49% state that economy either did not improve or worsened relative to September 2008. 64% expect their economy to be better than in September 2008 by the end of Q1 2010 (up from 61% reading in September 2009). So almost 50% believe that their economy is no better now than at the beginning of this recession (full 4 quarters ago) and some 36% believe that it won't come out of the recession even after 6 quarters of straight contraction.

"A larger share of executives also expects the good news to continue, with 47 percent expecting GDP growth to return to pre–September 2008 levels in 2010 or 2011, compared with 40 percent
six weeks ago." Key point here is that this is an improvement in the indicator, not the actual growth signal (which would require a reading above 50%).

"Although the global news is good, there are marked regional differences; executives in the developed countries of Asia are generally the most optimistic, and those in Europe are the least." This tell us what we all knew - European companies are suffering still through the remnants of old pains, banks are yet to suffer most of their pains, and households - well, households in Europe are in a perpetual pain given sticky unemployment and slow consumption growth and household investment. Thus: "Everywhere except Europe, more executives describe the economy over the next several months as “battered but resilient” than say it is frozen, stalled, or regenerated." (see pic below)So much for the European Century story.

But what are the causes of this pessimism in Europe / optimism in Asia scenario? One can speculate:

For example, despite all the crises, all public spending and monetary easing, business leaders worldwide still see Government regulation as one of top three problems (chart below).
What this tells me is that structural issues that have precipitated the current recession have not been addressed. Can one be out of crisis when the causes of crisis in the first place remain intact?

Another interesting issue - future profitability.
I am not sure how you feel about this, but it makes me very uncomfortable for several reasons:

1. Again, Europe acts as a global drag (just as it was before this crisis), and this is before the hefty tax increases necessary for underwriting recent profligate spending are factored in;
   
2. US - think of this as the indicator of future equity values and you can see just how massively is overbought the US equity market;
3. Overall, all countries which used large state reserves of liquidity to finance current crisis measures (India, China, Asia-Pacific) are on the tearing path for profitability relative to Europe and North America.
   

Now take the outlook for 12 months ahead:
Let's look at this closer:

1. Low customer demand for our products or services: the main driver for all types of firms - with profits at risk (66%), static (46%) and expected to rise (41%). Just think what this means for countries that like Ireland are staring at higher taxes into foreseeable future and destroyed households' net worth;
2. Loss of business to low cost competitors: do I need to say anything here in terms of threats to Ireland Inc? Well, let me put 5 cents in - think of wages path in this economy. While private sector did some cutting (and hardly enough to reach long run equilibrium wages) public sector did none and is unlikely to do much (the latest plan for 6.85% cuts is (a) insufficient, and (b) won't happen in real terms). So overall level of wages in Ireland is really stuck somewhere around 2006 levels.
3. Competition from new entrants is the worry for leaders in profitability, but it will also impact the developed world economies. Why? Because to counter such entry you need new investment and to have new investment you need capital. Currently, capital is mopped up by Governments financing their deficits through Central Banks' issuance of new cash. Later it will be cleaned out by higher taxes. Not a good prospect going forward.
4. Low levels of innovation - again go back to capital in (3) and the same investment cycle restart bottlenecks. Ditto for Inability to get funding - Number 7 on the list.
   

We can go on, but you can see where all this is leading us -

• our current fiscal and monetary policies will be haunting us down the line into the so-called recovery,
  
• while more frugal Governments in China, India (you get the irony here?), Asia and so on, having stayed pre-crisis off the path of unsustainable increases in public spending at rates much faster than growth in their real economies, were able to absorb the crisis with lesser burden of debts.

This is where optimism is now resting globally. We are, therefore, back to the paradigm of "Smaller Governments, Happier Economies"... and healthier households, one might add?

Economics 25/09/2009: Euroarea improving growth

Eurocoin is out for August and it is showing a positive reading for the first time in 15 months:
So it is time to upgrade a notch my forecasts.

Interesting detail - Eurocoin turn around is under-pinned by rising (though still negative) trend in industrial production, business surveys (both PMI and EU Commission) still staying on the negative side, with Commission survey being particularly gloomy. Consumer surveys are still in dire straits, with exception of Italy (happy summer, folks) and Spain, though Spain is now looking poised for a double-dip consumer recession. Stock prices still are posting poor performance except for Spain and to a lesser extent Germany. Exports are at zero growth rates across the Eurozone, but are modestly positive in Germany, France and Spain.

Net result - a mixed bag of continued weaknesses (abating) and some strengths (very modest).