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: Exploding errors: COVID19 and VUCA world of economic growth forecasts

 

Just as I covered the latest changes in Eurozone growth indicators (https://trueeconomics.blogspot.com/2020/09/17920-eurocoin-leading-growth-indicator.html), it is worth noting the absolutely massive explosion in forecast errors triggered by the VUCA environment around COVID19 pandemic.

My past and current students know that I am a big fan of looking at risk analysis frameworks from the point of view of their incompleteness, as they exclude environments of deeper uncertainty, complexity and ambiguity in which we live in the real world. Well, here is a good illustration:

You can see an absolute explosion in the error term for growth forecasts vs actual outrun in the three quarters of 2020 so far. The errors are off-the-scale compared to what we witnessed in prior recessions/crises. 

This highlights the fact that during periods of elevated deeper uncertainty, any and all forecasting models run into the technical problem of risk (probabilities and impact assessments) not being representative of the true underlying environment with which we are forced to work.  

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).

4/7/20: ifo Institute Eurozone Growth Outlook

Germany's ifo Institute issued a new growth outlook for Eurozone economy:

• "Overall, the eurozone economy is likely to see a sharp recession in the first half of 2020. 
• "GDP already contracted in Q1 by 3.6%. 
• "In Q2, the decline of GDP is forecast to be historic (-12.3%). 
• "On the other hand, the recovery is likely to be quick supported by massive stimuli in some eurozone countries with GDP growth reaching +8.3% in Q3 and +2.8% in Q4 2020. 
• "Yet, the GDP level at the end of last year will not be reached by the end of this year."

In 1Q 2020:

• GDP fell by 3.6%. 
• "The greatest negative contribution came from private consumption. 
• "... firms hold back their investments due to liquidity issues and uncertainty on future developments. 
• "... external demand was weak and caused exports to plunge. 
• "Economic activity went down by 5.3% (Italy), 5.3% (France) and 5.2% (Spain). Germany was affected less severely with GDP contracting by 2.2%. 

Dynamics into June:

• "The European Commission’s economic sentiment indicator fell from 94 points in March further to 65 points in April, rebounded somewhat in May and increased strongly in June up to almost 76 points."
• "The IHS Markit composite purchasing manager’s index reflects a similar development as it dropped from 30 points in March to as low as 14 points in April. In May it recovered to 32 and in June again up to 48 points." Note: Markit PMIs below 50 indicate continued, compounded contraction, as a rise in index from 32 to 48 between May and June means that contraction was weaker in June.

Summary of forecasts:

Headwinds to the above forecast:

• "Currently, economic projections are made in face of high epidemiological uncertainty. ... This forecast assumes that a second COVID-19 wave will be prevented. The occurrence of a second wave, with containment measures to being introduced again, is thus a downward risk for our forecast. 
• "Another uncertainty for this forecast is that we are still learning about consumer reactions to containment measures and it is still unclear, how quickly consumption behavior will normalize.
• "In addition, the liquidity situation of many companies is deteriorating rapidly. An unexpectedly high number of insolvencies might disturb the economic recovery and cause bigger than expected problems for the banking sector. Currently, in many countries new regulations for postponing insolvencies were introduced, which means that these will become evident later than usual, probably not before autumn. 
• "Also, numerous private households might run into solvency issues due to lower income and a worsening labour market situation."

In contrast, here are the IMF latest forecasts for the euro area:

Eurocoin leading growth indicator: https://trueeconomics.blogspot.com/2020/06/29620-eurocoin-growth-indicator-june.html.

Markit PMIs:

3/7/20: ECB Jumping the Proverbial Shark?

ECB's money-printing press has been running overtime these weeks. So let's put the Euro area central banks' monetary policy shenanigans into perspective, comparing them to the Global Financial Crisis (GFC) related measures, the Euro area sovereign debt crisis and the subsequent painful recovery:

Good thing: ECB has deployed COVID19 response at scale and fast. Bad thing: it is highly uncertain how much growth all of this activism is going to sustain. From 2000 through 1Q 2020, there is zero (statistically) relationship between current GDP growth (nominal) and ECB assets accumulation in the same year and in prior year:

Even ignoring statistical significance, the relationship itself is not positive, especially in the lagged data. In other words, there is absolutely no evidence of causality from ECB asset purchases to higher economic growth. While reasons for this results are complex (and not really a matter for this post), there are some serious questions to be asked as to how much tangible growth is being sustained by the Central Bank's activism. On the other side of the same argument, if we assume that the ECB purchases of assets are effective at sustaining growth in the Euro area economy, then we must have some serious questions as to what the Euro area economy is capable of producing in terms of GDP growth without such interventions.

In simple terms: we are damned if we do, and damned if we do not:

• Either monetary activism is not effective at sustaining growth, or
• If monetary activism is effective, then the state of the economic institutions overall is so dire, it remains comatose even with extraordinary supports from Frankfurt.

Neither is a pleasant conclusion. And there is not a third alternative.

Just in case you need a reality check on how poor Euro area's growth has been, here is a summary:

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':

26/6/20: Longer-Term Impact of COVID19 on Growth

IMF published updated forecasts this week, and here the summary:

IMF has stopped doing 5 year forecasts this April, due to uncertainty induced by the COVID19 pandemic. 

Looking at the longer run effects of the pandemic, based on October 2019 (pre-Covid19 trends), and earlier growth trend before the Global Financial Crisis (GFC) puts COVID19 pandemic into historical perspective:

The differences between the above trend lines are telling. 

Globally, GFC resulted in a permanent loss of real income that amounts to a cumulative decline of ca 17 percent over 17 years (2008-2024). COVID19 is forecast to result in additional permanent loss of 3.2 percent within 5 years 2020-2024.

Eurozone has been hit even harder. GFC resulted in a permanent loss of real income to the tune of 12.8 percent while COVID19 is currently set to yield a permanent additional loss of income to the tune of 7.1 percent over less than 1/3rd of the post-GFC trend line duration. 

The numbers above are rather 'indicative', in so far as any and all forecasts past 2020 are perilous at the very best. But you get the picture: we are witnessing two consecutive events that result in permanent deviation of economic activity away from the prior trends. And both events are sharp. Even with a 'V-shaped' recovery, we are in trouble (because a V-shaped recovery taking us into mid-2020 means recovering end-of-2019 levels of economic activity, while losing 1.5-2 years of growth momentum (recall, economy was slowing down in H2 2019 on its own, without COVID19). 

As we say... [ok, well, may we do not say it often, but...] this picture is f*ugly... 

1/6/20: COVID19 and European Banking

McKinsey research note on European banks' potential losses due to COVID19 is quite on the money:

With more than 1/3rd of European executives expecting "a muted recovery that would lead to sharp drops in banks’ revenue, a squeeze on their capital, and a hit on return on equity", European banks can expect revenues to drop by 40 percent plus, and ROE drop 11 percentage points in 2021.

And the problems are strategic. COVID19 is actually accelerating changes in customers' demand for services. "McKinsey’s European customer survey shows how customer behavior and needs have changed over the past month: digital engagement levels have climbed up to 20 percent, the use of cash has halved, 30 to 40 percent of customers have expressed a greater need for advice, while 20 to 40 percent want products to help them through the crisis.4 Pension shortfalls are a particular challenge with those close to retirement facing a very immediate problem."

Alas, European banks, especially those operating in the 2008-2014 crises-hit economies, such as Ireland, Italy, Spain and Portugal, are utterly unprepared for these shifting trends. I wrote about these problems in a series of two article for The Currency here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks and https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks.

27/5/20: Germany: Employment and Business Activity Show Gentle Uptick in May

Germany employment conditions improved slightly in May, based on ifo Institute survey:

The gains are in line with the Business Activity survey results:

However, both business expectations (major driver of improvement) and current conditions (remaining deeply under water and actually still deteriorating in May) are well below 2009 crisis reading:

19/5/20: German Hawks vs ECB Doves?

My article for The Currency on the German Constitutional Court ruling regarding ECB's PSPP program: https://www.thecurrency.news/articles/17028/german-courts-are-fighting-with-the-ecb-what-does-it-mean-for-ireland.

6/5/20: Eurozone Composite PMI: Covid Horror Show

Final Eurozone Composite Output Index came in at 13.6 (Flash: 13.5, against March Final: 29.7). March was bad. April is worse. Final Eurozone Services Business Activity Index was at 12.0 (Flash: 11.7, March Final: 26.4), final Manufacturing PMI covered here: https://trueeconomics.blogspot.com/2020/05/4520-eurozone-manufacturing-pmis-crater.html.

1Q 2020 implied decline in Euro area GDP is at around 3.5%. 2Q 2020 start is now worse than 1Q 2020.

4/5/20: Eurozone Manufacturing PMIs Crater to Historic Lows

I do not commonly cover Eurozone PMIs, but April read-out is shocking. Truly, abysmally, shocking.

From Markit release:

• Final Eurozone Manufacturing PMI at 33.4 in April (Flash: 33.6, March Final: 44.5), so down 11.1 points m/m
• March was bad - at 44.5 well below the zero growth line of 50.0. April came in woefully bad. 
• Confidence sinks to record low and job losses mount
• This was "the lowest ever recorded by the series (which began in June 1997), surpassing readings seen during the depths of the global financial crisis". 

I have covered BRICS and Global Manufacturing PMIs for April here: https://trueeconomics.blogspot.com/2020/05/4520-bric-manufacturing-pmi-april.html. 

24/4/20: "Sentiment at German companies is catastrophic" ifo Institute

ifo Institute's German business sentiment barometer out today. Direct quote: "Sentiment at German companies is catastrophic. The ifo Business Climate Index crashed from 85.9 points in March to 74.3 points in April. This is the lowest value ever recorded, and never before has the index fallen so drastically. This is primarily due to the massive deterioration in the current\ situation. Companies have never been so pessimistic about the coming months. The coronavirus crisis is striking the German economy with full fury."

Here's the bigger kicker: Expectations plunged more over the last 3 months than current situation assessments, down from 93.8 in December 2019 to 69.4 in April 2020, as compared to the current situation index drop from 98.8 to 79.5 over the same period.

Two key sectors: woeful dynamics

22/4/20: Eurozone Growth Forecasts

April data on analysts and institutional forecasts for Eurozone growth over 22 sources, including a range of investment banks and international institutions are summarized here:

So far, estimated 2020-2021 economic fallout from COVID19 pandemic is in the range of 3.48-3.87 percentage points compared to January forecasts. In other words, markets expectations are currently at 2021 full year real GDP being 3.48-3.97 percent below the market consensus forecast back in January. Markets are now pricing in cumulative 2020-2021 decline in GDP of 1.22-1.70 percentage points on 2019 levels. Put differently, by the end of 2021, investment banks and international institutions are, on average, expecting the Eurozone economy to be 1.22-1.7 percentage points worse than at the end of 2019.

Should 2019 growth rate prevail in 2022, by the end of 2022, based on the above forecasts, Eurozone economy will still be worse off than at the end of 2019.

These expectations are not consistent with a V-shaped recovery expectations by the majority of the European political leaders and media pundits.

9/4/20: Ifo Eurozone Forecast Q1-Q3 2020: Covid19 Impacts

Germany's ifo Institute joint forecasts for Eurozone growth are out today. Bleak reading. The forecasts below assume that Covid-19 restrictions will be gradually lifted over the summer 2020.

Seasonally and working-day adjusted GDP growth:

From ifo forecast: "The economy in the euro area is expected to slide into a deep recession in the first half of 2020:

• GDP growth is forecast to be -2% in Q1 and -10% in Q2, followed by a recovery in Q3 with +8%. 
• Due to the lack of comparable events in the last decades and the unpredictable course of the pandemic, these estimates are subject to substantial uncertainty."
• "Gross fixed capital formation is also certain to decline, with -2% in Q1 and -10% in Q2, due to supply disruptions, planning uncertainty and a preference for liquidity."
• "Foreign demand is likely to contribute negatively to growth, as a result of the euro area’s exposure to recessive international trade and a struggling global economy."

Inflation environment:

Headwinds and risks: 

• "A more unfavorable course of the pandemic would require longer and possibly stricter containment measures...
• "Despite massive liquidity provision by governments and central banks, a prolonged downturn would then lead to liquidity strains in the economy. 
• Increased debt levels associated with low income flows and asset devaluations are likely to lead to solvency issues for thinly capitalized corporations and private households.
• An ensuing rise in loan defaults could in turn lead to problems in the banking sector." 
• "A resurgence of the European debt crisis on a large scale thus constitutes a non-negligible risk to the forecast."

7/1/20: Euromoney on 2020 Risk Outlook for the Eurozone

Euromoney on Eurozone risks into 2020, with some comments from me: https://www.euromoney.com/article/b1js9nd289vtm9/country-risk-2020-vision-brings-the-eurozones-risks-into-focus. 

10/12/19: Irish Banks: Part 2

Continuing with the coverage of the Irish banks, in the second article for The Currency, available here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks, I cover the assets side of the banks' balancesheets.

The article argues that "The banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what does not make sense to investors does not make sense to society at large." In other words, strategic errors that have been forced onto the banks by deleveraging post-crisis have resulted in the Irish banks becoming a de facto peripheral play within the Euro area financial system, making them unattractive - from growth potential - to international markets.

The key conclusions are: "From investors’ perspective, neither of these parts of the Irish lenders’ story makes much sense as a long term investment proposition. From the Irish economy’s point of view, the banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what doesn’t make sense to investors doesn’t make sense to the society at large."

10/12/19: Irish Banks: Part 1

Returning back to the blog after a break, some updates on recent published work.

In the first article on Irish banking for The Currency, titled "Culture wars and poor financial performance: examining Ireland’s dysfunctional, beleaguered banking system", I argued that "The financial performance of the Irish banks has been abysmal. Not for the lack of profit margins, but due to strategic decisions to withdraw from lending in the potential growth segments of the domestic and European economies." The article shows the funding side of the Irish banks and the explicit subsidy they receive from the ECB through monetary easing policies - a subsidy not passed to the end credit users.

In simple terms, high profit margins are underpinned - in Irish banks case - by low cost of funding.

Conclusions: "The implications of the lower cost of banks equity, interbank loans, as well as deposits for the Irish banking sector are clear cut: since the start of the economic recovery, Irish banks have enjoyed an effectively free ride through the funding markets courtesy of the ECB and the blind eye of the Irish consumer protection regulators. Yet, despite sky-high profit margins extracted by the banks from the households and businesses, the Irish banking sector remains the weakest link in the entire Eurozone’s financial services sector, save for Greece and Cyprus. If the funding side of the equation is not the culprit for this woeful record of recovery, the other two sides of the banking business, namely assets and regulatory costs, must be."

Read the full article here: https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks. 

29/9/19: Divided ECB

Divided they stand...

Source: https://www.bloomberg.com/news/articles/2019-09-29/lagarde-inherits-ecb-tinged-by-bitterness-of-draghi-stimulus

The ECB is more divided than ever on the 'new' direction of QE policies announced earlier this month, as its severely restricted 'political mandate' comes hard against the reality of VUCA environment the euro area is facing, with:

1.  Reduced forward growth forecasts (net positive uncertainty factor for QE)
2. Anaemic inflation expectations (net positive risk factor for QE), but reduced expectations as to the effectiveness of the QE measures in their ability to lift these expectations (net negative uncertainty factor)
3. Low unemployment and long duration of the current recovery period (net negative uncertainty factor for QE)
4. Relative strength of the euro, as per chart below, going into QE (net positive risk factor for QE)
5. Related to (5), deteriorating global growth and trade outlooks, with the euro area being a beneficiary of the Trump Trade Wars so far (ambiguous support for QE)
6. Expectations concerning the Fed, Bank of Japan, Bank of England etc policy directions (a complexity factor in favour of QE), and
7. Expectations concerning the potential impact of Brexit on euro area economy (another complexity factor supporting QE).

Here is a chart showing exchange rate evolution for the euro area, and key QE programs timings (higher values denote stronger euro):

Meanwhile, for the measures of monetary policy effectiveness (lack thereof) see upcoming analysis of the forward forecasts for euro area growth on this blog in relation to Eurocoin data.

26/8/19: ifo Survey Shows Increasing Business Concerns in Germany

Ifo Institute's Business Climate indicator for Germany is falling off the cliff:

In simple terms, current business situation assessment has now fallen to its lowest reading since March 2015, forward business expectations are the lowest since June 2009, and overall Business Climate index is at its lowest reading since November 2012.

August 2019 marks fifth consecutive month of decline in the overall Business Climate index, current Business Situation index, and Business Expectations index.

Overall, the indicator is still pointing to a downturn in growth, as opposed to a recession:

The Dispersion Index - a measure of the degree of businesses-perceived uncertainty about the future direction of the economy - has now risen to the levels last seen in April 2010.