13/7/15: About That Europe's Recovery Party

Last week, IMF published its WEO update for July. Little to go by in the general 'news' terms, but a telling sign of just how well repaired the world economy is becoming.

First, off the top, IMF dropped its forecast for global growth for 2015 from 3.5% in April 2015 to 3.3% in July. 2016 outlook remains unchanged at 3.8%. Given IMF estimates 2013-2014 growth at 3.4% each year, this means that 2015 is now expected to be sub-average for the three years period - hardly a sign of an improvement.

When considered by broader regions, Advanced Economies drove deterioration in the outlook. 2015 growth in advanced economies is now projected to be around 2.1%, down on 2.4% projection back in April. 2016 outlook is unchanged at 2.4%. Meanwhile, Emerging Markets and Developing Economies growth forecast has deteriorated from 4.3% in 2015 projected back in April, to 4.2% in July update. 2016 outlook remains the same at 4.7% projected growth rate.

IMF lauded the return to growth in the Euro area, which is supposedly booming - forecast to expand at 1.5% in 2015 (July outlook), same as in April outlook. And the Fund produced a doozer of an uplift to 2016 forecast growth - from 1.6% expected back in April to 1.7% expected in July update. Meanwhile, the U.S. economy got severely downgraded to 2.5% forecast expansion for 2015 (against 3.1% forecast back in April) and to 3.0% expansion forecast for 2016 (against 3.1% forecast back in April).

You can't make this up: the return to growth in Europe is still full-blown 40 percent lower growth than in wobbling U.S. Just in case you wondered: over 2013-2015, according to the latest forecast from the Fund,

• U.S. economy will expand, cumulatively, by 5.39%
• Euro area economy will grow by 1.91%
• Japan will grow by 2.31%
• UK will expand by 7.16%, and
• Other Advanced Economies group will grow by 7.90%.

Yes, that's right - Euro area will under-perform Japan, the heroes of 'blanket QE bombing' of the economy. 

4/7/2013: Ifo Forecast for euro Area Growth Q2-Q4 2013

Ifo Institute latest forecast for Eurozone:

-- "Activity contracted by 0.3% in Q1 2013, falling for the sixth consecutive quarter."
-- "GDP growth is expected to turn slightly positive in Q2 2013 (+0.1%), with a mild acceleration over the following quarters (+0.2% in Q3 and +0.3% in Q4)."
Core drivers:
-- "...progressive improvement in exports and a marginal recovery of domestic demand in the second half of the year."
-- "…fiscal consolidation and ongoing deleveraging in corporate and banking sectors of several Eurozone economies will continue to weigh on economic growth."
-- "Labor market conditions will remain unfavorable, placing an additional burden on disposable income and private consumption."
-- "Due to tight credit conditions and weak prospects for internal demand, gross fixed investment is also expected to remain weak."
-- "Exports growth and the need to replace an ageing capital stock will lead to a modest investment recovery in Q3 and Q4 2013 (+0.1% and +0.4% respectively)."
-- "Under the assumption that Brent oil price remains stable at USD 103 per barrel in Q3 and Q4 and the euro/dollar exchange rate fluctuates around 1.30, inflation is projected to 1,3% in Q4."

Core caveat: "This forecast assumes that financial tensions in Europe do not escalate and a gradual unwinding of the monetary policy stimulus in the United States."

Full note: http://www.cesifo-group.de/ifoHome/facts/Forecasts/Euro-zone-Economic-Outlook/Archive/2013/eeo-20130704.html

My view: optimistic assumption on inflation and EURUSD rate, but generally, agree with Q2-Q3 outlook as a central scenario. Risks are rising, however, by the day.

Core charts:

30/7/2012: Euro Area forecast by Standard and Poor

S&P's note on euro area crisis is a rather entertaining read, if you are into the sort of 'entertaining' a la mode of Quentin Tarantino... The note is The Curse Of The Three Ds: Triple Deleveraging Drags Europe Deeper Into Recession, authored by EMEA Chief Economist: Jean-Michel Six.


Snapshot of views (emphasis mine):

• A combination of public, household, and bank deleveraging are stifling growth in most European economies. [Now, I've been saying all along that we cannot ignore household debts, yes so far, European and National policymakers are utterly hell-bent on saddling indebted households with the bills for indebted states and banks. Just look at Ireland, where the banking sector is now outright moving into enslaving households by dictating to them how much they should spend on food & clothing so they can maximize extraction of mortgages repayments. And the Irish Government only eager to lend their support to the banks.]
• This is also limiting the effectiveness of the European Central Bank's efforts to support the financial sector and eurozone economies. [Not really, folks. You might missed it, but European 'leaders' are heavily taxing economy already to subsidize insolvent banks and sovereigns. Alas, the room for more taxes is limited in Europe not by household debt - about which the respective National Governments give no damn - but by the fact that Europe already has some of the highest income taxes in the world.]
• Subsequently, the S&P is cutting their base-case growth forecasts for the eurozone and U.K. economies for 2012 and 2013. See two tables below

• S&P also see a 40% chance that downside risks could push European economies into a genuine double-dip recession in 2013 (second table above).

So risk-weighted expected growth is now forecast, for the Euro area to be -0.76 in 2012 and -0.08 in 2013. If we take potential growth at 1.5%, this would imply an opportunity cost of over 3% in 2012-2013 to the Euro area economy.

And the core downside risks are:

• A hard landing in some emerging markets, delaying the recovery in world trade;
• The prospect of one of the main eurozone countries losing access to capital markets for a prolonged period; and
• A more pronounced retrenchment in consumer demand, especially in the core countries.

Key changes to previous forecasts:

• "We have cut our forecast for GDP growth in France to just 0.3% this year and 0.7% in 2013, from 0.5% and 1%, respectively, in our previous forecasts. 
• "We've also revised downward our GDP projections for Italy to negative 2.1% for 2012 and negative 0.4% in 2013. 
• "In the case of Spain, we now forecast GDP will decline by 1.7% this year and that it will be negative 0.6% next year—a cut from our previous forecast declines of 1.5% and 0.5%. 
• "For the U.K., we have revised our 2012 estimate to 0.3% this year. Yet, the provisional GDP estimate released on July 25 by the U.K. statistical office for the second quarter of negative 0.7% makes our full-year forecast more uncertain. If confirmed, this result would most likely lead to zero or slightly negative growth this year."

Economics 30/8/10: Euro area growth indicator slows in August

Eurozone's leading growth indicator, Eurocoin has fallen once again to 0.37 in August from July already anemic reading of 0.4. This means that my updated forecasts for Euro area growth remain in the range of 0% - 0.26%, with mid-range forecast of 0.20% for Q3 2010.

Chart below illustrates:In the mean time, continued pressures on Euro area economies and unbalanced nature of recovery (with Germany powering ahead, while the rest of Europe stagnates or continues to decline) are taking their toll on public confidence in European institutions.

Overall voters confidence in EU has dropped to record lows in most countries according to the Eurobarometer published on August 26th. Just 49% Europeans think that their country's membership of the EU is a "good thing" – lowest in 7 years. Trust in EU institutions has dropped to 42% from 48% recorded in Autumn 2009. Latest survey results are most likely impacted by the survey timing - carried out in May 2010 - at the peak of sovereign debt crisis worries. But it is unlikely that August events would have done much to repair this. PIIGS, plus Cyprus, Lux and Romania lead in terms of declines. Confidence in all PIIGS countries declined 10-18% yoy.


The latest Eurocoin leading indicator reading clearly suggests that unemployment and economic performance will remain leading causes of concerns across the EU (Eurobarometer recorded 48% of EU citizens being primarily concerned with rising unemployment, while economic crisis in general is a cause for concern for 40%). For the first time Eurobarometer also included Iceland, now a candidate for EU accession. Only 19% believe accession will be a good thing for their country and only 29 percent believe their country will benefit from EU membership.

Another interesting result was that when asked what they associate the EU with – most of the respondents said free travel and the euro, followed by peace and, amazingly, "waste of money" (23%). The latter category was led by Austrians (52%), Germans (45%) and Swedes (36%). Just 19% of respondents said the EU stands for democracy, a drop of seven points yoy. Just 10% of respondents in Finland, UK and Latvia identified "democracy" as a principle that is linked to the EU objectives. Romania (33%), Bulgaria (32%) and Cyprus (30%) were the countries with most positive view of the link between democracy and the EU. Overall, in no country did 'democracy' figure as the EU core objective for more than 1/3 of the population.

Support for EU acting as a policeman of financial markets was much stronger. 75% of the respondents said more coordination of economic and financial policies among member states would be effective in fighting economic crisis. 72% back a stronger supervision by the EU of international financial groups (though this majority increased just 4 points since 2009).


Perhaps encouraged by the public support for greater coordination, French and German authorities continue to move in the direction of enhanced harmonization of their tax systems. French budget minister Francois Baroin visited his German counterpart Wolfgang Schaeuble, making an announcement that "Germany is a model which should be a source of inspiration for [France]." Baroin also stated that France "intends to accelerate the harmonisation of both fiscal systems, on corporate as well as personal income taxes". President Sarkozy has requested the French court of auditors to issue a report (due for early findings release at the end of September) looking at areas of fiscal convergence with the German system. The report is due by the end of the year, but a pre-report will be published at the end of September. It is likely that France might move to abolish wealth tax as Germany did back in 1997. Per reports: "in the longer term, Paris is also looking at harmonising Vat, which is higher in France – 19.6% compared to the German 19%" and "capping the EU budget" to give national Governments more opportunities to slash domestic deficits. Mr Schaeuble indicated that Berlin wants consensus on European harmonisation on bank profits taxation - a subject for the next ministerial meeting between the French and German finance ministers in September.

Economics 30/7/10: No double dip for the euro area, yet...

New data from eurocoin is out - time to update euro area forecasts. Aptly in line with the US Q2 growth now coming at a slower 2.4% annualized rate, both the leading eurocoin indicator of activity (down to 0.4 in July from 0.46 in June) and my forecast for Q2 and Q3 2010 growth for the euro area are also moderated. Chart below illustrates:
GDP forecast range is for quarterly growth of -0.1% to +0.05% in Q3 2009.

So no double dip for the euro area yet, but things continue to head that way...

Economics 28/05/2010: Euro area leading indicators

I have not updated my forecasts for the euro zone growth in some time now, and it is on the 'to do' list. However, as predicted, euro area leading indicator from Eurocoin came in today at a disappointing 0.55% down from 0.67% a month ago and marking a second consecutive monthly decline. The indicator hit 0.79% in March 2010, marking a 3-year high.
This time around, declines in the indicator were driven by the adverse movements in the stock markets valuations. However, decline is absolutely in line with PMIs, despite the industrial production indicator showing sustained growth. Also worryingly, consumer confidence remains below waterline and is trending down again:Exports are on a tear up, rising at a faster rate in May relative to April. This might be the good news for overall growth, but it is clear that domestic investment and demand sides are still recessionary. Of course, there's a popular theory out there - in Brussels, and even here at home in Dublin - that exports will lift us out of the recession. If you think so - look no further than Japan. Japan has managed to maintain booming export activity, amidst shrinking overall economy for two decades now.