Another chart from the B of E August Inflation report:
Data yesterday reconfirmed weak growth in Europe: 6 quarters of negative growth while EU wide government debt and unemployment increase.
The pin everyone is waiting to hear drop is the first sign of a recovery, but I think this may be more a wing and a prayer than a divine right of economics.
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.
Industrial production down by 0.3% in euro area and EU27 – short term data is far less important than the longer term compound declines in industrial production shown in the following chart taken from the Eurostat report.
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.
All this at precisely the time that the new Fiscal Compact rules come into force.
You have to ask yourself how much is left in the tank! Slow growth is a given, but downside risk has an increasingly decreasing margin of error.
Making economic forecasts and asset allocations must be a very a very difficult job at the moment for asset managers.
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.
Total orders (volume) fell by 4.8% over a year ago (unadjusted) and by 1.3% adjusted (X-12_ARIMA) over the month to August.
….says Roger Bootle in a recent article, and I would have to agree with him.
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.
Further to my recent post on narrow money supply growth: Eurozone M1 has also likewise shown recent, though unspectacular (in historical terms), growth:
The German Markit/BME manufacturing PMI fell for the fourth month in a row in July, at its fastest pace since April 2009, to its lowest level since June 2009.
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
As expected France and Italy (and a host of others) received ratings downgrades, an event which was hardly surprising. 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.
Previous more detailed post – http://blog.moneymanagedproperly.com/?p=617
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
The plight of the 1% – some good quotes here with respect to the upper echelon’s ignorance over the likely deteriorating quality of their own pies: upper echelon wealth depends on the health of the pyramid, something which many fail to understand. In other words, the wealthy have more to lose if the supporting structures collapse.
Eurozone crisis hits US mortgage securities – Euro banks may be selling US asset backed (mortgage backed) paper causing a fall in the pricing of these assets( which incidentally may further influence Fed buying of mortgage based assets). The dynamics of this activity can better understood by reading a recent paper by Hyun Song Shin, Global Banking Glut and Loan Risk Premium discussed in an earlier post of mine - Light on the Euro Zone banking crisis.
Can Italy survive the financial storm? An article from Vox that suggests yes by providing a positive spin on recent developments in Europe. I am not sure that I share these sentiments which depend on falling wage costs, stability in the banking system through the ECB longer term refinancing operations and a belief in the implementation and effectiveness of austerity measures:
“The Italian government is pushing a strong and credible fiscal adjustment through Parliament. “
“The stability of the Italian banking system now seems assured given that the ECB has made three-year funding available “
What has to start yet is to make the Italian economy competitive again by reducing labour costs……Provided the real sector of the economy can be shielded from the worst effects of the financial storm the country should have enough time for the real adjustment to bear its first fruits.”
With regard to wage costs, Germany has indeed benefitted from lower growth in wage costs, but its wage costs are still relatively high (higher than Italy’s) and a larger component of gross wages in Italy are non wage costs, which means non wage costs need to fall, itself implying in part further austerity. Not only will wage costs and non wage costs need to fall if they are to compete with lower cost Eastern European countries, but productivity and skills will need to rise if they are to compete with the likes of Germany and the US. It is not so much wage costs, but the wage costs relative to the added value produced by labour in the industries in which they are employed and hence a refocus and restructuring of capital employed which also depends on so many other factors. This is a very long term outcome, and these are usually characterised by barely perceptible incremental changes along the way. It may be hard to discern any benefit for some time and certainly not in sufficient time to assuage deflationary risks currently embedded in the economy..
As far as austerity measures, there is no guarantee that the short term impact of such measures will be negligible in economic terms, especially when combined with European, if not global austerity imperatives. Finally, is the stability of the Italian banking system really assured, as suggested, by the new LTRO measures introduced by the ECB?
Labour_cost_index_-_recent_trends/ Economic boom barely lifts German labor costs / EU-Comparison of labour costs and non-wage costs /LABOUR DEMAND IN GERMANY: AN ASSESSMENT OF NON-WAGE LABOUR COSTS / Problems of International Labour Cost Comparisons/ http://www.oecd.org/dataoecd/51/53/48723947.pdf / The margins of Labour Cost adjustment./ This Is The Chart That Really Makes The Germans Furious / After the Election: Germany Will Continue to Obstruct Global Economic Rebalancing/ What Explains the German Labor Market Miracle in the Great Recession?*/ Wage setting in Germany – new empirical findings /The economy of Germany: powered by reform