29/6/2012: Eurocoin June 2012: Rotten Readings

Eurozone's latest lead growth indicator Eurocoin (CEPR and Banca d'Italia) has hit a new low for the year in June.


In June the €- coin index declined from -0.03% to -0,17%, indicating a further worsening of cyclical economic difficulties. The decline is due principally to the markedly worse results of opinion surveys of firms and households and, to a lesser extent, to trends in share prices.


Charts below:

My forecast, consistent with eurocoin data is for growth in Q2 of -0.25-0.37% in GDP, as per below:

The monetary policy remains stuck in 'ineffective' mode:

Rotten to the core!

28/1/2012: Eurocoin for January 2012

The latest leading indicator for euro area growth -Eurocoin - for January continues to signal recessionary dynamics, albeit at moderating rates of decline.

January Eurocoin rose to -0.14 from -0.20 in December 2011. Here are some charts:

Eurocoin is now in the negative territory for four consecutive months. 3mo MA is at -0.18, 6mo MA at -0.07, crossing into negative for the first time since the last recession. In January 2011 the indicator stood at +0.48. Quarterly rate of growth is now at -0.17 implying annualized contraction of -0.56%.

There is now, due to persistent negative reading, more consistency in eurocoin and ECB repo rate, but inflation-growth remain unbalanced when it comes to applying Taylor rule to ECB rate policy.

All in, the rates decision based on the leading indicator performance should be to stay put and await more significant moderation on inflation side. Mild bout of inflationary recession is still on the cards for the euro area for Q1.

30/12/2011: Eurocoin December 2011: recession + inflation

Eurocoin - euro area's leading indicator of growth environment - posted another disappointing month in December. December reading came in at -0.20, same as November with 'stabilization' accounted for by improvement in surveys-based indicators for industrial and services firms, offset by material deterioration in actual demand indicators. Core Q4 2011 forecast for euro area growth now moved to -0.2, dangerously close to establishing a full-blown statistical contraction in the economy. More significantly, current growth and inflation conditions pairing pushed ECB policymaking into a proverbial straight jacket corner: rates consistent with inflation remain in the region of 3-times higher than current rate, while rates consistent with growth conditions are about right for the current 1.0% rate.

Charts below illustrate.

3mo MA for Eurocoin is now at -0.18, against 6mo MA of +0.03. YOY Eurocoin is down 141% and the indicator remains at the lowest level since August 2009. Annualized growth rate is forecast is running at -0.798% and 6mo MA annualized growth rate is running at +0.117% (also the worst performance since August 2009).

25/11/2011: Eurocoin signals recession for the euro area

And so the euro zone is now most likely in a recession. That's right, the R word is back.

Today, CEPR released its composite leading economic indicator for November - eurocoin - and the measure has posted it second consecutive monthly negative reading on foot of six consecutive monthly declines. Here are the details.

Eurocoin fell to a recessionary -0.20 in November 2011, from -0.13 in October and +0.03 in September.  The 3mo MA is now at -0.1 and 6 mo MA declined to +0.148. A year ago, the indicator stood at +0.45. Chart below updates, including eurocoin-consistent forecast for growth.

The following charts show the ECB decision-making inputs:

So ECB rates consistent with current growth are in the range of 1.0-1.5% - basically bang-on the current rate. However, inflation remains sticky and all indications are it will come in at around 2.7% in November, suggesting that rate expectation is for no change at beast (optimal rates consistent with this rate of inflation is in the neighborhood of 4%).

The ECB dilema continues.

31/10/2011: Stagflation on Europe's doorsteps

Euro area preliminary inflation estimate came in today with October reading at 3.0%. This is the second month in a row with inflation anchored at 3.0% and coupled with the signs of a recession (see charts below showing eurocoin leading growth indicator for October at -0.13, signaling contraction in economic growth) we are now in the stagflationary territory.

 You can see the dramatic deterioration in inflation-growth dynamics year on year in the chart above. The chart below shows updated 'optimal' inflation-consistent zone for ECB rates at over 4.0% against the current rate of 1.50%.

The above suggests that the ECB is now boxed into the proverbial stagflationary corner - lowering rates to improve growth outlook will risk pushing inflation even higher, while hiking rates or even staying put at current rates risks continuing deterioration in growth fundamentals.