Helicopter Money…European growth

Long term Euro Area growth has been slowing and this is best illustrated by looking at annualised growth over 5 and 10 year horizons.  Could growth in the current cycle have already peaked?

image_thumb11Loan growth remains lacklustre and broad monetary aggregates ex M1 are declining.  The most recent decline in loan growth looks to be mirroring the deceleration in economic growth experienced since Q1 2015. The ECB increased its monetary stimulus push in March in response.


Employment and wage growth continue to rise but are hardly inspiring amidst considerable unemployment across the Euro Area.

The slowdown in global trade appears to be impacting key manufacturing new orders, in particular in Germany where the IFO Business Cycle Clock for the manufacturing sector shows a downturn.


German foreign capital goods orders relative to trend:

This graph shows latest results on new orders in manufacturing

Export growth is sliding…has it peaked?


Economic sentiment is in decline as is consumer confidence in the Euro Area: yet further indication that growth may have peaked.


Shorter term data, in particular the Flash Markit Composite PMI for the Euro Zone, shows a tepid March bounce back from weakness in the first two months of the year. 

“despite the rise in March, the average PMI reading for the first quarter of 53.4 was the lowest quarterly trend for a year, signalling a slight slowing in the pace of economic growth”

Slowing growth in China, what looks to be a weak plateau in the US and a still slow recovery in Europe is raising global financial/economic stability risks.  There remains considerable slack in Europe and lower energy prices appear to have helped boost consumption, but the concern remains that at low growth rates the global economy is skirting the edges of another financial crisis.  Negative rates and quantitative easing are failing, not unexpectedly, to have the desired effect.  We may be nearing the moment where interest in heavier infrastructure spending possibly financed by “Helicopter money”, given the global sovereign debt positions, could be rearing its head.  

Watch out for any further easing in growth!

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Some interesting Euro Zone GDP charts

The cumulative change in final consumption expenditure of General Governments exceeds the change in GDP since 2007:


Household and non profit organisation expenditure has languished, especially once you exclude German data:


And the fall in gross fixed capital expenditure is heady:


Exports have fared better:


And imports with the exception of Germany reflect the overall economic weakness:



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 is signalling 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.

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As it came to pieces in my hands…

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?

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As we move from the shock to the core, Euro industrial production data is more than just a number..

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.

I think Spain will need to default on some of its debt..

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.

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The Euro Crisis is not over..

….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.  

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Manufacturing woes part 3–Europe

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

Don’t worry, here comes the three horsemen of the apocalypse!

Ambrose Evans-Pritchard has neatly summed up some industry think in his latest piece, “Global banks see market rally on Greek exit”. 

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

Denuded Data!

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