James Mackintosh

Some interesting charts from Credit Suisse this morning are testing the idea that eurozone unemployment looks particularly awful.

Adjust for the rising number of people participating in the workforce in the eurozone, and the falling number willing to work in the US, and unemployment is just about the same in both. Read more

John Authers

The Bank of England has hit the target at last. UK inflation is at 2 per cent, bang in line with the Bank’s target, for the first time since the end of 2009. This is good news for the UK, which had been buffeted by an incipient inflation problem. But it is part of a global trend that could be far more problematic: deflationary pressure.

As the chart shows, the BoE now completes a set of all the four major developed market banks – along with the Federal Reserve, the Bank of Japan and the European Central Bank – to have inflation at or below the target of 2 per cent. Read more

John Authers

At first, the idea that the Nobel economics prize should be shared between Eugene Fama and Robert Shiller sounds absurd – akin to making Keynes and Friedman share the award.

Gene Fama, of the University of Chicago, is famous as the father of the Efficient Markets Hypothesis, after all, while Yale’s Bob Shiller is famous primarily for being the principal critic of that hypothesis. Read more

James Mackintosh

With the US government missing in action, the statisticians who usually draw up Friday’s non-farm payrolls numbers are kicking their heels at home. In their absence, the market is likely to turn to today’s estimates from payrolls processor ADP – which has direct access to data on about a fifth of total pay packets.

This should make ADP’s numbers more reliable than those from the government. But because investors focus on the government survey, rather than ADP, what really matters is how close the ADP estimates are to the official figures. At first glance they look pretty good:

ADP v non-farm payrolls Read more

James Mackintosh

Economists often seem to be living in a different world, not least when their forecasts of future recessions – or more precisely the lack of them – are examined.

Now two economists have confirmed that economists are on a quite different plane to the rest of the population, by exploring their views on policy issues facing America. Two Chicago-based finance professors, Paola Sapienza of Northwestern and Luigi Zingales of Chicago Booth, tried to identify issues on which economists generally agreed.

Only two issues garnered complete agreement: every single economist questioned (as part of a regular survey) said it was hard to predict share prices, and not one thought US healthcare was sustainable.

By contrast only a small majority of Americans (55 per cent) agree that share prices are tough to forecast, and two-thirds think US healthcare is financially sustainable.

This might just suggest that the average American hasn’t paid enough attention, since shares are patently hard to forecast (not necessarily impossible, as the efficient market theory beloved of so many economists posits, but certainly very difficult). Equally, even America’s politicians agree that healthcare spending at the current level is unsustainable; part of the original justification of Obamacare was to reduce costs, after all.

But the general pattern is continued on many other topics: the views of economists are furthest from the general public on those issues where the economists agree the most. Read more

John Authers

Ben Bernanke can move markets, and sometimes his words are too strong for his own good. That may have been true of his press conference last month, when he announced that he planned to start tapering off QE bond purchases later this year, and end them altogether by next summer. That drove a dramatic rise in Treasury yields, and in the dollar.

For a further classic example, look at the speed with which currency markets responded late on Wednesday and early on Thursday to a speech he made in Massachusetts, and to the minutes from last month’s meeting of the Federal Open Market Committee, published on Wednesday. The euro gained 4.5 cents against the dollar in a matter of minutes, while the pound gained almost 4 cents (or about 2.6 per cent). Read more

James Mackintosh

The US Federal Reserve’s support for the markets can be measured lots of ways, from the impact on bond yields through to comparisons of equity prices and the central bank’s balance sheet. Here’s one I rather like, with a hat tip over to BNP Paribas’s William De Vijlder.

The third round of the Fed’s quantitative easing, or QE∞, is now 41 weeks old, and during that time there hasn’t been a single really bad week, which I defined as a loss of 2.5 per cent or more. The last time there was such a long period without a big down week was during QE2. Before that it hadn’t happened since early 1997.

Equities and the Bernanke put

The total loss of all the down weeks since QE∞ began, including weeks with only a small loss (a somewhat odd measure, obviously offset by plenty of up weeks) has been just under 18 per cent, close to the lowest reached over rolling 41-week periods during the “great moderation” of 2003-2007, and to that reached under QE2. Read more

James Mackintosh

Ooh la la! French consumer confidence figures just came in, and they aren’t pretty. The index just matched its lows from late 2008, itself the lowest ever.

So far, so eurozone. It isn’t exactly new news that the French economy is in terrible shape. But this chart shows how consumer confidence has broken away from share prices, something it usually tracks closely. Read more

James Mackintosh

Economic bloggers love Excel, so they have leaped on the discovery that Ken Rogoff and Carmen Reinhart, two of the most famous economists out there, aren’t very good at spreadsheets.

The story is told elsewhere in detail, and the academic paper debunking R&R’s maths is full of delicious examples of mistakes (look at footnote 6 for a lovely example).

The gist of it is that enormous weight is given to one year in New Zealand, 1951, when R&R recorded GDP falling by 7.6 per cent.

This year is given a lot of weight for three reasons: First, four previous post-war years were excluded. Second, the average was worked out by producing an average for each country, then averaging those. The combined effect was to give one year in NZ the same weight as 19 years of Greece. Third, a whole bunch of other countries were excluded by mistake.

R&R admit the Excel error in excluding other countries, but are sticking to their other exclusions (because their data on debt-to-GDP had gaps at that point), and to their method of averaging. They also point out that the broad conclusion, that growth slows as debt rises, is still supported by the data, just not so dramatically.

The New Zealand figure is intriguing, though. The 7.6% drop in GDP appears to come from a series compiled by the late Angus Maddison, the great economic historian.

But 1951 was a very strange year for the Kiwis, and the falling GDP then is not an example of weak growth with high debt. The price of wool tripled in 1949-50, and since it made up about half of the country’s exports this boosted GDP enormously. When prices fell back, GDP fell again. Government debt really wasn’t an issue. Read more

James Mackintosh

Former US Treasury Secretary Larry Summers warned of the dangers in the eurozone in his latest op-ed for the FT, and it is hard to disagree. But part of what he said bothered me:

A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment.

 Read more

James Mackintosh

Just a quick update for those who love Iceland as a model (a category which unites the unlikely pair of uber-Keynesian Paul Krugman and Conservative eurosceptic Dan Hannan).

After its disastrous banking and property bubble and bust, house prices have been growing strongly again, and are within a whisker of their 2008 highs – in stark contrast to Ireland and Spain. All three (with two different measures of Spanish housing) are shown in this chart, and Iceland’s break from the Irish/Spanish pattern is clear:

House prices Iceland, Ireland, Spain

This, just like the country’s return to economic growth, looks like another justification for Iceland’s decision to refuse to bail out its banks, unlike most of the rest of the world.

Now, I’m no friend of bank bailouts, and would much rather see middle-class bank creditors take losses than taxes rise on the poor to subsidise those creditors.

But things aren’t quite as simple as the housing chart shows. As well as cleaning up its banking system through a gigantic default, in large part on foreigners, Iceland’s krona has collapsed.

When measured in foreign currencies, the people of the island are far poorer than they were, something which really matters for a place which imports virtually everything it needs other than fish and electricity.

One example is the import of cars: for the four years since 2008, the total tonnage of cars (I know, funny measure, but that’s how Iceland provides it) imported is lower than for the single year of 2006. And this isn’t only because of the extremes of the bubble: last year, even as Iceland began to recover and imports picked up, saw fewer cars imported than in any year from 1999 to the collapse.

Adjusting Icelandic house prices into euros, then, allows a fairer comparison with Spain and Ireland’s outcomes (although not a way Icelandic residents will think about it, of course). And it tells quite a different story:

Now, this doesn’t matter to Icelandic homeowners paid in krona. But it does put a bit of a damper on the idea that Iceland is having a strong recovery.

Measuring in krona, even Spanish house prices have started to rise, as you see in this next chart: Read more

James Mackintosh

Ireland’s recent history is a story of hopes dashed. Hope is now being stoked again, not least by those with the most interest in being positive: the Irish government and European lenders.

For Europe, Ireland is the poster child for austerity and must, just must, be recovering. Some positive jobs figures, showing the first growth in employment since 2008 (on which more later) have prompted what passes for elation in the depression-hit island.

European Commission President Jose Manuel Barroso led the cheering this week on a visit to Dublin, saying Ireland’s economy “is turning the corner”.

It shows that the programmes can work. It shows that there can be light at the end of the tunnel.

When there’s a determination we can achieve results. This is a message that’s valid for Ireland and other countries that are going through reforms.

Of course, he wants to believe this. Europe desperately needs a success story to set against the anti-austerity vote in Italy, yet more gloom in Greece and a worsening economic outlook for the eurozone.

But the bond markets agree, and have done for months. Irish 8-year yields (its benchmark) stand at 3.7 per cent, lower than Spain and Italy. The country has successfully returned to bond markets, and hopes to bring in a 10-year benchmark before the end of June. Even the inconclusive Italian elections prompted only a slight wobble.

So, have the markets become too optimistic? Below is a rather longer than usual read on Ireland and the wider eurozone issues. Read more

James Mackintosh

Brits wanting a holiday in the sun have to stump up a lot more since the pound’s crash during the financial crisis. Even after a partial recovery, the pound remains down almost a fifth in real terms against its trading partners.

On the plus side, exports should be booming. Sadly, they aren’t. There are plenty of excuses explanations, but one stands out: British exporters have too much focus on slow-growing European economies and not enough on the whizzy emerging markets. The killer statistic is that the UK exports more to tiny troubled Ireland than to all the Brics put together. Read more