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."

6/2/2014: Euro Area Economic Conditions and Expectations: Ifo

The Ifo Indicator for the economic climate in the euro area for Q1 2014 is out today. Some positives, some negatives.

Overall index of Economic Climate in the  Euro Area rose from 114.7 in Q4 2013 to 119.9 in Q1 2014. Which is good - we are at the highest levels since Q3 2007. 

All improvement is due to improved assessment of the current situation: Present Situation index is up at 120.3 from 106.3 in Q4 2013. This is the highest reading for the index since Q4 2011. But if you think this is 'as good as it gets' we have some room to climb up, then, since the sub-index historical average is 126.9. With Germanic precision, the Ifo characterised the latest development as "far less unfavourable assessments of the current economic situation". Not a 'positive' or a 'favourable', but 'less unfavourable'.

Meanwhile, "the economic outlook for the next six months remains unchanged at the highest level for around three years. The economic recovery should become more marked in the months ahead." This references the fact that Expectations for the Next 6 months index is stuck at 119.7 in Q1 2014, same as in Q4 2013. Which is significantly above historical average of 94.7. 

But expectations mean little. One bizarre quirk is that crisis-period average for the series is 95.9, which is above the historical average. Which, obviously, begs a question: Just how much does the forward optimism track the future outcomes? Apparently, not much. There is a negative historical correlation of -0.18 between expectations and current conditions assessments, so in a sense expectations just tell us that, on average, business leaders expect improvement in the future when conditions are poor today. I showed before that once you check for lags, 6mo forward expectations do not do much to forecast outcomes registered for current conditions 6 months after the expectations are issued. And I have tested not just point lags, but also 6mo averages. The result is still the same: all expectations are telling us is that when things are terrible today, businesses expect them to improve tomorrow. This is like telling us that growth conditions are mean-reverting. Which is, of course, the case. Even in North Korea.

Expectations gap to current conditions has fallen, as current conditions improved. The gap now stands at 99.5 down from 112.6 in Q4 2013. The gap confirms what we learned from expectations series. Average expectations gap during the crisis is 153.8 and historically it is 88.5, which shows that businesses form much more optimistic forward expectations during the crisis period than in other periods. 

Some charts:

Few more points, this time straight from the Ifo release: 

"Germany, where the very positive economic situation continued to improve, received the best assessment. More economic experts were also positive about the current economic situation in Austria. Latvia, which introduced the euro as a currency at the beginning of the year, and Estonia are also among the few countries in the euro area where the current economic situation is deemed satisfactory overall. The present economic situation in Greece, Italy, Portugal, Spain and Cyprus, by contrast, barely changed compared to the last quarter and remains at a crisis level. In Belgium, Ireland and The Netherlands the economic situation improved somewhat compared to last quarter, according to WES experts, but remains "unfavourable" as in Finland and France.

Expectations for the next six months remain at a high level in almost all euro area countries apart from Greece and France, where the experts surveyed were less positive than three months ago. Cyprus is the only country in which experts expect the economic situation to deteriorate further.

The forecast inflation rate for the euro area for 2014 of 1.5% is slightly below the estimated rate for 2013 (1.7%). While experts expect the short-term interest rates to remain stable for the next six months, a greater number of survey participants expect long-term interest rates to rise. The majority of economic experts believe that the euro is overvalued against the US dollar and the Japanese yen. They expect the US dollar to appreciate against the euro over the next six months."

So good news: the incoming freight train of rising rates is yet to reach the tunnel. The bad news is that the 'periphery' is still stuck in the said tunnel, while the 'soft core' of Belgium, Ireland (welcome to the club) and the Netherlands is barely clawing its way toward the exit. The other good news is that the incoming commuter train of exchange rates (effect on exports) is slightly delayed (we can expect some depreciation of the euro before interest rates hikes hammer us back into the FX corner).

15/1/2014: Things are fine... things are working...

On foot of disastrous (for euro area) long range forecasts from DG ECFIN (covered here: http://trueeconomics.blogspot.ie/2014/01/1412014-dg-ecfin-latest-long-range.html), Morgan Stanley latest forecast for the global economy is here:

H/T Fabrizio Goria @FGoria

2012 outrun: euro area = lowest growth
2013 estimated outrun: euro area = lowest growth
2014 forecast: euro area = lowest growth
2015 forecast: euro area = lowest growth on par with Japan

Unpleasant, to put it mildly... Meanwhile, here's some bragging about the great euro area achievements... obviously not to be confused with those stated above... via ESM Press Office:

@ESM_Press:
#ESM MD Klaus #Regling in hearing with EU Parliament Members, Strasbourg: lv/stream at 15:00 http://www.europarl.europa.eu/ep-live/en/schedule …
#Regling: I welcome this debate because I think transparency & discussion are essential ingredients for lively democracies
#Regling: not my role to defend troika, support overall eco. approach. €area faced existential crisis with no tools, so troika was set up
#Regling: I worked for #IMF & know well #IMF program design which was model for program of €countries under assistance
#Regling: our critics miss the point. GR, IR, POR, CY faced choice: buying time with #EFSF/#ESM program or collaps w/ adjustment overnight
#Regling: no #EFSF/#ESM program would have meant risk of leaving €area; polls show citizens of concerned countries want to stay in €area
#Regling: disagree that there is no democratic control for programs; troika advises, political decision is taken by elected governments
#Regling: In POR & IR even opposition parties at the time, which are today in government, committed to assistance programme
#Regling: decisions on #EFSF/#ESM financial assistance is for national gov/parl because risk is on national budgets
#Regling: am not minimizing the difficulties that the countries are facing, especially unemployment
#Regling: there are clear signs that our strategy is working, in Dec IRL & ES had successfully exited their programs.

Happy times... and -0.6-0.5+0.6+1.1 is just a fine, fine, fine arithmetic... cause you know... 'things are working'...

14/1/2014: DG ECFIN latest long-range forecasts for euro area, 2014-2023

Some interesting, although abysmal, forecasts from DG ECFIN on euro area's growth prospects out through 2023. Original paper is linked here.

Few charts of note with my comments:

Total factor productivity growth in Euro area... three regimes: decline in 1970s, gradual and shallow recovery in 1980s-1990s, collapse in 2000s and early 2010s, and now expected shallow recovery to below 1% trend in 2015-2023... In brief - abysmal...

Subsequently, steady decline in TFP relative to the US, from levels already below those in the US in 1995 (ca 85% of the US levels back then) to some 25% lower than the US into 2023... Meanwhile, physical capital share is declining less dramatically and is remaining close to that found in the US... which implies that we are witnessing in the case of the euro area increasing relative physical capital intensity of production compared to tech and human capital intensity?..

Notice how the crisis effects on output growth are 'permanent' - through 2023 forecasts, the euro area is not expected to regain the rate of growth in output, let alone the levels of output consistent with pre-crisis trends. That is ca 15 years of 'lost decade' (obviously subject to forecast uncertainty) and a gap of ca 20% of GDP... and this gap will remain beyond 2023 (unless one to dream up a scenario of a discrete jump in GDP of ca 20% comes 2024...)

 Now onto US-euro area comparatives. These speak for themselves.

Ugly prospects for the euro area, to put it mildly.

And a summary of that conclusion:

10/1/2014: Ifo forecast for Euro area economic growth Q1-Q2 2014

German Ifo institute published its projections for euro area economic outlook for 2014. Here are the details:

• "As projected, GDP in the Eurozone expanded by a meagre 0.1% in Q3 2013, as export growth fell sharply."
• "Economic activity is expected to accelerate modestly over the forecast horizon (+0.2% in Q4 2013, +0.2% in Q1 2014 and +0.3% in Q2 2014) with a gradual shift in growth engines from external to domestic demand."
• "Continued tight fiscal policy in many member states together with persistent labour-market slack conducing to a stagnant real disposable income will lead to limited private consumption growth."
• "Investment is forecast to increase thanks to the gradual acceleration in activity and the need to renew production capacity after a marked phase of adjustment."
• Under the assumptions that the oil price stabilizes at USD 110 per barrel and that the euro/dollar exchange rate fluctuates around 1.36, headline inflation is expected to remain well below 2% (0.9% in Q1 2014 and 1.1% in Q2 2014)."
• "The major upside risk to this scenario is a stronger than expected investment growth, led by improved access to credit."
• "A stagnation in private consumption triggered by continued labour market weakness and weaker external demand in emerging economies are key downside risks."

Full details available here: http://www.cesifo-group.de/ifoHome/facts/Forecasts/Euro-zone-Economic-Outlook/Archive/2014/eeo-20140110

Some charts.

First, for unimpressive growth outlook for the recovery forward, compared to the past, both pre-crisis and 2010-2011 period:

Summary of forecasts:

Inflation outlook, as a bonus offering the reflection on just how poorly the monetary policy in the euro area been performing: remember the ECB mandate is to keep inflation at below but close to 2%...

Core inflation above is matching the target solely in 2007-2008, off-target or close to being off-target in parts of 2006 and 2012, significantly off-target in H2 2009-Q1 2011 and Q2 2013-on. ECB updated forecasts for inflation are at 1.4 percent in 2013, 1.1 percent in 2014 and 1.3 percent in 2015, which means ECB is expecting inflation to miss its target for the next 2 years at least.

Here's a chart of the latest survey indicators for economic conditions in the euro area - current and forward looking from the Ifo network and the EU Commission: