2/3/16: BRIC Manufacturing PMI: February

BRIC manufacturing sector conditions have posted major deterioration in February 2016 compared to January, marking another ugly month for world’s largest emerging economies.

Russian Manufacturing PMI for February posted a rather unsurprising and relatively mild deterioration from already marginally-recessionary reading in January. Details are covered here: http://trueeconomics.blogspot.com/2016/03/2316-russia-manufacturing-pmi-february.html.

Chinese Manufacturing PMI continued to tank in February, with country Manufacturing sector remaining the weakest of all BRICs, save Brazil, every month since July 2015. The details are covered here: http://trueeconomics.blogspot.com/2016/03/2316-china-manufacturing-pmi-february.html.


Meanwhile, Brazil’s manufacturing recession “extended to February, with a further drop in incoming new work leading companies to lower production and cut jobs again. Such was the extent of the downturn that firms shed jobs at the second-fastest pace since April 2009,” per Markit.

Brazil’s Manufacturing PMI fell from an ugly 47.4 in January to a horrific 44.5 in February, marking 13th consecutive sub-50 reading. On a 3mo average basis, Brazil’s Manufacturing remained in a contraction (45.8) over the 3mo period through February 2016, just as it was in the contraction (44.0 average) in the 3mo period through November 2015. In 3mo period through February 2015, PMI averaged 50.2.

Per Markit: “Amid evidence of an increasingly fragile economy and a subsequent fall in demand, the level of new business received by Brazilian manufacturers decreased in February. Having accelerated to the fastest since November 2015, the pace of contraction was steep. As a consequence, companies scaled down output again. Production dipped at a sharp and accelerated rate.
Supported by the depreciating real, new foreign orders for Brazilian manufactured goods improved for the third straight month in February. That said, new business from abroad increased at a modest pace overall.”

All in, Brazil remains BRIC’s weakest economy in Manufacturing sector terms every month since February 2015.


As in previous months, India was the only BRIC economy with Manufacturing PMI reading above 50.0 marker. In February 2016, Indian Manufacturing PMI stood at 51.1, unchanged in January 2016. The positive impact of this, however, is weak, at 51.1 marks relatively low (by historical comparisons) growth in the Indian Manufacturing sector.

Per Markit: “Manufacturing business conditions in India continued to improve, with new orders, exports, output and purchasing activity all rising in February. However, a faster expansion in new business inflows failed to lift growth of output and workforce numbers were left broadly unchanged again. PMI
data also highlighted a weaker rise in costs and the first reduction in selling prices since September 2015… Reflecting sustained growth of new work, Indian manufacturers raised their production volumes in February. That said, the rate of expansion eased since January and was marginal overall.”

On a 3mo MA basis, Indian Manufacturing PMI averaged 50.4 in 3 months through February 2016, down on 50.7 average for the 3mo period through November 2015 and down massively on 52.9 3mo average through February 2015.

Overall, India remains the best performing economy in the BRIC group, even though its Manufacturing sector growth is now in slow growth mode since September 2015.

In summary, in February, BRIC group of world’s largest emerging markets economies has posted another deeply disappointing performance across the Manufacturing sector. This compounds adverse headwinds in these economies in January and signals strong possibility of the BRICs exerting a significant negative pressure on global growth.

2/3/16: China Manufacturing PMI: February

Chinese Manufacturing PMI for February signalled worsening operating conditions in the sector and marked 12th consecutive month of recessionary readings, reaching 48.0 in February, down from 48.4 in January and down from 50.7 in February 2015.

Per Markit: “Operating conditions faced by Chinese goods producers continued to deteriorate in February. Output and total new orders both declined at slightly faster rates than at the start of 2016, which in turn contributed to the quickest reduction in staffing levels since January 2009. Lower production was a key factor leading to the steepest fall in stocks of finished goods in nearly four-and-a-half years during February. At the same time, lower intakes of new work enabled firms to marginally reduce their level of work-in-hand for the first time in ten months. Prices data indicated weaker deflationary pressures, with both selling prices and input costs
declining at modest rates.”

On a 3mo MA basis, 3mo average through February stood at 48.2 - second lowest in the BRICs, up marginally on 48.0 3mo average through November 2015, but down on 50.0 3mo average through February 2015.

It is simply impossible to imagine how this data can be consistent with 6.9 percent growth recorded in 2015 or with over 6% growth being penciled for 1Q 2016.

As shown above, China is now a consistent under-performer in the BRIC group since July 2015 with its Manufacturing PMI reading below that of Russia (in a recession) and above Brazil (in a deep recession).

2/3/16: Russia Manufacturing PMI: February

Russian Manufacturing PMI for February produced another disappointment, falling from a marginally contractionary reading of 49.8 to somewhat faster contraction-signalling 49.3.

Per Markit, “Russian manufacturers reported a further deterioration in operating conditions during February, the third in as many months. Job cuts
were evident amid a sharp fall in backlogs of work. However, production remained broadly unchanged as a slight rise in new orders was reported. Meanwhile, price pressures remained evident, as both output charges and input costs rose.” So firms effectively were reducing their backlogs of orders, with work-in-hand reductions continuing now every month since March 2013.

On a slightly positive note, per Markit: “Russian goods producers recorded a slight expansion in new business volumes during February. According to anecdotal evidence, a higher volume of new work reflected the development of new products. However, the rise in new orders was driven by the domestic market, as new export orders declined further. The rate of contraction accelerated to the sharpest in 19 months and was marked overall.”

On a 3mo MA basis, 3mo average through February 2016 stood at 49.3, which is lower than the 3mo average through November 2015 (49.8), but still better than the 3mo average through February 2015 (48.7).

So the key reading from this data is that Manufacturing remains in a shallow downturn for the third month in a row, signalling a poor start to 2016 and leaving no doubt that the economy is now set to post another quarter of negative growth, unless there is a major improvement in Services sector readings in February and a major gain across both sectors in March.

29/2/16: GE 2016 - Ireland's Answers to No Questions Asked

The election 2016 is a catalyst-free contest that has been shaped by the political parties attempts to understand the mind of the electorate, while the electorate has been struggling to make up its mind about what the pivotal issues of the election should be. Compounded by the  epic gaffes of the reality-skipping life-time politicos (take that Enda Kenny pill, ye old comedian) and we had an election devoid of real ideas and ideals as far as the mainstream parties go.

Harder Left and genuine Centre-Left (e.g. Social Democrats and majority of the independents) have attempted to focus the elections on the issues relating to the lagging nature of economic recovery in the domestic sectors - an issue that, traditionally, has been the core breadwinner for the Labour. However, having completely abandoned any pretence at ideals-based, principles-rich politics, the Labour has thrown its weight behind the FG-led attempt to steer plebiscite into a debate about a general (and to majority of us abstract) notion of policy continuity and stability of governance as the panacea for the ‘continued recovery’. Topical issues and specific policies aimed at actually producing a real recovery that is not stuck in the canyons of tax arbitrage by the MNCs became the victims of this absurd departure from the world of the living into the world of FG/LP.

Even shielded from competition by being effectively the only Right-of-Centre (in the Politics of Boggerville 101-style of Enda Kenny and Michael Noonan) party, FG has managed to squander the election by such a massive margin, one has to wonder how on earth can the party continue to pretend to represent anyone other than a handful of clientilist farmers, rent-seeking businessmen and a bunch of conservative civil servants. 

Not surprisingly, the key battles of the GE2016 have been waged in the contestable space created by Labour’s departure from its social and electoral core. 

Failure of Labour and FG to consolidate Centre-Left and Centre has meant that the FF was left significant room to recover some of its electoral fortunes. In a typically FF fashion, the ‘new party of the Centre-Left’ has managed to deliver very few tangible new ideas, but provided plenty oppositional rhetoric and old-fashioned pork barrel promises.

All in, Election 2016 was dominated by the lack of big thinking, shortage of specific ideas, and a large doses of surrealism. Neither global, nor European context entered the mainstream debates; economics swung from ‘tax and don’t spend’ to ‘don’t tax and do spend’ heralding the arrival of the Celtic Tiger 3.0. The entire circus of the ‘fiscal space’ debates was yet another opportunity for Enda Kenny to play the role of a cross between the U.S. Republican contestants Ben Carson and Jeb Bush - a dynamic combo of a man who can’t run for the office and a man who doesn’t know he wants to run for the office. Money, advisers, analysts, party machines and even track record - all squandered on disconnecting from the voters.

In contrast, three smaller political groupings / parties: Renua from the Right and Social Democrats from the Centre Left and the Independent Alliance have mangled to produce far reaching, ambitious, even if, at times, poorly structured policies proposals. The Independent Alliance and Soc Dems have fielded some really strong, highly impactful candidates with ideals and occasionally ideas of their own. These three forces, relatively weak and surrounded by a sprinkling of other independents and political groupings brought into Election 2016 something missing in Irish politics - integrity, honesty, openness and debates. No matter how strong their showing in the current Election has been, they provided a crucially important alternative to the stale politics of Irish elites: the Axis of FG, FF and Labour.

The most surprising aspect of the Election 2016 is the complete and total disregard by the core political parties for the voter perception of Irish politics as a palace of parochialism, corruption and cronyism. After 5 years of the current Coalition effectively replaying old FF book on cronyism and favouritism, while droning on about the ‘New Era in Politics’, the litmus test of this electoral cycle should have been a focus on political system renewal and reforms. This simple was a task too difficult for the political system to handle and even contemplate. Which, sadly, means that our Permanent Government - the cabal of unelected advisers and senior civil servants - remain in place, aided and abetted by the school of hungry and agile piranhas from the private sector always ready to issue a research note or two about the need for continuity, the necessity of predictability, the value of stability and the fabled markets’ longing for conformity with the status quo.

All hail Tipperary North constituency for delivering much of it in a concentrated form once again… 

Which brings us around to 'predicting the future'. It will be the same as the past.  

Any coalition involving FG will be a poison chalice to either FF or FG or both precisely because although FF lacks ideas, at least it is based on the ideal of a pub-pump-politics that connects with wider ranging population. FG can't even muster as much. Despite the fact that the latter has a better pool of younger cadre than the former, in my opinion, and has been better in governance too (although here we really are setting the bar low to begin with). FG will continue to play the 'extend and pretend' card in any power deal, hoping the miracle of recovery (sooner or later, it is bound to happen in a meaningful way, or so the theory goes) will sustain them into the next election. Which means their track record will be woeful - no reforms, no change, just throwing pennies and dimes at problems as soon as Michael Noonan can rake them in. 

For FF, such a scenario won't be good enough because the party needs desperately to rebuild and re-energise its base (which it started doing in the GE 2016, but is yet to complete).

Any other coalition (involving Independents) will not be stable, as FG seniors clamour for top brass positions, while the Independents largely want the same. Competition is an unbearable condition for Irish elites that prefer to play a 'spread others' butter on your spuds' game.

Alternatively, the whole circus tent might come down and we might go to the polls once again, comes late 2016 - early 2017, especially if the 'fiscal space' gets shocked a tad.

I'd put 30-35% chance on the GE2016.2.0, an a balance on the FF/FG shotgun marriage, and a 40% change on GE2017. Though, of course, miracles of the parish priest and the publican agreeing with the AIB branch manager down at the pub on where to put that new Centra in town do happen, still... Harmony might be attained.

28/2/16: ECB in March: A Thaw or a Spring Blizzard?

My comment on what to expect from the ECB in March for Expresso http://en.calameo.com/books/004629676f86bc6c6796a.

As usual, full comment in English here:

While the transmission mechanism has been improving in recent months across the euro area, leading to stronger lending conditions across the common currency area and a wider range of the member states' economies, inflationary dynamics remained extremely weak, even when stripping out the effects of oil and other commodities prices. As the result, ECB continues to see inflation as the key target and is likely to intensify its efforts to boost price formation mechanism.

Thus, despite all the ECB efforts, inflation remains stubbornly low and even slipping back toward zero in more recent data prints. Improved lending is not sufficient to create a major capex boost on the ground, weighing heavily on growth dynamics. Lower costs of borrowing for the euro area governments, while providing significant room for fiscal manoeuvre, is simply not sufficient to sustain a robust recovery. About the only functioning side of the monetary policy to-date has been the devaluation of the euro vis a vis the US dollar - a dynamic more influenced by the Fed policy stance than by the ECB alone.

My expectation is that the ECB will cut its deposit rate to -40 bps (a cut of 10 basis points on current) with a strong chance that such a cut can be even deeper. We can further expect some announcement on an extension of the QE programme beyond the end of 1H 2017.

The key problem, however, is that the ECB is also becoming more and more aware of the evidence that past QE measures in Japan, the UK, the euro area and across Europe ex-Euro area have failed to deliver a sufficient demand side boost to these economies. Thus, in recent months, the ECB has been increasing rhetorical pressure on member states governments to engage in supply side stimuli. Unfortunately, this too is a misguided effort.

In the present conditions, characterised by markets uncertainty, heavy debt overhangs and mis-allocated investment on foot of previous QE rounds, neither supply nor demand sides of the policy equation hold a promise of repairing the euro area economy. In addition, accelerated QE will likely feed through to the markets via higher volatility and possible liquidity tightening (bid-ask spreads widening, fear of scarcity of high quality government bonds and uncertainty over viability of the current monetary policy course).

28/2/16: Deutsche Bank post covered in Turkey

Turkish channel Kanal Finans covers my post on Deutsche Bank trials & tribulations: http://kanalfinans.com/one-cikanlar/bir-deutsche-bank-krizi-vardi-ne-oldu-sant-manukyan.

Original post here: http://trueeconomics.blogspot.com/2016/02/12216-deutsche-bank-crystallising.html.

28/2/16: Expresso on Paul Mason's Latest Book

Portugal's Expresso reviewing Paul Mason's ( @paulmasonnews ) recent book "Postcapitalism: A Guide to Our Future" here: http://expresso.sapo.pt/economia/2016-02-28-Vem-ai-o-pos-capitalismo, including a comment of mine.

In English, my full view:

In his latest book, Paul Mason tackles some key themes of the global economic development in the new millennium : themes of debt overhangs, technological disruptions and the shifting of political, social and economic systems toward more data-intensive, more open and democratic platforms. Noting the links between the fragility of the global financial system (the financialisation hypothesis), persistent macroeconomic imbalances (global current account imbalances and savings-investment mismatch),  and the severe levels of private and public indebtedness, he draws two key conclusions that are required to describe the current state of the world economy: the link between the no-longer sustainable model of economic growth based on leveraging, and the need to break the status quo of indebtedness in the real economy. For those of us, who have, over the years, persistently called for these changes to be enabled by fiscal and monetary policies, Mason's book is a welcome addition to the arsenal of intellectual arguments supporting real change in the ways we structure our macroeconomic policies. For those who, like majority of Europe's political elites, have sleepwalked through the ongoing financial, fiscal, monetary and economic crises, it is a necessary wake up call.

I covered the above themes throughout the blog and across a range of articles in the past, most recent being this example: http://trueeconomics.blogspot.com/2016/02/17216-four-horsemen-of-economic.html.

28/2/16: Every Little Hurts: U.S. Consumers and Inflation Perceptions

I have written quite a bit about the wobbles of time-space continuum in the U.S. economic growth universe in recent months. But throughout the entire process, the bedrock of U.S. growth - consumer sentiment - appeared to be relatively stable as if immune to the volatility in the fortunes of the broader economy.

This stability is deceptive. Here is a chart plotting sub-series in the University of Michigan surveys of consumer confidence:

The above shows several things, some historical, others more current.

Firstly, the impact of the crisis of 2008 and subsequent second dip in the economic crisis fortunes in 2011. These were sizeable and comparable in terms of the magnitude to the abysmal late 1970s-early 1980s period.

Secondly, a steady decline in inflationary pressures on households since the early 2012. A trend bending solidly the Fed narrative of well-anchored inflationary expectations post-QE. A trend that accelerated since mid-2014 to flatten out (without a solid confirmation) toward the end of 2015.

Thirdly, a longer view of the things: despite low by historical standards inflation, the share of U.S. households still concerned with its impact on their well being is... err... high and sits well above the average for 1993-2004 golden years of the first 'Great Moderation'.

All of which, in my view, continues to highlight the utter and complete failure of traditional fiscal-monetary policies mix deployed since 2008 by the U.S. Fed and richly copied by the likes of the ECB. It also reflects a simple fact that inflation (even at near-zero bound) remains a concern for households who experience decades of weak income growth.

If, per Tesco adds, every little helps, then, when it comes to the household wealth destroying economic policies, every little also hurts...

23/2/16: Moody's on Russian Banks & Ruble

A recent Moody's report on Russian banks makes an interesting point, linking capital buffers in the banking system to ruble valuations

Per Moody's: "We expect Russian banks' capital ratios and loan performance to bear the brunt of the country's falling currency and economic contraction. We also envisage a detrimental impact on bank profitability as rising problem loans will likely lead to higher loan-loss provisioning expenses for banks."

The rouble dropped a further 3% in January 2016, after falling 23% versus the dollar in the second half of 2015. At the same time, the Russian economy contracted by 4% real GDP for 2015 and Moody's forecasts further GDP contraction of at least 2% in 2016.

By Moody's estimate, "close to a third of the banking sector's loan book is denominated in foreign currency and the falling rouble will likely inflate the value of these loans in the calculation of risk-weighted assets (the denominator of the capital ratio) pushing it higher and, consequently, capital ratios lower. Without accounting for additional loan growth, a 10% rouble devaluation could lead to a 30 basis point negative impact on capital ratios..."

This is not as dramatic as the headline risks occupying Moody's, but material. Worse, this risk is coincident with the broader recessionary pressures on Russian banks. Thus, "Moody's expects the recession, with the added burden of currency depreciation, to lead to rising problem loans for Russia's banks. The rating agency estimates the stock of nonperforming and impaired loans in the banking system to rise to 14%-16% over the next 12 months, from an estimated 11% as of year-end 2015."

The third coincident factor is the Central Bank policy space: "Currency depreciation may also prevent the Central Bank of Russia from lowering its key interest rates (currently at 11%), which sets the benchmark and influences the rates which banks pay for customer deposits and the rates at which they borrow on the interbank market."

Final pressure point for the banks is deposits composition "...if corporate and retail depositors decide to protect themselves from the falling currency and switch to FX deposits. Trends so far show rouble deposits stagnating while FX deposits have increased. The percentage of FX deposits to total deposits rose to 39% as at end of December 2015, compared to 29% as at end of March 2014."

March-December comparative is significant, as it sheds some light on longer term trends beyond December 2014 - March 2015 period when forex deposits of major corporates were driven down on the foot of Moscow urging de-dollarization of the deposits base, reducing cash reserves held in forex to January 2015 levels.

19/2/16: OECD Data Sums Up the 'Repaired' Advanced Economies State of Disaster

Just because everything has been so thoroughly repaired when it comes to the Advanced Economies, growth of real GDP in the OECD area has been falling for three consecutive quarters through 4Q 2015. Of course, you wouldn't know as much if you listen to exhortations of Europe's leaders, but... per OECD latest statistical update, in 2Q 2015, q/q real GDP growth across the advanced economies was 0.6%, falling to 0.5% in 3Q 2015 and to 0.2% in 4Q 2015. Which puts 4Q 2015 growth of 0.2% at lowest level since 1Q 2013.

In the U.S., economic growth slowed to 0.2% in the fourth quarter, against 0.5% in the third quarter, marking second consecutive quarter of growth slowdown. Small uptick in UK growth to 0.5% in 4Q 2015 still puts end of 2015 growth rate at below 1Q 2010-present average and at joint second lowest reading since 1Q 2013.

And there has been no acceleration in growth in the euro area's Big 4 for two consecutive quarters now, with both Italy and France dancing dangerously closely to hitting negative growth and Germany posting lacklustre growth since 1Q 2015.

Per OECD release, "Year-on-year GDP growth for the OECD area slowed to 1.8% in the fourth quarter of 2015, down from 2.1% in the previous quarter. Among the Major Seven economies, the United Kingdom (1.9%) and the United States (1.8%) continued to record the highest annual growth rates, although both down from a rate of 2.1% in the previous quarter. Japan recorded the lowest annual growth rate, 0.7% compared with 1.6% in the previous quarter."

About that 'normalised' and 'repaired' global economy, thus... 

18/2/16: Lack of Support for 'Refugees --> Growth' Link in German Survey

As a separate matter, the same survey of 'some 220' German economists by CESIfo found that...

"A relative majority (40 percent) of participants expects the asylum-seekers to have a negative impact on the country. Only 23 percent see them as benefitting the country. The remainder was undecided. The majority of German economics professors therefore do not share the optimism of the Deutsche Bank’s Chief Economist, David Folkerts-Landau. He described the flood of refugees as Germany’s biggest economic opportunity since its reunification.

The majority of economics professors (56 percent) believes that the minimum wage should be lowered to facilitate the integration of asylum-seekers with poor skills into the German labour market. 37 percent, however, does not support this view. Some economists feel that this could lead to tensions between Germans and new arrivals. “I am no advocate of the minimum wage,” writes Prof. Dr. Erwin Amann of the University of Duisburg-Essen in the survey. “But a reduction in the minimum wage would prompt a debate over German workers being crowded out,” he warns."

So much for that "Keynesian growth stimulus" from immigration, then...

18/2/16: Europe's Problem is Not Germany...

CES-Ifo just released their survey results for the regular poll of some 220 German economists. And if you think that professionals are at any odds with Schäuble on monetary policy of the ECB, think again.

Which, of course, is absolutely correct. For German economy, ECB's policy is too loose. For French economy, about right. For Italy and Spain - probably somewhat too restrictive, although who on Earth can tell with any degree of confidence what 'about right' policy for these two can even look like...

Still, the key point remains: Euro is still a malfunctioning currency that cannot reconcile differences between various economies. In other words, Europe's problem is not Germany. It is not France, nor Spain, nor Italy. Europe's problem is not even Euro. Instead, Europe's problem is Europe.