2/4/15: BRIC: Business Outlook 12 months ahead

Summary of BRIC economies Business Outlooks for 12 months ahead, via Markit:

India: "The Markit India Business Outlook survey points to sustained optimism among Indian companies. However, the net balance of +26 percent for overall output is the lowest in one year and below the both the BRIC and global averages. Weaker degrees of sentiment have been recorded across the manufacturing and service sectors, with the respective net balances registering +24 and +28 percent in February."

Russia (covered in more detail here: http://trueeconomics.blogspot.ie/2015/04/2415-russia-business-outlook-q1-2015.html): Overall private sector outlook forward has improved at the mid-point of Q1 2015 compared to the start of Q4 2014 as headline % of companies expecting an increase in next 12 months minus % expecting a decline has risen to +20% from Q4 2014 record low of +10%. The net balance for expected goods production over the next 12 months has risen to +35%, the highest since October 2013." We are seeing effects of imports substitution.

China: "…continued optimism at Chinese companies regarding future business activity". "February’s net balance of +30 percent is up from +26 percent in the autumn to the highest reading in a year. The latest reading is also above both the BRIC and global averages (+28 percent and +27 percent, respectively). …A net balance of +28 percent of goods producers anticipate an expansion of output over the coming year, up from +25 percent in October. Meanwhile, a net balance of +32 percent of service providers forecast business activity to increase in the next 12 months. This is the highest net balance seen in the service sector since mid-2012."

Brazil: "private sector companies remain optimistic towards output growth in the coming 12 months. However, the business activity net balance has slipped from +44 percent last October to +28 percent, its lowest reading since composite data were first available in October 2009. Sentiment has deteriorated at manufacturers and service providers."

As the chart below summarises, BRIC expectations are more subdued than those in the major advanced economies, with exception for Japan and the US.

Click on the chart to enlarge

Overall, this data shows consistent trend toward moderation in business expectations across the BRIC economies into Q1 2015, signalling growing downside risks to global growth. So far, ex-India (yet to be reported), Manufacturing data for March PMI surveys suggests this trend continuing through the end of Q1.

2/4/15: Russia Business Outlook: Q1 2015

While we are waiting for Markit to publish the latest Services PMIs for BRIC economies and the last remaining Manufacturing PMI of the group for India, here are some interesting stats on longer-term outlook in the Russian economy.

Via Markit Russia Business Outlook survey for Q1 2015, covering business expectations 12 months forward:

• Overall private sector outlook forward has improved at the mid-point of Q1 2015 compared to the start of Q4 2014 as headline % of companies expecting an increase in next 12 months minus % expecting a decline has risen to +20% from Q4 2014 record low of +10%. 
• Nonetheless, as Markit notes, "the latest figure is still the joint-second lowest since the series began in late-2009."
• "Moreover, among the countries surveyed globally, only Japan (+16%) and France (+19%) have weaker activity expectations than Russia."

Interesting point: per Markit, "The overall improvement in the business outlook has been driven by manufacturers. The net balance for expected goods production over the next 12 months has risen to +35%, the highest since October 2013." We are seeing effects of imports substitution.

Another point is that Services providers are much less optimistic: "...the services activity net balance has risen only slightly to +12%, the third lowest on record and the weakest figure among all

countries surveyed."

Core drivers for downside in expectations: "general weakness in the wider economy, a lack of working capital, high interest rates, inflation, currency fluctuations and a rising tax burden." Key risk, especially in the Services sector, is Capex: "... firms expect to cut capital expenditure over the next 12 months. The net balance for capex has trended lower since the start of 2013, and has fallen into negative territory in February for the first time, at -2%. This is also the lowest capex net balance of all countries surveyed. Service providers expect to cut capex (-3%) while the outlook at manufacturers is broadly neutral (+1%)."

Considering the above chart, the slowdown in the economic growth has become pronounced in Q4 2013, although structural weaknesses appear to set in around the ned of 2011. This is also consistent for the BRIC group overall as shown in the chart below:

Excluding Brazil (see my PMI analysis of the BRIC for more on this) all other BRIC economies have posted a sharp drop in expectations starting with Q1 2012. This trend remains persistent through Q1 2015, with Brazil joining the line up in full in Q1 2015.

Not a good sign for the global economic growth prospects...

1/4/15: H-W Sinn "Europe’s Easy-Money Endgame"

A very interesting op-ed by Professor Hans-Werner Sinn of German Ifo Institute for Project Syndicate: http://www.project-syndicate.org/commentary/euro-demise-quantitative-easing-by-hans-werner-sinn-2015-03

The problem outlined by Professor Sinn is non-trivial.

"...for countries like Greece, Portugal, or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30%, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10-15%. But Portugal and Italy have so far failed to deliver any such “real depreciation,” while relative prices in Greece and Spain have fallen by only 8% and 6%, respectively".

As Professor Sinn notes, there are four possible solutions:

1. "Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it." 
2. "The south can deflate." 
3. "The north can inflate." 
4. "Countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency."

So here's the problem, correctly identified by Professor Sinn: "Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls".

Now, note: Ireland has opted for the second path. Any surprise we are driving people into bankruptcy in tens of thousands (once current legal queue is taken into account), along with multiple businesses?

But back to Prof Sinn's analysis. Remember the ECB QE? Ok, says Prof Sinn, suppose it delivers on target inflation of just under 2%. What does it mean for internal devaluations in the 'peripheral' Europe?

"If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today."

The problem, thus, is an unresolvable dilemma, since with that sort of arithmetic, we are in a tough bind:

• Either Germany runs mild inflation, while the 'periphery' runs outright deflation, allowing - over a painfully long period of time (decade or more) to devalue the imbalances, or
• Eurozone pursues Mr Draghi's objective of 'just under' 2% inflation across the entire Euro area at the expense of Germany (and the rest of the already shrunken 'core').

Do note, I have argued before that deflation in the 'periphery' is not a bad thing, as it allows for the interest rates to remain low (servicing cost of household and corporate debts is lower) and deleveraging of the households and companies to be less painful, while sustaining some domestic demand through increased purchasing power of incomes. So I agree with Professor Sinn's criticism of the ECB QE programme. 

The problem is that this means, as Professor Sinn rightly suggests, continued suppression of demand (the 'austerity' bit).

The choice faced by Europe are ugly. All of them. And there are no guarantees for any of them to actually work. And the cause of this problem is singular: creation of a political currency union. For anyone who says that Greece, Italy, Portugal, Cyprus, Ireland and Spain have caused their own problems, the replies are both simple and complex: 

• The simple one: absent the euro, their problems would have been by now solved by a combination of the old-fashioned defaults and devaluations. 
• The complex one: absent monetary transfers (lower interest rates and ample bank liquidity flowing cross-borders) with the EMU from the late 1990s through 2007, the imbalances generated in the 'peripheral' economies would never have been this large. Which means that the simple reply above would have been even more easy to apply.

1/4/15: St. Petersburg's Finec Students Visit Dublin

It was a real pleasure last week to speak to a group of students from St. Petersburg State University of Economics (Finec) during their visit to The College of Business, DIT as a part of the joint MSc programme.

Very informing Q&A and subsequent discussions. One very pressing topic, raised by students was the perception of Russia in Ireland and in Europe.

This was an open event for IRBA members too, so quite a few came over to the presentations and Q&A. 

1/4/15: Greek Crisis: Gaining Rhetorical Speed

So Greece is on- off- today in relation to the upcoming repayment of the IMF EUR450 million tranche due April 9. And no, it ain't April Fools Day joke.

Reuters reported as much here: http://mobile.reuters.com/article/idUSB4N0VR02320150401?irpc=932 and a more detailed report is here: http://www.spiegel.de/wirtschaft/soziales/griechenland-will-sich-nicht-an-iwf-zahlungsfrist-halten-a-1026697.html. Subsequently, the claim (made on the record) was denied: http://www.telegraph.co.uk/finance/economics/11509302/Greece-threatens-international-default-without-fresh-bail-out-cash.html

What happens if Greece does go into the arrears via-a-vis the IMF? Here is the IMF position paper on what happens in these cases: http://www.imf.org/external/np/tre/ofo/2001/eng/090501.pdf
And here are the Measures for Prevention/Deterrence of Overdue Financial Obligations to the Fund—Strengthened Timetable of Procedures as tabulated in the above report:

Which means that, in the nutshell, little beyond bureaucratic notifying and meetings takes place within the first 3 months of the breach. Nothing in terms of IMF penalties, that is. The markets, of course, will be a different matter altogether.

Meanwhile, Greece is rolling back on some past 'reforms':

And is planning on asking for more money soon:

This is some sort of a Chicken Game head-on road competition, while dumping petrol on the way... for speed...

1/4/15: Irish Manufacturing PMI: March 2015

Markit/Investec Manufacturing PMI for Ireland came out today showing continued and robust growth in the sector (or in the sub-sample of the sector covered by the survey).

Per Markit: "The Irish manufacturing sector registered a further strong improvement in operating conditions during March, helped by a series-record rise in employment. Job creation was linked to a further sharp increase in output requirements amid strong new order growth. The recent weakness of the euro against both the US dollar and sterling led to a first increase in input prices in three months."

Balmy conditions in the sector have meant that the PMI slipped somewhat from the scorching hot reading of 57.5 in February to a hot and humid 56.8 in March. Trend is flattening out, as expected, given the already surreal readings and the fact that the index has been over 50.0 for 22 consecutive months and within statistically significant difference from 50.0 for 19 months straight.

Aside from the above, anecdotal evidence - from one of the larger trade bodies - suggests that externally trading SMEs are now showing serious uptick in their exporting activity due to improved exchange rate environment.

Cited by Markit employment outlook strength is confirmed by today's Live Register data for February 2015 which shows:

1. Significant declines in Live Register y/y
2. Broad declines in Live Register across duration of registrations (long- and short-term supports); and
3. Broad declines in Live Register by occupation, with all occupations posting decreases in LR.

So on the net - good news.

1/4/15: Export@Google March 2015

My recent conversation about the state of the global markets, economy and everything for Export@Google event last month

This is now available on youtube: https://www.youtube.com/watch?v=wnoH_ndAQRI

1/4/15: Russian Manufacturing PMI: March 2015

Russian Manufacturing PMI (Markit & HSBC) for March came in with new disappointment: the indicator slipped to 48.1 from 49.7 in February. This marks the second lowest reading in the series since June 2009 (the lowest reading since June 2009 was recorded in January this year at 47.6).

from Markit release: "production and new business both recorded mild declines. Employment also fell, but at a weaker rate with consumer goods producers recording modest growth. There was some positive news on the inflation front, as input and output prices continued to rise, but to much slower degrees than seen at the start of the year".

Overall trend toward deepening contraction in the Manufacturing remains:

Ironically, February improvement in PMI to 49.7 (still below 50.0) means that 3mo average for Q1 2015 is now at 48.5 which is better than 3mo average for Q1 2014 (48.3), if only marginally. This is despite the fact that in March 2014, PMI was reading 48.3 against 48.1 in March 2015.

As reminder, Russian Manufacturing PMIs first slipped below 50 in July 2013 and remained below 50 in 15 months out of the last 21 months.

31/3/15: Six out of Seven Signs the US Economy is Weaker in Q1

That economic recovery in the U.S. - the engine for growth in far away places, like Ireland, the hope of the IMF, the beacon of the dream that debt stimulus is a fine way to repair structurally weakened (let alone devastated - as in the Euro area) economies is... err... coughing diesel:

Source: @M_McDonough

In basic terms, five out of six tracked Economic Surprise sub-indices are in the red now, with four of them in the red for some time. And the overall Bloomberg Economic Surprise index is in the red, and has been in the red for most of the Q1. And the overall index is falling in steep ticks... which is not good... not good at all.

31/3/15: Three Strikes of the New Financial Regulation: Part 2: Dubious Economics of FTT

My new post on the mess that is Europe's Financial Transactions Tax is available on LearnSignal blog: http://blog.learnsignal.com/?p=169

31/3/15: The Most Effective QE of all QEs

In the previous post I shared my view of the QE. Here is the best, most succinct summary of the effectiveness of the 'most effective' of all recent QEs: the US example via @Convertbond:

Nails it.

31/3/15: QE for the People

ECB's QE programme launched this month is targeting wrong policy and likely to fuel an already massive bubble in stocks and bonds. It is also unlikely to help generate real economic growth, as it simply transfers more wealth to the financial markets.

Look at the facts: 

• The Eurozone is suffering from structural stagnation that is driven by the lack of investment, anaemic domestic demand and policies, including taxation and enterprise regulation, that reduce entrepreneurship and make jobs creation and productivity growth (especially Total Factor Productivity) excessively costly.
• Overall household and corporate indebtedness in the Euro area remain high despite several years of deleveraging.
• Bank lending markets fragmentation contrasted by booming equity and bond markets shows that the problem is not in the lack of liquidity, but in over-leveraging present in the economy.

Experience in other countries that recently deployed QE shows that current measures by the ECB are unlikely to provide sufficient stimulus to drive growth to the new (and higher) ‘normal’: 

• Japan, the US, and the UK experiences with QE show that monetary policies are useful to the real economy only when they are combined with either expansionary fiscal policies or real investment increases or both.
• Even in such cases where QE has been successful, sustainability of QE-triggered growth has been weak in the presence of structural debt overhangs (Japan) and had to rely on structural drivers for growth present prior to the deployment of QE (the UK and the US).
• In the Euro area, the idea is to combine QE with austerity policies and in the presence of dysfunctional financial markets. Such a program could increase misallocation of resources via bidding up financial assets prices over and above their long term fundamentals-justified levels. 
• Bank of England created £375bn over the course of its QE programme. By the Bank of England’s own estimates, QE in the UK pushed up share and bond prices by around 20%. But because around 40% of stock market wealth is held by the wealthiest 5% of households, QE has made that wealthiest 5% better off by around £128,000 per household. 
• You might want to check this post on the potential effects of QE on the real economy: http://www.zerohedge.com/news/2015-03-28/finally-very-serious-people-get-it-qe-will-permanently-impair-living-standards-gener 

In short: the QE, as currently being carried out by the ECB, benefits the less-productive holders of financial assets, not the poor, nor the entrepreneurs, nor the real enterprise.

There is an alternative policy, a policy of “Quantitative Easing for the People”, an idea of distributing QE money directly to the citizens of the Euro area.

This is a more efficient approach for stimulating the real economy precisely because it puts liquidity directly at the point where it is needed most and can be used most efficiently, absent intermediaries, to address real structural problems present in the economy.

The plan is identical to the ECB current plan in terms of funds allocated: €60 billion will be created each month for 19 months. The amount each national central bank will create can also depend on its share of capital in the ECB, just as the current ECB QE programme envisages.

Each Eurozone citizen can receive ca €175 on average each month for 19 months. 

• The funds are taxable income, so there is a benefit to the Exchequers, allowing the governments to engage in expanded investment programmes or more efficiently close some of the budgetary gaps, while buying more time to implement structural reforms.
• The funds (net of tax) can be used by households to accelerate debt deleveraging and/or repair their pensions funds and/or fund consumption.
• As the result, “QE for the People” will stimulate domestic demand (consumption, investment and Government investment), while increasing the rate of debt deleveraging.
• In addition, “QE for the People” can help improve banks’ balancesheets by increasing loans recovery (as households repay loans). In contrast, ECB QE will not have such an effect as it will be taking off banks balancesheets zero risk-weighted Government bonds.  Thus, “QE for the People” can be seen as a more efficient mechanism for repairing financial system transmission mechanism than ECB own QE policy.
• The quantum of stimulus implied by the “QE for the People” proposal is significant. Take Ireland, for example. “QE for the People” means annual benefit of around EUR8 billion in direct stimulus (depending on how Ireland's share is estimated). In 2014, Irish Final Domestic Demand grew by EUR6.15 billion. So the direct effect of this measure for just one year would be equivalent to more than full year worth of real economic growth.

19 economists from across Europe and outside signed last week’s FT letter proposing this plan (with some variations) to stimulate the real economy in the euro area. The original letter is available here: http://www.basicincome.org/news/2015/03/europe-quantitative-easing-for-people/. 

This note posits my personal view of the alternative policy, somewhat at variance with the letter itself on the specific modality of Government involvement in the funding and Government receipt of the QE funds over and above normal tax capture (which I do not support).