Expectations for 2014 may need to be tempered against a weak/weakening Eurozone. Up until today’s flash Markit PMI, European economic fundamentals have weakened considerably since the summer. But even the positive flash PMI data is nothing to write home about:
From the Markit report:“On the downside, the PMI issignalling a mere 0.2% expansion of GDP in the fourth quarter, suggesting the recovery remains both weak and fragile. “The upturn is also uneven. Growth is concentrated in manufacturing, where rising exports have helped push growth of the sector to the fastest for two and a half years, while weak domestic demand led to a further slowing in service sector growth.
Paul Weller: “I stood as tall as a mountain; I never really thought about the drop; I trod over rocks to get there; Just so I could stand on top; Clumsy and blind I stumbled;…I didn’t stop to think about the consequences; As it came to pieces in my hands.”
The 2008 crisis told us that there was a mismatch between asset values and debt, asset values and future return, and debt and economic growth as well as some rather large structural economic imbalances.
We have tried to delay the eventuality implied by the difference in the hope that the “true” magical economic growth rate should return. Have we built up a bigger monster, and if so, how do we slay the beast?
German real GDP fell by 0.5% in Q4 (provisional) and grew by 0.7% as a whole over 2012. Exports were key to the +vely meagre growth rate, producing 1.1% (provisional) of real GDP growth which offset a negative 0.3% (provisional) contribution from the domestic economy.
Short term declines in output can usually easily be accommodated by an economic framework, but, longer term, sustained declines have much more damaging effects: higher unemployment and its attendant social and funding issues; lower capital investment and reduced investment in human capital; overall infrastructure risks; deflation as returns on capital decline and as increasing amounts of marginal capital are written off (debt attached to such capital needs to be written off, impacting asset values and broad money supply stock); and ultimately increased costs of future growth. once an uptrend is re-established, including that of inflation.
The longer the economic malaise continues the greater will be the impact on productive and financial capacity of the Euro economy and the greater the weight of the current sovereign (and banking system) debt problems.
Spain’s economic problems deepen and as its problems deepen so does its ability to support and repay its debts weaken. I am in particular disturbed by many a loose sanguine comment over the risks of a Spanish default without, apparently, taking the time to explain in context some of the unique characteristics of the Spanish debt problem.
August data is out and the only monetary aggregate that has shown an increase has been the narrower M1: M2-M1, M3-M2, and lending aggregates all showed either reduced rates of growth or increased rates of decline.
Economic growth the foundation on which debt will be repaid and austerity allowed to work its magic is negative in the Eurozone. Economic conditions, on average, have been brutal over the last year and sovereign debt problems have worsened.
Interestingly July represented the 13 month of falling new business, the longest stretch of declines since the survey began in 1996.
Manufacturing orders, whether you look at the X-12 ARIMA or the BV4.1 data adjustments (shown, given its longer term data profile), is showing a sharp deceleration as of June 2012 (latest data). Continue reading →
But this type of industry thinking is also likely to scare away the retail investor, through rational cognitive dissonance or otherwise.
Apparently, we are set for a big rally, once Greece leaves the Euro, as Central Banks the world over pump yet more liquidity into the financial system. This will either be via LTRO Repo type (temporarily exchange your securities for cash) transactions or the better for the banks and sovereigns, QE (buy your duff securities for a price you would not be able to dream of otherwise).
Here is my very quick, write it as you think it, opinion on this “play”. Continue reading →
I have yet to see the detailed summary figures, and we still have to go through a couple of revisions, but Eurozone growth (Euro 17) failed to expand year on year and quarter on quarter. Continue reading →
US weekly unemployment claims are trending up with previous figures being consistently revised upwards. A focus on current trends is meaningless, which is why I have been comparing current unadjusted data with historic data. I have looked at the last 9 weeks to 7 April, and historic 9 week periods over the same time frame, and found that current trends represent the worse weekly claims outcomes since at least 1997: Continue reading →
Flash PMI data for Europe shows a worsening of conditions in manufacturing and weakness in service sector growth amidst gathering austerity and further deterioration of sovereign debt dynamics in Portugal, Italy and Spain. Continue reading →
It has been some time since I have posted thoughts on economic data: sometimes it is better to stand and watch the water pass under the bridge and just realise that water always passes under the bridge. Continue reading →
Euro zone money supply growth (deposits and lending) continued to contract with the exception of M1 and the pitifully small annual growth rates belie the declines of the last two months. Such data is compatible with deleveraging and ongoing contraction in GDP.
It is interesting that the ECB is relying on long term repurchase operations to get the financial system back on an even keel. The question is, will this operation have the desired result? Probably not, is the answer if the financial system is still in a deleveraging cycle. Continue reading →