27/7/15: IMF Euro Area Report: Growth, of European Standards

The IMF today released its Article IV assessment of the Euro area, so as usual, I will be blogging on the issues raised in the latest report throughout the day. The first post looked at debt overhang while the second post presented IMF views and data on the euro area banking sector woes.

Here, let's take a look at headline growth outlook.

Based on the IMF view: in the Euro area, "the recovery continues. After weakness through mid-2014, growth picked up late last year and has continued in 2015, driven by domestic demand. Private consumption remained robust, reflecting rising employment and real wages, while fixed investment has expanded moderately. Among the large economies, Germany continues to grow slightly above 1½ percent, while Spain is rebounding strongly. Italy is emerging from three years of recession, and activity in France picked up at the beginning of this year."

This sounds good. Until it ain't. Chart below shows that growth drivers remained in 1Q 2015 the same as in 4Q 2015:

And more: stripping the uplift in inventories, headline GDP growth in 1Q 2015 would have been worse than in 4Q 2014. And, despite collapse in oil (energy) prices and increase in consumption, imports have increased their drag on GDP growth.

Meanwhile, Industrial Production is virtually flat, as is Construction activity:

So the net medium-term result is bleak: "Despite the cyclical upturn, growth of only about 1.6 percent is expected over the medium term, with potential growth averaging around 1 percent. The output gap would close around 2020 with unemployment still near nine percent and inflation reaching 1.7 percent, somewhat below the ECB’s medium-term price stability objective. The picture is more disappointing in comparison to the U.S. with the per capita income gap now the largest since the start of EMU, and projected to widen further."

How much further? Oh, take a look at these:

A positive scenario uplift can only be expected from long-term and painful reforms. IMF lists them here:

"A scenario combining monetary easing, fiscal support under the SGP, and comprehensive structural
reforms would include:

• Monetary easing. Current interest rate policy continues through 2020 and QE through September 2016.
• Fiscal space within the SGP. For the eurozone, fiscal space available within the SGP could amount to 0.6 percent of euro area GDP. This includes (i) room under countries’ Medium-Term Objectives (MTOs) (0.3 percent of euro area GDP); (ii) SGP flexiblity that a few qualifying countries could use for structural reforms (0.2 percent of euro area GDP); (iii) windfalls from lower interest payments due to QE (0.1 percent of euro area GDP) for one-off investments or structural reforms for a few countries already meeting their MTOs; and (iv) growth-friendly fiscal rebalancing for countries with limited fiscal space to lower the labor tax wedge by two percentage points, financed by base-broadening measures.
• Centralized investment. An increase in private investment of 0.2 and 0.8 percent of euro area GDP in 2015 and 2016 is assumed, which is equivalent to 1/3 of the targeted amount of European Fund for Strategic Investments (EFSI) projects.
• Clean-up of bank and corporate balance sheets A fully functioning credit channel is simulated as a decline in corporate borrowing rates, by 80 basis points in Italy, 25 basis points in Germany and France, and 50 basis points in the rest of the euro area. This would bring the spread between selected and core countries roughly to pre-crisis levels.
• Structural reforms. Gradual implementation of product and labor market-related reforms in the 2014 G20 Comprehensive Growth Strategy could increase total factor productivity (TFP) by about 0.1 percent in 2015, 0.5 percent in 2017, and 0.9 percent in 2020. The implied TFP changes would differ substantially among member countries, with France, Italy, and Spain enjoying the largest gains."

So combined effect of the above over the longer term: "The growth dividend of a balanced policy mix can be large. The EUROMOD module of the IMF’s Flexible System of Global Models (FSGM) points to a substantial growth dividend, particularly from fiscal policies and the improvement of the credit channel. Real growth for the euro area would increase by 1.3 and 1.4 percentage points to 2.7 and 3.0 percent for 2015 and 2016, and HICP inflation rate in these two years would rise to 0.6 and 2.1 percent. The output gap would close by the end of 2016, about four years faster than in the baseline, and unemployment would be 0.8 percentage point lower than in the baseline by 2016."

Which is, honestly speaking, laughable because of two points worth noting:
1) There is an ongoing and deepening reforms fatigue which is pushing the reforms horizon out toward the next downturn cycle (in other words, we are unlikely to see majority of real reforms to be enacted before the next recession strikes); and
2) Even with all things going the IMF way, unemployment will remain atrociously high. In other words, growth uptick even in the best case scenario is likely to be largely jobless.

So summary of growth uplift drivers is in the chart below:

Expect the expected: looser fiscal policy being the largest new contributor to growth in 2016; labour markets and product markets reforms being marginal - adding at most 0.25-0.3 percentage points to annual growth rates. The fabled 'credit conditions improvements' (banks doing their bit for growth) is expected to be minuscule (despite all the hopes attached to them by the likes of Irish authorities and all the resources of the state devoted in 2008-2011 to repairing them). And headline growth expectations for baseline scenario still resting at 1.7% and 1.6% GDP growth in 2016-2017.

Here is the summary of IMF projections out to 2020:

Yep, the first line of projections above shows perfectly well the poverty of low aspirations that Euro area has become, while the unemployment rate projections confirm the same. Everything else - all the talk about structural reforms, growth drivers and the rest - is pure unadulterated bull. Even in the age of massive QE, collapsed oil / energy costs, and improvements in [sliding back on] fiscal 'reforms', the euro area remains the sickest economy in the advanced world.

31/10/2014: Eurocoin Falls Again in October

Meanwhile, in the vastly-repaired, improvingly-coordinated, enhancely-harmonised Euro area, leading growth indicator, Eurocoin (published by Banca d'Italia and CEPR) posted another (4th consecutive monthly decline in October, falling from massively anaemic 0.13 in September to even more anaemic 0.08 in October.

The projected underlying GDP growth rate is now back at zero, having posted a 'recovery' to 0.1% in Q3 2014.

And the ECB is now even more stuck in the proverbial dark corner of near-deflation, zero growth and zero interest rates:

The drivers to the downside?

Industrial production is down across all Big 4 economies:

Business Confidence is down everywhere, save in Spain:

Consumer surveys down in performance terms everywhere and below zero on balance in France and Italy:

With stock markets performance markedly deteriorating, this means the only previous consistent support for 'growth forecasts' is also gone:

And the 'exports-led' recovery is just... err... shall we say 'fizzled out'?

But keep reminding yourselves, this is a 'European Century'...

24/10/2014: One Ugly with some Ugly Spice... EURO STOXX EPS

It's Friday... ECB is coming up with the banks tests on Sunday... And before then, if you want 'ugly', here's 'ugly':

The above chart plots Earnings per Share, in euro, for S&P500 and for EURO STOXX. It comes via @johnauthers

Now, despite this, you wouldn't believe it, but roughly 68% of European companies reporting earnings this quarterly cycle to-date have been outperforming analysts expectations.

And for some real 'ugly' spice on top of this pizza, the sub-trend decline in the EPS for European stocks has set on roughly H2 2011... something we shall remember when we re-read all the European 'recovery' tripe from 2011 and 2012 and a good part of 2013.

25/12/2013: Eurocoin: Euro Area Growth Firmed Up in December

Merry Christmas to all!

Some good news from the euro area economy front on Christmas day: eurocoin - leading growth indicator for the euro area - posted another (6th consecutive month) improvement in December 2013, rising to 0.29 from 0.23 in November.

December reading marks the 4th consecutive month of the indicator above 0.0 (growth), although it remains in statistically insignificant range. This is the highest reading for the indicator since July 2011.

Latest forecast for Q4 2013 growth in euro area GDP, based on eurocoin, is 0.22-0.25%.

Chart below shows that 2013 marks the year of ECB policies starting to finally bear some fruit. The point here, of course, is that the ECB should have been much more aggressive earlier on - as this blog argued consistently since the beginning of the crisis.

However, the ECB policies are still not being able to generate the momentum strong enough to escape deflationary pressures. Chart below shows that over the last 24 months, monetary policy has failed to sustain moderate inflation and that overall policy trajectory is still driving euro area economy toward deflation.

But back to better news. Despite weaker industrial activity, eurocoin rise in December is based on broad improvements in the economy across household and business confidence.

31/10/2013: Eurocoin: Weak Growth Remains Weak: October 2013

In the previous post (http://trueeconomics.blogspot.com/2013/10/31102013-nairu-or-ndru-euro-area.html?spref=tw) I covered the latest unemployment and inflation stats for the Euro area in the context of economic growth conditions. Now, let's update the data for Euro area leading growth indicator, eurocoin:

Eurocoin rose in October 2013 to 0.20 from 0.12 in September, marking the second consecutive month of the indicator reading above zero. However, eurocoin failed to reach statistically significant levels once again. This implies that the recovery is weak, and subject to serious risks.

In line with the indicator increase, growth forecast also improved from 0.1% for Q3 2013 to 0.18% for the start of Q4 2013.

In relation to inflationary pressure, eurocoin is now signalling expansion that is not sustained by underlying domestic activities:

The above conjecture is supported by analysis of eurocoin core components, showing that the latest improvements came from equity markets indicators (as in September) and also from improved industrial production and exports. Industrial production gains were in turn driven primarily by Germany, while composite PMIs remained generally in the negative territory. Meanwhile, consumer sentiment deteriorated, including in Germany (though it stayed in the positive territory there). 

On ECB move potential see: http://trueeconomics.blogspot.ie/2013/10/31102013-nairu-or-ndru-euro-area.html

4/10/2013: Eurocoin: Cautious Return of Growth? September 2013

I have not updated my charts for Eurocoin in some time now, so might as well bring them up to September cover:

Eurocoin - the Banca d'Italia and CEPR joint leading indicator for growth in the euro area rose above zero, for the first time since September 2011, reaching +0.12 in September 2013. The rise was not statistically significant, but is nonetheless welcome. Growth forecast consistent with this level is 0.1% which is below Q2 2013 at 0.3 but that ignores the point that in Q2 2013 eurocoin run at an average of -0.143.

And updating monetary policy charts: growth is still being accommodated by historical standards, but caution on behalf of ECB is still excessive. Cutting rates to 0.25 or lower will be fine, even by inflation consideration (chart below):

And y/y change in inflation/growth relationship:

Inflation dampening while growth accelerating... hardly a scenario for sustained recovery, but we have seen periods with even more pronounced disconnect. 

26/7/2013: Eurocoin signals 22nd consecutive month of recession

CEPR and Banca d'Italia leading growth indicator for the euro area, Eurocoin, is out for July, showing that growth in the euro area economy remained under water for 22nd month in a row.

Per charts above,

• Eurocoin indicator stood at -0.09 in July, an improvement in the rate of contraction on -0.18 in June 2013 and on -0.24% in July 2012.
• Both, 3mo MA and 6mo MA of Eurocoin through July 2013 are at -0.14.
• Q2 2013 forecast for growth is now at -0.15 and Q3 2013 forecast (based on July and trend) is slightly more benign -0.1-0.11, though that is a very high risk forecast.  

Looking at the 'Impossible Monetary Policy Dilemma':

ECB rates are at zero bound and are not stirring growth, with HICP being in the 'safely benign' territory. We are looking at a scenario where the only reason not to drop rates to zero is that doing so will not make any serious difference to growth.

29/3/2013: Eurocoin signals 18th consecutive month of recession

Eurocoin leading indicator for euro area growth was out today. Key highlights:

• Eurocoin rose to -0.12 in March 2013 from -0.2 in February 2013. 
• Eurocoin remains below -0.03 reading attained in March 2012 and +0.57 reading for March 2011.
• 3mo MA is now at -0.183 which gives Q1 2013 growth forecast (q/q) or 0.18% for euro area GDP.
• This means that Eurocoin is now below zero in every month since September 2011, marking a massive 18 months in a row.
• In previous recession of 2008-2009 Eurocoin duration below zero was 13 months, which means that the current bout of economic contraction is longer in duration than the so-called Great Recession.
• In March 2013 Eurocoin gained some upside support solely from buoyant stock markets. 

Here are some charts:

And as usual, monetary policy charts for which analysis remains as postulated in my February post (here):

1/3/2013: Eurocoin February 2013 - 17 months-long recession?

February eurocoin leading growth indicator for the euro area, published by the Banca d'Italia and CEPR came in at another sub-zero reading of -0.20. This marks statistically insignificant improvement from -0.23 in January 2012.

More ominously, the reading posts 17th consecutive monthly below-zero reading. Put differently, on monthly average basis, eurocoin has been posting sub-zero readings since March 2011.

Y/y comparatives are even worse. Back in February 2012 the indicator stood at -0.06, and in February 2011 it was running at a blistering pace of +0.57, while in February 2010 we had a reading of +0.77. In fact, this is the lowest reading for any February since the depths of the Great Recession in February 2009.

Two charts to illustrate the eurocoin dynamics and associated implied growth forecasts:

• 3mo MA is now at -0.233, while 6mo MA is at -0.267. 2008-2009 crisis-period average was -0.31. Draw your own conclusions (STDEV = 0.471 for historical record and 0.560 for the crisis period).

As I pointed out before, the last 12 months of economic performance in the euro area have shown very clearly that the ECB monetary policy stance is not working. Here are the same illustration (updated to February 2013 figures) once again:

Growth-consistent level of the ECB rates is zero. Meanwhile, with slowly moderating inflation still above the target, inflation-consistent rates are probably closer to 1.25-1.5%.

Inexistent fiscal policy at the euro area level is matched by the dysfunctional monetary policy. Next stop? Possibly political psychosis?

27/1/2013: Eurocoin January 2013: Misery broadly unchanged isn't a sign of stabilization

You might be forgiven for thinking that the euro crisis is over and that we are returning to the 'Old Normal' of growth, recovery, stability etc... Much of the recent commentary has been focused on the 'restoration of markets confidence' in sovereign finances, citing yields declines across the euro area.

I covered the latest data on sovereign yields from the CMA quarterly report for Q4 2012 here.

However, euro area remains a global (that's right - global) growth laggard on par with the gravely sick Japan - as the IMF latest WEO update clearly shown (see details here).

And here are the most up-to-date data on leading economic growth indicator from CEPR and Banca d'Italia - the eurocoin - for January 2013:

• In January 2013 eurocoin stood at -0.23, an improvement on -0.27 in December 2012 and the highest reading since June 2012, but still in the negative territory.
• January marked 16th consecutive month of below zero reading in eurocoin and based on historical trends, this gives us forecast for the euro area economic growth of -0.4% in Q4 2012 and same for January 2013.
• In 2008-2009 recession, eurocoin average reading stood at -0.31. In 6 months period through January 2013, the average reading is at -0.29. 
• Ominously, while in 2008-2009 recession period, average ECB rate stood at 2.54%, last 6 months average rate was 0.75%, suggesting that easing of monetary conditions has little effect on the real economy.

Some charts to illustrate:

The next set of charts shows that the ECB policy remains in a bizarre no-man's land of neither delivering price 'stability' target (close to, but below 2%), nor supporting growth.

So no easing of the real economic crisis in sight and no signs of the euro 'saviour' ECB when it comes to dealing with the growth collapse.

30/11/2012: Eurocoin continues to signal EA17 downturn in November

In November euro area leading growth indicator Eurocoin stood at -0.29 % which is the same level as in October. This reading "reflects the opinions of households and businesses, as recorded by the surveys, which overall remain still unfavourable, though signs of an easing of pessimism emerged in some euro-area countries less affected by the sovereign debt tensions". Some details can be found at http://eurocoin.cepr.org/index.php?q=node/148 .

Reading below zero signals contraction in economic activity and the Eurocoin is now under water for 14 months in a row. The reading of -0.29 is the 3rd lowest the indicator reached during the current downturn. 

Consistent with the current slowdown, the price-growth dynamics suggest that there is an opening for further ECB easing:

Per above, it is quite obvious that we are stuck in the quick sand of being very near the zero-rate bound and no improvements in growth.

Per below, current inflation is still above the target, but the direction of change is encouraging:

In particular, latest inflationary pressure easing appears to be in line with ECB expectations and suggest that inflation is relatively well anchored, although still ahead of the ECB formal target.

Furthermore, 3-mo MA for Eurocoin through November 2012 is at -0.3 and 6mo MA at -0.273, both close to -0.31 average for the crisis period of 2008-2009.

The mixed bag of indicators is firmly shifting toward some action from the ECB soon.

20/11/2012: CEPR Recession Dating puts EZ on downturn from Q3 2011

With some delay, it is worth taking a look at the official economic dating of euro area recessions via CEPR (full release here):


"Euro area GDP peaked in the third quarter of 2011 and, except for a minor rebound in the first quarter of 2012, it has declined since then according to currently available data. Although some other indicators of economic activity, most notably employment, had peaked earlier (see below), the Committee has determined that, in this episode, the peak of economic activity coincides with that of GDP. In other words, the euro area has been in recession since 2011Q3." [ emphasis mine]

Two charts:

And a chart with most current leading economic indicator and actual Q3 preliminary data on GDP growth: