17/1/19: Eurocoin December 2018 Reading Indicates a Structural Problem in the Euro Area Economy

December 2018 reading for Eurocoin, a lead growth indicator for euro area posted a second consecutive monthly decline, falling from 0.47 in November to 0.42 in December. December reading now puts Eurocoin at its lowest levels since October 2016.

Charts below show dynamics of Eurocoin, set against actual and forecast growth rates in the euro area GDP and  inflation:

Per last chart above, the pick up in inflation, measured by the ECB’s target rate of HICP, from 1.4% at the end of 3Q 2017 to 1.7% in 3Q 2018 has been associated with decreasing growth momentum (Eurocoin falling from 0.67 q/q to 0.48, and growth falling from the recorded 0.7% q/q in 3Q 2017 to 0.2% q/q in 3Q 2018).

With this significant downward pressure on growth happening even before any material monetary tightening by the ECB, Which suggests that euro area growth problem is structural, rather than policy-induced. While QE did boost growth from the crisis period-lows, it failed to provide a sustainable momentum for significantly expanding potential growth. Thus, even a gradual slowdown in monetary easing has been associated with a combination of subdued, but accelerating inflation and falling growth.

3/1/17: Euro growth greets 2017 with a bit of a bang

December marked another month of rising economic activity indicator for the euro area. Eurocoin, a leading growth indicator published by Banca d’Italia and CEPR notched up to 0.59 from 0.45 in November, implying annualised growth rate of 2.38 percent - the strongest growth signal in 67 months. It is worth remembering that in 2Q and 3Q 2016, real GDP growth slumped from 0.5% q/q recorded in 4Q 2015 - 1Q 2016 to 0.3% in Q2-Q3 2016. Latest 4Q 2016 reading for Eurocoin implies growth rate of around 0.47 percent, slightly below 1Q 2016 levels, but above the 0.31% average for the current expansionary cycle (from 2Q 2013 on).

Charts below illustrate these dynamics

Cyclical trends in growth rates currently imply ECB policy rate mispricing of around 2.0-2.5 percentage points (see chart below).

Meanwhile, inflationary dynamics, based on 12mo MA, suggest current monetary policy environment providing only a weak support to the upside.

The growth dynamics over the last 12 months are not exactly convincing. Even at currently above 2Q and 3Q forecast for 4Q 2016, FY 2016 growth is coming in at 1.58% annualised, against FY2015-2016 growth of 1.65%. Overall, this environment is unlikely to drive significant changes in ECB policy forward, as Frankfurt will continue to attempt supporting growth even if inflation ticks up to 0.4-0.5% q/q range for 12 months moving average basis.

15/5/16: Don't Rush the Cheers for Eurozone Growth, Yet

Remember record-busting 0.6% preliminary flash estimate of the first estimate GDP growth figure for Euro area released back in April? Well, it sort of was true, sort of...

Eurostat now puts 1Q 2016 growth at 0.5% q/q in its updated estimate released today - 0.1% lower than the April estimate. This figure is tied jointly for highest q/q growth figure since 1Q 2011 when it hit 0.8%.

Sounds good? Brilliant - the euro area outperformed both the U.S. and the UK. But when one looks at annual rates of growth... things are not as shiny.

In annual terms, growth rate actually fell in 1Q 2016, from 1.6% in 2Q 215 through 4Q 2015 to 1.5% in 1Q 2016. You won't be jumping with joy on that. And as the euro area lead growth indicator, Eurocoin suggests, rates of growth have been declining over the last three months through April 2016, dropping from cyclical high of 0.48 in January 2016 to a 13-months low of 0.28 in April 2016:

There is a strong smell of smoke from the Eurostat figures. Demand side of the economy is apparently booming. Despite the fact that retail sales are tanking:

Meanwhile, external trade is also underperforming (on foot of euro appreciation from November 2015 lows against both the US dollar and British pound):

Euro bottomed out at around 1.057 to the dollar at the end of November, and steadily gained against the USD every month since, with current valuation around 1.13-1.14 range. This hardly supports European exports to the U.S. Controlling for volatility, similar trend is against British Pound. About the only thing going the euro way today is yen and it is immaterial to the Euro area’s economy.

So euro zone economic growth appears to be loosing momentum since the start of 2Q 2016. And there are both short term drivers for this and long term ones.

Short term drivers, as outlined above suggest that current risks environment appears to be titled to the downside:

• Eurozone Composite Output Index by Markit posted 53.0 in April against March 53.1. Statistically-speaking, the rate of growth effectively remained static. 
• German Composite PMI was at 53.6, which is an 11-months low, French Composite index reading was 50.2 (barely above the 50.0 line, but still at 3mo high), while Italian Composite PMI in April came in at 53.1, also 2 months high. 
• Importantly, the euro zone PMI indices have been moving out of step with the Global PMI readings. In April, while eurozone PMI declined marginally compered to the end of 1Q 2016, Global PMI reading marginally picked up, rising from 51.5 in March to 51.6 in April. 
• The ongoing stagnation in France continued, while solid expansions were noted in Germany, Italy, Spain and Ireland.
• Developed markets saw all-industry output rise at the fastest pace in three months during April. However, the rate of increase still one of the weakest registered during the past three years. Growth remained only modest in both the US and the UK (UK growth slowed to its weakest pace since March 2013). This puts pressure on demand for eurozone exports and, in turn, pressures profit margins and investment.
• Given 1Q growth estimate at 0.5% (q/q growth) from the Eurostat, current level of Eurocoin suggest quarterly growth slowdown to around 0.4%. 
• Ifo’s Economic climate indicator for the Euro area has now been on a clear declining trend since mid-2015 and is now at its lowest levels since 1Q 2015 and second lowest reading in two-and-a-half years.
• In Germany, consensus estimates put gross domestic product growth at 0.3 percent in the current quarter and 0.4 percent in 3Q and 4Q, with full year growth of around 1.5 percent.

My view: we might see 2Q growth coming in at 0.3-0.4 percent, if April trends continue into the rest of 2Q. Overall, I expect 2016 growth to be around 1.4-1.5 percent which is just about to the downside on current consensus estimate of 1.5 percent.


Long term drivers for structural euro zone growth weakness: Even with positive 1Q 2016 print on growth side, it is fairly clear that euro zone lacks serious growth catalysts.

Everyone is talking about Brexit referendum and the renewal of the Greek crisis as key threats. Put frankly - this is a smokescreen. When it comes to longer term euro zone growth prospects both are irrelevant. Growth within the euro area has nothing to do with the UK. And Greece has been effectively removed from the markets and economic agents' considerations - the country is no longer commanding any serious media attention (with markets fatigued by the never-ending 'crises'). With ESM / EFSF /ECB now seemingly the sole bearers of Greek debt (with IMF likely to take back seat in the Bailout 3.0 as per http://trueeconomics.blogspot.com/2016/05/11516-71-steps-guide-to-greek-crisis.html) Greek funding issues and any risk of a default are unlikely to trigger Grexit. Put more directly, even if Greece were to exit the Euro, no one will bat an eyelid over such an event.

Meanwhile, the real long term problems for the euro area are:

• Capex remains subdued across the entire euro area, including Germany, Italy, France. 
• Fiscal policy is currently largely neutral and it is hard to see how the euro area can find any significant capacity to increase fiscal spending. 
• ECB stimulus is working in the financial markets, but not on the ground - there is still too much debt and too little prospect for a return on capital. Quality borrowers are not rushing to take on loans for capex. And the banks are not too eager to lend to borrowers with legacy leverage problems. 
• Eurozone banking is still a mess: capital and loans restructuring is sporadic, rather than systematic, negative rates taking a bite out of margins, but even if this headwind is taken out, markets volatility is not helping. 

And there are even bigger structural headwinds:

1. Lack of agility in the structurally over-regulated and sclerotic economy: technological innovation is weak, adoption of technological innovation is weak, labour force quality is deteriorating, so productivity growth has collapsed. Entrepreneurship is weak. Employment is sluggish and of deteriorating quality. That’s supply side.
2. Demand side is improving due to a short term boost from the post-Great Recession cyclical recovery. But, legacy issues of debt across corporate and household sectors and public finances are still present.
3. On financial side: banks-intermediated funding model for capex is a drag on growth and there is zero momentum on equity and direct debt issuance sides. Even with ECB going into another round of TLTROs, issuance of new bonds has spiked primarily because of larger corporates issuance, not because of market deepening.
4. On policies front, there is total and comprehensive paralysis. EU is malfunctioning, torn apart by crises of European making. National governments have lost capacity to legislate because of delegation of so much decision making to Brussels in the past. Political discontent is rising everywhere. We now have growing proportions of core European countries’ populations - the Big 4s - wanting to reexamine the entire EU.

Europe has been Japanified. And there is little that it can do to avoid this stagnation trap. There is no hope that  fiscal policy can do what monetary policy has failed to deliver - the great hope of Keynesianistas. And with that, both the monetary and the fiscal sides of European growth equation are out. What's left? Endless low interest rates (with a risk of policy error, should Germans rebel against Draghi's uncountable puts) and endless painful quasi-deflating (through low demand) of debt. Aka, pain.

9/10/2014: IMF Lagarde: We Are Out of Ideas, You Are Out of Convictions

In several recent posts, I have highlighted the fact that the IMF - that stalwart of global 'structural' reforms - has now effectively exhausted its toolkit of ideas as to how we can get global growth back on track. And the governments around the advanced economies world are now equally out of conviction to deploy the IMF's old toolkit.

This is evident across the board: from the Fund latest World Economic Outlook update which keeps endlessly banging on about the need for

• Accommodative monetary policies and, simultaneously, de-risking of the financial economy (the two tasks that actually contradict each other, as IMF own GFSR report admits);
• Structural markets reforms (which in the IMFspeak means preciously little more than more reforms of the labour markets, or in distilled terms: more 'activation' efforts to bring the unemployed to still inexistent jobs and push welfare recipients off the dole into still inexistent jobs);
• Credit supply restoration in the economy amidst continued banks deleveraging (which basically means that the banks need to get rid of old - presumably bad risk - loans while increasing their stock of new - presumably better risk - loans);
• Creation of better, more robust risk management frameworks in banking while increasing banking sector concentration (the outcome of the deleveraging process) and increasing risks concentrations by creating more centralised controls and supervision (e.g. the European Banking Union); and so on.

All of the above 'reforms' are clearly self-contradictory in so far as achieving one side of the objective implies undermining the other side.

And with today's release, we have a veritable Map to the Middle-Earth from the Fund's own Christine Lagarde. In today's "The Managing Director's Global Policy Agenda" Ms. Lagarde is navel gazing over 14 pages of text, charts and slides under the sub-heading of "Aiming Higher, Trying Harder". You get the sense of frustration of the Fund stuff with the intransigent Governments unwilling to deploy all of the medicines prescribed to them by the Fund, but you also get a feeling for the out-of-touch banality of the IMF's approach to the crisis.

Take the preamble. "Bold and resolutely executed policies are needed to prevent growth from settling into a “new mediocre,” with unacceptably low job creation and inclusion. Measures should emphasize":

• "Lifting growth. Decisive structural reforms are needed to bolster confidence and lift today’s actual and tomorrow’s potential growth and break the pattern of persistent underperformance and insufficient job-creation. Accommodative monetary policies should continue to support demand and provide breathing space as these reforms are implemented. But it is essential that they are accompanied by macro-critical reforms that remove deep-seated distortions in labor and product markets; improve credit flows to productive sectors; strengthen growth-friendly fiscal frameworks; and eliminate infrastructure gaps." You get a sense that this has been said before, argued many times over and offers nothing new. In effect, the IMF is saying: spend more, cut spending more, re-spend more; and fund it all by printing presses, while making sure the rag-tag of the real economy (SMEs and households) don't get their hands on the printed cash.
• "Building resilience. Easy money continues to increase market and liquidity risks, especially in the shadow banking sector, potentially compromising financial stability. Appropriate regulation and vigilant financial sector supervision, including developing and deploying macro-prudential tools, can help limit excessive financial risk-taking. Preparations for less benign financial conditions also need to be stepped-up. As monetary policy normalization approaches in some major economies, stronger policy frameworks, institutions, and economic fundamentals can mitigate potentially adverse spillovers." But, dear IMF, who creates this 'easy money'? And for who the money is 'easy'? The answer is in the first point above: printing presses do create 'easy money' and Governments and larger banks get 'easy money'. So de facto, IMF advice 1 and 2, taken together mean that creating growth + building resilience to risk = growing the share of Government and big banks in the economy. That should really keep troubles at bay, especially since the current crisis is caused by… yep, you've guessed it, rising role of Governments and big banks in the economy. Apparently, what can't kill you makes you stronger.
• And then there is IMF advice that IMF should learn to follow itself: "Achieving coherence. International cooperation is needed to amplify the benefits from these bold policies and to avoid exacerbating existing distortions, particularly regarding financial stability and global imbalances. Dialogue and policy cooperation can help smoothly rebalance global demand; minimize adverse spillovers and spillbacks from asynchronous monetary unwinding; ensure consistent financial regulation; and maintain an adequate global financial safety net. Fresh momentum must be injected into the global trade dialogue." Where did we hear that? Ah, yes, right - we've heard in Greece (when the IMF quietly stood by as the EU rained chaos onto Greek and Cypriot financial systems and Exchequers by refusing to get Public Sector Participation - or restructuring - going); and we heard it in Ireland (where the IMF stood idly by as the Irish Governments and European partners loaded some EUR70 billion-plus worth of banks debts onto the real economy and then destroyed entire sectors of the economy in the name of Nama-lution); and in Italy (where IMF is still refusing to acknowledge the need for sovereign debt restructuring).

Do not forget that the IMF team has run out of Athens this week in a hissy - the most heavily 'repaired' economy in the world seems to be going off-the-rails again.

Here is the road map for advanced economies as traced by the IMF:

As we have it: in Euro Area the achievements were: 1) 'good progress' on monetary easing (the printing press) but more to be done; 2) 'some progress' on consolidating the banking system eggs in one regulatory basket (and more to be done); 3) basically no fiscal reforms; and 4) no reforms on taxation, no improvement in competition across both labour and product markets (not to mention decline in competition in financial economy).

Are we still talking, Ms Lagarde? Oh yes…

Let's take a look at the first pillar of IMF 'wisdom': the printing press. Here's Fund own assessments of the outcomes: "Despite massive and welcome monetary support in major advanced economies and slowing fiscal consolidation, the recovery remains uneven and sluggish. Growth, and hence policy advice, are increasingly divergent across countries. Inflation is still below target in many advanced economies and is a growing concern in the euro area, while unemployment has stayed high. … The envisaged acceleration in economic activity has again failed to materialize."

So just as with Krugmanomics, the IMFology calls for more printing, cause previous rounds weren't enough: "Growth prospects in advanced economies are expected to remain uneven across regions. The strongest growth rebound is expected in the United States, while growth in Japan will remain modest. The crisis legacy brakes (including high private and public debt) are expected to only gradually ease in the euro area, while inflation expectations continue to drift down and deflationary risks are rising. Growth elsewhere, including other Asian advanced economies, Canada, and the United Kingdom, is projected to be solid."

And with all of those 'structural reforms' - do we have an uplift in at least potential (if not actual) output? Nope: "Growth potential may be lower than earlier assumed… Increasing evidence suggests that potential growth started to decline in advanced economies even before the onset of the crisis—which may be affecting the current pace of recovery. The recent slowdown in EMEs also has a large structural component, raising questions about the sustainability of growth rates achieved prior to the crisis and during the 2010–11 rebound."

So here are two road maps side by side: one for Spring 2014 and another for Fall 2014… and, save for gentle re-phrasing of the same, the two are largely identical when it comes to the advanced economies.

So spend more on infrastructure as opposed to reduce debt overhang... and that will be funded by what? Pears and apples?

Out of new ideas. QED.