Economics 26/02/2010: Euro area growth - leading indicators

Eurocoin - leading indicator for growth in the euro area is out today, so it is time to update the forecasts:
Last month, my forecast for Eurocoin indicator was to decline from 0.78 to 0.74 over February-March. The actual outrun was the decline to 0.77. So I stick to my forecast for further deterioration. All signs are pointing in the direction of the recovery being reversed - from exports to industrial production, to consumer confidence. And the global economy is starting to feel the pressures of fiscal unwinding. Ditto for the Euro area countries, where Greece and Spain are now at the forefront of fiscal pressures, while France and Germany are also feeling the heat.

This is consistent with low rates of growth, if not an outright double dip in economic activity. For now, I am still happy to stick to 0.6-0.7% annual growth rate for the Euro area as a whole for 2010.


On a related tone, but different geography, UK house prices are down 1% in February per Nationwide Building Society, reversing 9 consecutive months of growth. The end of stamp duty holiday is to be blamed, as well as poor weather. But in my view, the reversal is a sign that absent stimulus (tax or spending) there is simply no fundamentals-justified demand in the market.

Economics 25/02/2010: European economy and EU Commission

"Curiously enough, the only thing that went through the mind of the bowl of petunias as it fell was Oh no, not again. Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the Universe than we do now." The Hitchhiker's Guide to the Galaxy.

Indeed. Today's ECFIN weekly newsletter said it all. Titled cheerfully "ECFIN e-news 8 - EU interim economic forecast: fragile recovery has begun" it featured the revised interim forecast for EU economy from the EU Commission. It turns out, per forecast that (unbeknown to most of us in the real world) "the longest and deepest recession in EU history came to an end as real GDP in the EU started to grow again in the third quarter of 2009." This comes despite the fact that growth actually fell (and almost reached back into negative territory) in Q4 2009. Thus, in line with Commission optimism, Brussels now expects "seven largest EU Member States, ...to expand by an anaemic 0.7%".

"Weaker housing investments and continuing balance-sheet adjustment across sectors are expected to restrain EU growth in 2010. Unemployment remains on the rise and would thus dampen private consumption as well. Inflation projections remain largely unchanged at 1.4% and 1.1% in the EU and the euro area respectively".

I am not sure if this rather gloomy prospect matches the headline, but the same issue of the newsletter contains another piece titled "Rebound in economic sentiment slows in February". So can someone explain to me, please - is it that the recovery has begun, or is that the recovery is running out of steam? Clearly, I would tend to believe the second one, since it is based not on projections by the Commission (which famously predicted, and actually planned for overtaking the US in terms of productivity, economic growth and economic wellbeing by 2010, moved to 2012 and later to 2015), but on hard data.


In February 2010, the EU's Economic Sentiment Indicator (ESI) rose by statistically insignificant 0.2% to a still-recessionary 97.4. ESI was down to 95.9 (-0.1% on January) in the euro area. The latter correction follows an unterrupted climb up over 10 months, suggesting that the growth momentum might have been exhausted.

February reading of the Business Climate Indicator (BCI) for the euro area rose for the eleventh month in a row. Happy times? Not really - the relatively low level of the indicator suggests that year-on-year industrial production in January 2010 was still contracting, not expanding.

Drilling deeper into data: all sub-components of the confidence indicators remained below growth levels in January and February 2010. And one - retail trade confidence indicator actually reversed back into contraction territory after December when it crossed over the growth line. Employment conditions in services have turned negative again in January, as did construction confidence indicator.

Which part is showing that the recovery has begun, I wonder?

May be, just may be - the business climate is improving somehow? Well, not really:
EU Commission own BCI is still stuck at -1 - below expansion levels.

Consumers picking up, then? Nope: "In February 2010, the DG ECFIN flash estimate1 of the consumer confidence indicator2 for the euro area signals the first fall after 10 months of improvement (down to -17.4 from -15.8 in January). Confidence declined also among EU consumers, but to a lesser extent (down to -13.6 from -13.1 in January)."


So: consumers are down, producers are in the red and overall economic indicators are turning South again... yet 'recovery has begun'.

A bowl of petunias signalling the nature of the Universe from its Brussels windowsill.

Economics 25/02/2010: Wholesale prices - deflation is still a problem

Wholesale and Producer prices are out today for Ireland, January 2010.

Per CSO: Monthly factory gate prices are up 1.5% in January as compared to 0.4% rise a year ago. Annual percentage change now stands at -2.8% in January 2010, compared with an annual decrease of 3.8% in December 2009.

Exports prices rose strong 2.0%, while the index for home sales was down 0.2%. In the year there was an increase in the exports price index of 3.3%, primarily due to positive currency movements and a decrease of 0.9% for domestic sales prices.
Producer price deflation is moderating
but this moderation is driven primarily by external factors.

January 2010 most significant changes were:

• Basic chemicals (+4.9%),
• Pharmaceuticals and other chemical products (+1.7%)
• Other food products including bread and confectionery (+1.4%),
• Beverages (-0.3%)
• Building and Construction All material prices increased by 0.9% in the month

On an annual basis:

• Basic chemicals (-9.6%),
• Office machinery and computers (-4.1%),
• Radio, television and communication equipment (-3.7%),
• Other food products including bread and confectionery (+1.8%)
• Tobacco products (+7.8%)
  
• Building and Construction All material prices -1.4% in the year since January 2009.

Capital goods – a very important driver for recovery, posted a yoy price drop of 0.6%, and a mom rise of 0.4%. Thus, mom changes were too weak to signal any significant turnaround in business investment cycle.

Wholesale price of Energy products fell 3.9% in the year since January 2009, while Petroleum fuels increased by 24.1%. In January 2010, there was a monthly increase in Energy products of 0.8%, while Petroleum fuels increased by 2.7%.

Overall, therefore, while some moderation in deflation at wholesale level is evident, there is not enough momentum to suggest that we are out of the woods yet. Chart above clearly shows that the deflationary trend prevalent since May 2009 was broken in December 2009 and the positive trend has accelerated in January 2010. It will require 1-2 months of continued upward trend to signal sustained movement toward a recovery and the risk here is for a double-dip.

The same stands for Industrial producer prices (Manufacturing). But there is far less optimism in the numbers for Capital goods, which show more volatility and reversals than broader indices.

Economics 25/02/2010: Exports under pressure

A quick note on Ireland's trade flows for December 2009 - published yesterday.

As I warned earlier, the stellar performing Chemicals (inc Pharma) sector is now starting to retreat. Exports of Chemicals are down 9.54% in November and, per CSO statement, went further down in December. Machinery and Transport Equipment is down 38.9% in November (year on year).

Charts below illustrate the problems and showing the trends:
Overall, exports are down and the trend is also down - there goes a hope of exports-led recovery (not that it makes any sense, to be honest, given the global trends for trade). Imports are again heading South - suggesting two things:

• a renewed pressure on consumer demand side; and
• continued weakness in imports of intermediate inputs by the MNCs (signaling potential further declines in exports as a result).

Trade balance is not improving despite imports fall-off. There is a clear flattening out of the upward trend, suggesting that we are now close to exhausting the stage when collapsing demand drove trade balance up. It is down to exports from here on to influence the trade balance and the signs are pretty poor.
Chart above shows that the adverse changes in exports are not coincident with changes in terms of trade which continue to improve since Summer 2009. However, as the next chart clearly indicates, we are now away from the historic relationship between exports and terms of trade:
This implies that decline in exports we are experiencing is driven by other factors. Might it be a longer term pressure on MNCs activities in Ireland? Global trade flows changes? Or both?

Either way, there is no sign of exports-led growth. Irish exporters have performed miraculous well in 2009, compared with the rest of this economy. But one cannot hinge all hopes, as the Government is doing, on exporting sectors. Even more importantly, one cannot take exports performance for granted (as our Government is doing as well) - we need coherent strategy to get exporting back onto its feet.

Economics 24/02/2010: What's heading for Nama land

On a serious note - good post by Gerard O'Neill here.

On a lighter note: wanna see one Nama-bound investment courtesy of Anglo Irish Loose Loan Giveaways?

Check it out here - replete with grammatical errors and misspellings in the text. 'Autentik' stuff...

Since Anglo holds the loan and we (taxpayers) hold Anglo, I wonder if being an Irish taxpayer qualifies one for a free drink in this place.

Economics 24/02/2010: Greeks, Germany and the euro

There is a fine mess going on in Athens. And it is both

• detrimental to the Euro; and
• predictable (see here).

Exactly a month ago to date, I have predicted that Greece is going into a Mexican standoff with EU. We now arrived at exactly this eventuality (see this link to a good summary of Greek Government views - hat tip to Patrick).

Back on January 24th, I wrote:

"The EU can give Greece a loan – via ECB... But the EU will have to impose severe restrictions on Greek fiscal policy in order to discourage other potential would-be-defaulters today and in the future. That won’t work – the Greeks will take the money and will do nothing to adhere to the conditions, for there is no claw back in such a rescue.

Alternatively, the EU might commit ECB to finance existent Greek debt on an annual basis. This will allow some policing mechanism, in theory. If Greeks default on their deficit obligations, they get no interest repayment by ECB in that year. ...but what happens if the Greeks for political reasons default on their side of the bargain?

If ECB enforces the agreement and stop repayment of interest, we are back to square one, where Greece is once again insolvent and its insolvency threatens the Euro existence. Who’s holding the trump card here? Why, of course – the Greeks. And, should the ECB play chicken with Greeks on that front, the cost of financing Greek bonds will rise stratospherically, and that will, of course, hit the ECB as the payee of their interest bill.

Thus, in effect, we are now in a Mexican standoff. The Greeks are dancing around the issue and promising to do something about it. The EU is brandishing threats and tough diplomacy. And the problem is still there."

There are three possible outcomes from the standoff:

• Greece backs down and Germany accepts an apology - which pushes us back to square one, with Greeks still in the need of funds and EU still without a plan;
• Greece goes for the broke and remains within the euro, implying a rapid and deep (ca 30%) devaluation of the euro; or
• Greece is forced out of the euro (there is, of course, no mechanism for such an action).

The first option is a delay in the inevitable; the last one is an impossible dream for fiscally conservative member states. Which leaves us only with the second option.

And incidentally, the only reason German bunds are still at reasonably low yields is because Germany is linked to Greece (and other PIIGS) only via common currency. Imagine what yields the German bunds might be at if a full political union was in place?

This, of course, flies in the face of all those who preach political federation as EU's answer to structural problem of hinging desperately diverse economies to common currency.

So hold on to your pockets - after the Exchequer raided through them via higher taxes; Greek default will prob their depths through devaluation. And then you'll still be on the hook for our banks claiming their share in an exercise of rebuilding their margins.