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

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.

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.

29/6/18: Can, Foot, Road: EU 'Agreement' on Migration Crisis

The EU27 have a new 'deal'. This time, on revamping the block's migration strategies in the face of continued relentless wave of refugees fleeing to Europe from Syria and North Africa, propelled or aided to take desperate actions by the regime change doctrine of Washington. Migration numbers are down roughly 90 percent from their peak in 2015, and fell 45 percent y/y in the first half of 2018. But, voter revolt against the system that is perceived as "open borders" is still fuelling rise in political opportunism and extremism across Europe. The latest catalysts for the negotiations have been: (1) the rise of anti-immigrant parties in Germany that now threatens the uneasy governing coalition in Berlin, and (2) the arrival to power of the new, anti-immigration coalition in Italy. To be more precise, Italian Government has been asking for the EU to take "concrete steps" to share burden of accepting refugees with Italy for some time now. Other  catalysts have been governments of Hungary and the Czech Republic, where current political leadership has been opposing the EU policy of imposing automatic quotas for accepting migrants.

Earlier today, following almost nine hours of negotiations, the EU27 finally hammered out a compromise deal, immediately labeled in the media as 'political fudge' - something the EU has been very skilled at achieving for a good part of the last 20 years.

To prevent Italy from exercising a veto on the deal, the EU agreed to redistribute arriving migrants away from the country of their original landing to "control centres" spread across the EU. Centres locations are to be specified later. "Control centres", funded out of unspecified funds, but presumably payable by the joint resources of the EU, will de facto trade 'local jobs and euros' for communities accepting large scale migrants detention centres. This model works well with military bases and jails, and can be attractive to some poorer Eastern European countries, as well as countries like Greece and Italy. The key to this is that the detention centres will only be located in countries that volunteer to accept them. In simple terms, immigration policy is now a part of fiscal redistribution scheme, just what Italy wanted.

"Control centres" will function as a triage point, with “rapid and secure processing” separating economic migrants from those with a potentially legitimate claim to the asylum. Thereafter, successfully pre-screened asylum seekers will be distributed under the principle of solidarity (quotas), although, in a bow to Czech and Hungarian governments, solidarity principle will apparently be voluntary too. In other words, "rapid" processing will likely end up being a 'lengthy detention' in "control centres", as many Governments will simply refuse to take in asylum seekers, while other Governments will end up being swamped with applicants.

To restrict the numbers of those reaching the EU borders in the first place, the EU meeting agreed to provide more funds for Turkey and Morocco to act as buffers for refugees. Algeria, Egypt, Libya, Morocco, Niger and Tunisia are to get funding for setting up 'processing centres'. Or, put differently, the EU will be paying more to warehouse migrants offshore, something that is likely to lead to lengthy detention in questionable conditions.

As a support for embattled Angela Merkel, the agreement also states that the nation states can “take all necessary internal legislative and administrative measures” to stop refugees and migrants crossing Europe’s internal borders. Whatever this means for the Schengen agreement and borderless travel, time will tell.


My view: The migration agreement is nothing more than another kick to the proverbial can that was stuck in the cracks on the proverbial road toward addressing the migration crisis. It fails to address actual modalities of asylum process, the key being the length of the process, lack of alternatives to highly costly and questionable (in ethical and even international law terms) deportations of failed seekers, and the lack of clarity of rules and resources for allocating successful asylum seekers. It also failed in effectively dealing with migrants inflows: a 'buffer zone' on the southern shores of the Mediterranean simply increases costs of making the crossing, and thus increases the risk of crossing to migrants. It does not remove the incentives for making the journey. In the case of Libya and Egypt, there are questions about these states' capacity actually control their borders, primarily arising from the nature of the Government regimes in both countries. In case of Syria, ability to seal off inflows of refugees from the country hinges on stabilisation of the Assad regime, as no other participant in the Syrian civil war has any interest in controlling Syria's Mediterranean coast. In effect, the EU agreement does not tackle the main issue at hand: how to reduce the inflows of both economic migrants and refugees into Europe. Likewise, the EU agreement does not even touch upon the need to structure effective measures (legal and institutional) to improve integration of the successful migrants into the European societies.

In short, we will be back to this issue soon. Mark my words.

22/10/17: Oh my... Germany Looks Like Japan ca 2000-2001?

A pic worth a 1,000 words:

Via Holger Zschaepitz @Schuldensuehner

In simple terms, despite its current fortunes, on the longer time horizon, German economy is suffering the same fate as the Japanese one, with two caveats:

1. A lag of a couple decades; and
2. An adjustment for institutional structures (e.g. greater openness to migration).

These are reflected in the distance between the German yields today and the Japanese yields in the 1990s and 2000s. That distance, of some 1,000 basis points, is material to the debt carry capacity (meaning Germany has much greater borrowing capacity than Japan had back in the early 2000s). But it is also more uncertain, as ECB monetary policy cannot fully converge to the German conditions alone (it can be dominated by these conditions for quite a long while, but neither perpetually, nor fully).

So here we have it, folks, our value systems (reflected in demographics) have Japanified Germany... before our fiscal policies did... 

28/9/17: Schauble: A Requiem For Austerity Finance

My comment for yesterday’s NY Times on Wolfgang Schäuble’s departure from the Finance Ministry post: https://nyti.ms/2k5N2Er 

7/6/17: European Policy Uncertainty: Still Above Pre-Crisis Averages

As noted in the previous post, covering the topic of continued mis-pricing by equity markets of policy uncertainties, much of the decline in the Global Economic Policy Uncertainty Index has been accounted for by a drop in European countries’ EPUIs. Here are some details:

In May 2017, EPU indices for France, Germany, Spain and the UK have dropped significantly, primarily on the news relating to French elections and the moderation in Brexit discussions (displaced, temporarily, by the domestic election). Further moderation was probably due to elevated level of news traffic relating to President Trump’s NATO visit. Italy’s index rose marginally.

Overall, European Index was down at 161.6 at the end of May, showing a significant drop from April 252.9 reading and down on cycle high of 393.0 recorded in November 2016. The index is now well below longer-term cycle trend line (chart below). 

However, latest drop is confirming overall extreme degree of uncertainty volatility over the last 18 months, and thus remains insufficient to reverse the upward trend in the ‘fourth’ regime period (chart below).

Despite post-election moderation, France continues to lead EPUI to the upside, while Germany and Italy remain two drivers of policy uncertainty moderation. This is confirmed by the period averages chart below:

Overall, levels of European policy uncertainty remain well-above pre-2009 averages, even following the latest index moderation.

12/4/17: European Economic Uncertainty Moderated in 1Q 2017

European Policy Uncertainty Index, an indicator of economic policy risks perception based on media references, has posted a significant moderation in the risk environment in the first quarter of 2017, falling from the 4Q 2016 average of 307.75 to 1Q 2017 average of 265.42, with the decline driven primarily by moderating uncertainty in the UK and Italy, against rising uncertainty in France and Spain. Germany's economic policy risks remained largely in line with 4Q 2016 readings. Despite the moderation, overall European policy uncertainty index in 1Q 2017 was still ahead of the levels recorded in 1Q 2016 (221.76).

• German economic policy uncertainty index averaged 247.19 in 1Q 2017, up on 239.57 in 4Q 2016, but down on the 12-months peak of 331.78 in 3Q 2016. However, German economic uncertainty remained above 1Q 2016 level of 192.15.
• Italian economic policy uncertainty index was running at 108.52 in 1Q 2017, down significantly from 157.31 reading in 4Q 2016 which also marked the peak for 12 months trailing period. Italian uncertainty index finished 1Q 2017 at virtually identical levels as in 1Q 2016 (106.92).
• UK economic policy uncertainty index was down sharply at 411.04 in 1Q 2017 from 609.78 in 4Q 2016, with 3Q 2016 marking the local (12 months trailing) peak at 800.14. Nonetheless, in 1Q 2017, the UK index remained well above 1Q 2016 reading of 347.11.
• French economic policy uncertainty rose sharply in 1Q 2017 to 454.65 from 371.16 in 4Q 2016. Latest quarterly average is the highest in the 12 months trailing period and is well above 273.05 reading for 1Q 2016.
• Spain's economic policy uncertainty index moderated from 179.80 in 4Q 2016 to 137.78 in 1Q 2017, with the latest reading being the lowest over the five recent quarters. A year ago, the index stood at 209.12.

Despite some encouraging changes and some moderation, economic policy uncertainty remains highly elevated across the European economy as shown in the chart and highlighted in the chart below:

Of the Big 4 European economies, only Italy shows more recent trends consistent with decline in uncertainty relative to 2012-2015 period and this moderation is rather fragile. In every other big European economy, economic uncertainty is higher during 2016-present period than in any other period on record. 

12/4/17: German Economy Forecasts 2017-2018

The latest joint economic forecast for German economy is out and, in line with what Eurocoin has been signalling recently (see post here), the forecast upgrades outlook for Euro area's largest economy.

Here's the release, with some commentary added: Germany's "aggregate production capacities are now likely to have slightly exceeded their normal utilisation levels. However, cyclical dynamics remain low compared to earlier periods of recoveries, as consumption expenditures, which do not exhibit strong fluctuations, have been the main driving force so far. In addition, net migration increases potential output, counteracting a stronger capacity tightening."

• German GDP) is expected to expand by 1.5% (1.8% adjusted for calendar effects) in 2017 and 1.8% in 2018
• Unemployment is expected to fall to 6.1% in 2016, to 5.7% in 2017 and 5.4% in 2018 
• "Inflation is expected to increase markedly over the forecast horizon. After an increase in consumer prices of only 0.5% in 2016, the inflation rate is expected to rise to 1.8% in 2017 and 1.7% in 2018". This would be consistent with the ECB starting to raise rates in late 2017 and continuing to hike into 2018. The forecast does not cover interest rates policy timing, but does state that "In the euro area, the institutes do not expect interest rates to rise during the forecast period. However, bond purchases are likely to be phased out next year." In my view, this position is not consistent with forecast inflation and growth dynamics.
• "The public budget surplus will reduce only modestly. Public finances are slightly stimulating economic activity in the current year and are cyclically neutral in the year ahead." In simple terms, Germany will run budget surpluses in both 2017 and 2018, with cumulative surpluses around EUR36.6 billion over these two years, against a cumulative surplus of EUR44.6 billion in 2015 and 2016.
• Current account surpluses are expected to remain above EUR250 billion per annum in 2017 and 2018, with cumulative current account surpluses for these two years forecast at EUR508 billion against EUR521 billion surpluses in 2015-2016.

Slight re-acceleration in both budgetary surplus and current account surplus over 2017-2018 will provide a very small amount of room for growth in imports and capital investment out of Germany to the rest of the euro area. 

27/5/16: Ifo on the Effects of German Minimum Wage on Internships

Germany's Ifo institute issued the following press release concerning the effects of the recently introduced minimum wage law on internships (emphasis is mine):

"Munich, 27 May 2016 - The new minimum wage law in Germany has eliminated numerous internship positions. This is the result of the latest Ifo Personnel Manager Survey, conducted for Randstad Deutschland, which was published on Friday.

The number of companies offering internships has roughly halved. Before the introduction of the minimum wage, 70% of the companies said they offered voluntary internships, a number which has now fallen to 34%. This is also the case for compulsory internships, where the percentage of companies likewise fell from 62% to 34%.

The decline in internships is evident in companies of all sizes. For companies with more than 500 employees, the proportion of firms with voluntary internships decreased from 88% to 52% and for compulsory internships from 91% to 68%. In companies with fewer than 50 employees, the shares fell from 59% to 26% (voluntary) and from 49% to 21% (compulsory internships).

More than a few human resource managers indicated that because of personnel budget constraints the number of internships offered has been, in part, significantly reduced. Other companies now only offer compulsory internships or have reduced the duration of voluntary internships to three months. Some companies expressed complaints about the additional documentation requirements as well as uncertainty over the distinction between voluntary and mandatory internships.

Excluded from the minimum wage since 1 January 2015 are only internships that are compulsory as part of study or training regulations as well as voluntary internships of up to three months before or during vocational training or higher education. Additional exemptions from the minimum wage are the long-term unemployed for the first six months on the job."

Note: German labour markets are currently relatively tight when it comes to supply of skills, so reductions in internships, if confirmed by other sources, would be even more significant in such a setting.

18/2/16: Lack of Support for 'Refugees --> Growth' Link in German Survey

As a separate matter, the same survey of 'some 220' German economists by CESIfo found that...

"A relative majority (40 percent) of participants expects the asylum-seekers to have a negative impact on the country. Only 23 percent see them as benefitting the country. The remainder was undecided. The majority of German economics professors therefore do not share the optimism of the Deutsche Bank’s Chief Economist, David Folkerts-Landau. He described the flood of refugees as Germany’s biggest economic opportunity since its reunification.

The majority of economics professors (56 percent) believes that the minimum wage should be lowered to facilitate the integration of asylum-seekers with poor skills into the German labour market. 37 percent, however, does not support this view. Some economists feel that this could lead to tensions between Germans and new arrivals. “I am no advocate of the minimum wage,” writes Prof. Dr. Erwin Amann of the University of Duisburg-Essen in the survey. “But a reduction in the minimum wage would prompt a debate over German workers being crowded out,” he warns."

So much for that "Keynesian growth stimulus" from immigration, then...

18/2/16: Europe's Problem is Not Germany...

CES-Ifo just released their survey results for the regular poll of some 220 German economists. And if you think that professionals are at any odds with Schäuble on monetary policy of the ECB, think again.

Which, of course, is absolutely correct. For German economy, ECB's policy is too loose. For French economy, about right. For Italy and Spain - probably somewhat too restrictive, although who on Earth can tell with any degree of confidence what 'about right' policy for these two can even look like...

Still, the key point remains: Euro is still a malfunctioning currency that cannot reconcile differences between various economies. In other words, Europe's problem is not Germany. It is not France, nor Spain, nor Italy. Europe's problem is not even Euro. Instead, Europe's problem is Europe.

11/11/15: New Cost Estimates of European Refugees Crisis: Ifo

Back in September, German think tank, CESIfo estimated the cost of European refugees crisis to be at around EUR10 billion (Germany costs alone). Yesterday (with update today), the Institute released updated estimates:

Crucially, per above release, the Ifo pours some serious cold water on the commonly repeated in the media claims that refugees can provide a substantial boost to the German economy due to their alleged employability.

22/9/15: Germany's IFO: "Refugees to Cost Ten Billion Euros"

Here is the full release from the Ifo Institute (emphasis in bold and comments in italics are mine):

"Ifo Institute Expects Refugees to Cost Ten Billion Euros

Munich, 22 September – If a total of 800,000 asylum-seekers do indeed come to Germany this year, as forecast by the German Federal Ministry of the Interior, it would cost the state around ten billion euros. This figure does not take into consideration family members joining the refugees or any educational measures; and is therefore a conservative estimate.  [here is a useful, albeit dated, link on family reunification framework in Germany showing significant potential impact. More current data is covered here. In addition, while educational expenditures can be significant, part of the costs will be carried through apprenticeships and training schemes that are covered by employers and that involve productive work, contributing to value added in the German economy.]

The qualification structure of immigrants from the crisis-afflicted states of Syria, Iraq, Nigeria and Afghanistan is probably poor. According to data from the World Bank, the illiteracy rate even among the 14-24 year old age group is 4 percent, 18 percent, 34 percent and 53 percent in these countries respectively. Even in the most developed of these countries (Syria) only 6 percent of the population has a university degree, which is not equivalent to a German diploma in many cases. Although refugees tend to be male and younger than the demographic average age, one thing is still clear: they are poorly prepared for the German labour market. In addition to language courses, Germany will also need to invest in training, which will generate extra costs. [We do not know exact quality of education and skills attained by the refugees, but applying average population parameters in this case can be fraught with some problems. For example, refugees coming through trafficking channels are required to pay up-front fees that are substantial in size, relative to average incomes. This means that there can be a strong selection bias in terms of refugees who reach Europe, compared to the average population in the country of origin - biases that tend to select more educated / better skilled and more financially enabled migrants. If so, their literacy rates and educational attainment status can be well above averages. In addition, undergoing a refugee journey implies very significant hardship, that is most likely known (at least partially) prior to the journey start. This can imply that refugees arriving into Europe may have stronger aptitude to succeed in integrating into new host society than those who remain behind. These biases are relatively well known in the literature on migrants flows in large scale migrations in the past.]
 
Many refugees will remain in Germany in the long-term and bring their relatives into the country. Migratory pressure from North Africa and the Middle East will remain high purely due to the demographical situation in these countries.  [This is correct, and the pressures are rising, not abating. The problem here is signalling: by openly accepting 800,000 refugees, German leaders have sent a very loud signal to the potential future refugees. Reality, however, is that such a signal will probably have only a marginal effect on refugees flows over time, since the main drivers (first order factors) pushing larger quantities of refugees into Europe - demographics, political and geopolitical instability, institutional deterioration, regional wars and conflicts, as well as issues such as climate change - remain acute.]

To avoid the refugee crisis becoming a long-term financial burden for German taxpayers, refugees have to get paid employment as fast as possible, so that they can meet their own living costs. There are fears, however, that many of them will not be able to find a job with a minimum wage of 8.50 euros in place because their productivity is just too low. It would be therefore be a good idea to lower the minimum wage across the board to prevent unemployment from rising.  [This is a matter for a separate analysis. While refugees initial productivity is likely to be lower, training and apprenticeship schemes should provide fast uplift in productivity for those who are well-enabled for such training. The key to limiting the cost of integrating refugees hinges crucially on several dimensions of German policy, namely: access to training, incentives to undertake training, quality of matching individuals to training opportunities, etc. Other considerations (for example pre-acceptance assessment of attitudes and aptitudes to integration) can help, but at this stage are not feasible except on a margin (for example prioritising processing of refugees who pass pre-acceptance assessments). Minimum wage coverage should not apply to apprenticeships and training schemes in general, in my view, and instead these activities should be covered by a separate minimum wage set below the normal employment-related minimum wage.]

Raising Hartz IV standard rates in the present situation is a very bad idea, as this would reduce incentives for refugees to look for work and generate an additional fiscal burden.
 
Model simulations by the Ifo Institute show that even in the case of a suspension of minimum wage legislation and Hartz IV rates remaining stable, the supposed immediate integration of immigrants into the German labour market does not stand to benefit the German economy. Although there are some labour market advantages, they are outweighed by higher unemployment rates and net transfers to immigrants.
 
Article: “Immigration: What Does the Domestic Population Stand to Gain?”  in: ifo Schnelldienst 18/ 2015; p. 3-12; a preview of the article is available at: http://www.cesifo-group.de/DocDL/sd-2015-18-battisti-etal-einwanderung.pdf "

Overall, a bold and interesting statement from Ifo (who are known for being bold), and a topic worth discussing.

15/7/15: Greece is Not Unique in Dissing EU Commitments

In previous two posts, I explored couple of angles on the famous Trust thingy that, allegedly, Greece so massively lacks. But, of course, my comparatives related to the 'peripheral' euro states, mostly Ireland. You can use the same two charts to draw conclusions on comparing Greek performance to other states, but the question still remains: outside the 'periphery' just how much Trust currency is there in circulation in the EU?

Take countries that are not in the group of borrowers from the IMF. There should be plenty of Trust to go around amongst them and the EU. And this means there should be plenty of agreement between their policies and the policies suggested to them by the Commission, especially those aimed at addressing that major burner of Trust - failure to comply with core fiscal criteria.

We can take a snapshot of this 'metric' of Trust by looking at how severely do EU member states deviate in their policies from the Commission prescriptions. This 'metric', after all, is an exact replica of the arguments advanced in the Eurogroup in the context of accusing Greece of wasting EU's trust.

So here is a handy chart, from the EU Commission:

What the above shows is that back in 2013 all of the EU states who were issued with 'country-specific recommendations' concerning their poor fiscal performance opted to ignore these recommendations. That is some Trust, there.

Between 2011-2012 and 2013 the extent of non-compliance did not decline (despite all the talk about austerity and structural reforms), but rose both on average and specifically in 10 out of 14 countries covered by these recommendations. That's some more Trust, right there.

On average, in 2013, some 43% of all EU Commission recommendations were not implemented by the states that are so distinctly Trustworthy from Greece, that Greece was singled out as a special case by the Eurogroup and the Euro Council.

Some of the worst offenders was Germany, and its pal (in berating Greece) Lithuania, plus the usual suspects of Italy and France.

Now, I am not a fan of EU Commission recommendations. But the fact is: Greece is by far not unique in terms of 'reforms' fatigue or lack of engagement with the EU Commission proposals on fiscal adjustments.

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.

4/6/15: Trend-spotting Out in 3 Key Charts

If you want to understand the German (and the Euro area) economy key trend, here are three charts:

Source for all: http://www.pewsocialtrends.org/2015/05/21/family-support-in-graying-societies/#

Combined, these imply one thing and one thing only: Domestic Demand (Investment + Consumption + Government Spending) can be sustained [in theory] over the next decades by just one thing: "Government Spending". In practice, the bad news is: such spending is neither hugely productive, nor feasible in current levels of indebtedness worldwide. Worse [from economic perspective] news: much of this spending will be swallowed by health & end-of-life services that will not be increasing the productive capacity of our societies.

In the mean time, logic of the above two charts implies:

1. Increased build up of external imbalances (current account surpluses in more extremely ageing countries);
2. Increased savings not suitable (due to risk profiles) for private investment (hence higher retail & long-term demand for highly rated bonds and equity, as opposed to higher growth bonds and equity); 
3. Reduced domestic consumption;
4. Heating up tax competition on the side of capturing revenues (as opposed to incentivising higher growth);
5. Growing reliance on 'hidden' taxes (e.g. currency devaluations and indirect taxation) to amplify (1) and (4);
6. Current 'peak productivity' generation (chart 3 above) is screwed on the double, and productivity growth curve going forward is downward-sloping, most likely even if we control for technological innovation.

All six points currently are at play. Draw your own conclusions.

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.

24/1/2015: ECB v Fed: Why Frankfurt's QE is a Damp Squib

A neat chart from Pictet showing balancesheet comparatives for ECB and the Fed.

Setting timing issues aside (which are non-trivial), the quantum of ECB balancesheet expansion planned is still too weak and it is too weak relative to previous peak. The Fed balancesheet expansion followed three stages:

• Stage 1 in 2008-2009 was sharp and more significant than for ECB.
• Stage 2 covered Q1 2009-Q2 2011
• Stage 3 covered Q1 2013 through Q3 2014.
• There were no major policy reversals, only moderation, over the entire QE period.

In contrast, ECB balancesheet expansions were weaker throughout the period, and were subject to a major reversal in Q1 2013 - Q3 2014 period.

In effect, even with this week's boisterous announcement, the ECB remains a major laggard in therms of monetary policy activism, compared to all other major Central Banks that faced comparable risks.

Now, to timing. ECB is a de facto your family doctor who routinely forgets to apply medicine in time and under-medicates the patient after the fact. Frankfurt slept through the Q1 2009-H1 2011 and went into a delirious denial stage in Q1 2013-H1 2014. The inaction during two key periods meant that nascent recovery of 2010 was killed off and 2013-2014 can be written off as lost years. The lags in policy reaction by the ECB are monumental: as the Fed ramped up monetary expansion in Q4 2012, the ECB will be presiding over a de facto monetary (balancesheet) stagnation, if not contraction, until March 2015. Which means that during the critical years of deleveraging - of banks and the real economy - debt reductions in the European economy were neither supported by the institutions (bankruptcy and insolvency resolution regimes), nor facilitated by the monetary policy. Instead, monetary policy simple delayed deleveraging by lowering the interest rates, without providing funding necessary for the writedowns. This is diametrically different to the US, where deleveraging was supported by both monetary policy and institutional set ups.

Meanwhile, Germans are now at loggerheads with the rest of Europe, whinging about the 'abandoned prudence' of the ECB. Best summary of why they are dead wrong is here: http://www.forexlive.com/blog/2015/01/23/eight-reasons-german-complaints-about-qe-and-the-eurozone-are-laughable/

The circus of the euro area pretence at economic (and other) policymaking rolls on. Next stop, as always, Greece...

15/1/2015: Upbeat German Data Might Not Be a Boom Signal for Europe

So German economy expanded 1.5% in 2014 and managed a budget deficit of just 0.4% of GDP. That's the latests numbers and they are beating performance since 2011. Which is good news.

Except for the bad news. Take a look at CES-Ifo data on current economic conditions and forward 6 months expectations.

Chart 1:

Per chart above, euro area assessments of own performance over 2014 were upbeat compared to Germany. The outrun is euro area economy under-performed Germany in the end. And forward:

Chart 2:

Euro area forward expectations remain also upbeat through Q3 2014 on 6 months forward basis. Which turned into downbeat print in Q4. But they remain upbeat through Q1 2015. And taking in the economy print for Germany for 2014, this suggests that euro area will be disappointing on growth over the next 3 months. Thereafter, either Germany will reignite euro area growth (option 1) or continue expanding without much of a response from the euro area (option 2)

What's more likely? Since 2010 through present, 6mo forward expectations in the euro area have been posting much shallower correlation with 6mo forward expectations in Germany (+0.56) than over pre-crisis period (0.66 for 2000-2007 and 0.70 for 1991-2000).  And these are taking Germany into account in euro area data.

Which suggests option 2 is likelier.

So it's Germany 1: Rest of EMU 0.5. Things are more worrying than 1.5% growth 2014 for German economy might imply.