You still need a strong constitution or a taste for gallows humour to read most eurozone economic statistics, as today’s release of the preliminary Q1 gross domestic product
growth contraction data shows.
The bloc is now in its longest recession since the birth of the single currency, beating the post-Lehman Brothers slump in duration, though not in the depth of the downturn. Read more
In doing the usual due diligence on the Bank of England’s pictorial forecasts – blowing up the images on screen, getting out a ruler, measuring the YoY growth rates, estimating the skew that represents a risk-adjusted forecast and shoving all the results into a pre-prepared spreasdsheet – you can produced this horrible chart of successive Bank of England growth forecasts.
All it really shows, in the grand scheme of things, is that the Bank’s growth forecasts were pretty good before the crisis and spectacularly awful more recently.
If you strip out a lot of irrelevant information, you get the following, which I think is pretty amazing. Read more
Interest rates are likely to linger for longer at their current record low of 0.5 per cent, following today’s growth figures. With GDP numbers coming in at expectation, market expectations haven’t shifted that much since yesterday, but over the past two months, the change is dramatic (see chart).
Just two months ago, markets forecast three rate rises this year; now the base rate is not expected to reach 0.75 per cent until November. The data also belie an assumption that a rate rise is far likelier in a month following a GDP announcement (notice the jump in expectations for August, November and February). Read more
German consumer optimism has brightened further. The GfK research organisation in Nuremberg estimates its “consumer climate” index will rise again in February, reaching a level last seen in the second half of 2007 – before the global financial crisis took its toll. Germans’ “propensity to buy” this month was the highest since December 2006, it reported.
But “propensity to buy” does not mean actually buying. The most recent German retail sales figures have been disappointing. November saw a 2.4 per cent fall compared with October. While economists generally expect 2011 to see a revival in consumers spending, on the back of steep falls in unemployment, rising wages and a general improvement in German confidence, few expect a dramatic surge. Read more
In recent weeks, the Bank of England’s problem has been inflation. It is too high at 3.7 per cent in December and going higher. Now the Bank has something apparently worse on its hands: stagflation. The Office for National Statistics has just shocked everyone by saying the UK economy contracted by 0.5 per cent in the final quarter of 2010. Expectations had been for a 0.5 per cent increase.
Nothing could cheer the Monetary Policy Committee more. Now it can bat away suggestions it should be raising interest rates with the comment that this would be nuts as the economy is again contracting. High inflation is nothing to worry about if the economy is still in intensive care. Read more
Italy’s economic recovery will remain weak and below the eurozone average over the next two years, the Bank of Italy forecasts in a report that diverges from more upbeat government predictions while underlining the need for structural reforms.
Noting a slowdown in gross domestic product growth in the last quarter of 2010, the central bank predicted on Tuesday that Italian GDP would grow at a similar pace of 0.9 per cent in 2011 and 1.1 per cent in 2012, boosted by rising exports but held back by weak consumer spending and the government’s austerity programme. Modest growth would not be enough to produce a robust recovery in employment, the bank said. Read more
Lower-than-expected growth in Brazil and New Zealand have prompted their central banks to maintain rates; in South Korea, “greatly decreased” inflation motivated the hold decision, in spite of a “continued upward trend” in growth.
Brazil’s monetary policy committee, Copom, kept the Selic rate at 10.75 per cent, hinting that a rate cut might have been on the cards were it not for recent macroprudential policies, whose effects on monetary conditions were yet to be seen. Read more
Latest Fed projections for the US economy are expected to have worsened considerably from last quarter. Robin suggests the 2011 growth forecast, due for release tomorrow, will fall to 3-3.5 per cent for next year. Unemployment might rise above 8 per cent in 2012, with long-term unemployment rising by more than a percentage point to 6 per cent. Below is a summary of recent projections with Robin’s figures added to the November row:
You can take a gloomy view of today’s eurozone GDP figures. Third quarter growth, at 0.4 per cent on the previous three months, was weaker than in the US and UK – where the talk is about quantitative easing and further measures to boost the economy - and the underlying trend appears to show a clear deceleration from the first half of the year.
But I suspect the ECB is not going to be too disappointed. Germany still managed an impressive 0.7 per cent expansion, while the French and Italian economies continue to expand, even if at a modest pace. Yves Mersch, Luxembourg’s central bank governor, has just told Bloomberg that the latest data were in line with the ECB’s “baseline scenario”. Certainly, the growth outlook will not stop the ECB from pressing ahead with its “exit strategy” to unwind emergency measures taken to support the financial system. Whether Ireland or the other “peripheral” eurozone countries do is another question…
Instead of falling gradually back to target, inflation in the UK is now expected to rise to about 3.5 per cent by the end of the year, staying above 3 per cent till mid-2011 before falling to about 2 per cent in 2012. The central projection – the dark red centre of the fan chart – now has an upward hump, as you can see to the right.
Rising import prices, rising VAT and companies rebuilding their margins were cited as reasons for the change in the Bank of England’s quarterly inflation report. Risks to the projection are on the upside. Read more
You might ask: what double dip?
UK gross domestic product rose by 1.2 per cent Q-o-Q in volume terms, revised up from the 1.1 per cent estimate published in July. Compared with Q209, the UK economy expanded by 1.7 per cent, up from an estimate of 1.6 per cent.
Construction and agriculture showed the greatest growth rates, as the chart below shows. (Agriculture contributed nothing to overall GDP growth, however: see table at bottom.) Transport, storage & communications began to contract this quarter, probably because of energy prices. Utilities also began to contract.
The ONS provides Read more
Beware governments sporting 90 per cent public debt-to-GDP ratios: that’s the conclusion of a new research paper from the ECB.
Up to 90-100 per cent, increasing public debt increases GDP growth, finds the research. Beyond this magic range, increasing debt is associated with ever lower growth rates (see chart, right).
More than this, debt-fuelled increases in the growth rate start to slow when public debt reaches 70-80 per cent of GDP. Austerians will be pleased. A handy map from the Economist, left, shows us which countries are likely to feel the heat first. But even German debt may classify.
The paper, by Cristina Checherita and Philipp Rother, looked at the average impact for 12 eurozone countries since 1970:
It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP.
With Europe’s performance hanging largely on the fate of Germany, it is hardly surprising that any fresh news from the continent’s largest economy. But some indicators are more useful than others.
The ZEW “economic sentiment” indicator published by the Mannheim-based ZEW institute has the advantage of early publication: August’s was released on Tuesday. But since the global financial crisis erupted in mid-2007, it has been unclear exactly how it should be interpreted.
During the early 2009, for instance, when German GDP was collapsing, the ZEW was rising steadily. But for much of the second half of last year – when a recovery was underway – it was broadly flat and then falling.
Now, I have realised what we have all be doing wrong. We have been looking at the chart upside down. Read more
When Wolfgang Schäuble, Germany’s finance minister, next meets his European counterparts, will he be heaped with praise – or brickbats? Germany’s economy is on a roll. It grew by 2.2 per cent in the three months to June, its best quarterly performance since reunification in 1990. But that has not necessarily gone down well with colleagues in other European capitals.
Unnoticed beyond his tiny country’s borders, Jean-Claude Juncker, Luxembourg’s prime minister, earlier this month launched an extraordinary attack on German economic policy, according to the Luxemburger Wort. Germany’s success was based on “wage and social dumping,” Mr Juncker is reported as having said. “The way Germany went about improving its competitiveness, I would not like to see in our country.” Since the launch of the euro in 1999, German workers had seen a meagre 12 per cent rise in wages, whereas his countrymen saw a 41 per cent rise, he went on. Read more
Japan’s economy grew by just 0.1 per cent in the second quarter, a sharp slowdown on the 1.2 per cent growth in Q1. Hurt by a strengthening yen, annualised, seasonally-adjusted Q2 growth is now 0.4 per cent, against last quarter’s (revised) 4.4 per cent.
The slowdown means China’s economy was larger than Japan’s during the second quarter. From the paper: Read more
The Bank of England has reduced its growth forecast – but views the dip as a temporary blip and not a turning point.
Spot the difference in the fan charts: see the little dip 2010-11 in the upper (August) chart compared to the lower (May) chart. Growth will dip thanks to “persistent tight credit and faster fiscal consolidation” – but the latter has also reduced the downside risks. Risks to growth fall on the downside.
Further, inflation is likely to remain above target till the end of 2011 – a full year longer than projected in May. Mervyn King has just said at the press conference that after 2011 – once the base effects are removed – he expects a period of below-target inflation. Risks to the projection fall mostly on the upside.
Understandably, given this, the governor is concerned about the effects on inflation expectations: Read more
There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.
Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.
The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.
Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward Read more
The second quarter GDP figures for the US were published last Friday. The financial markets do not usually get very agitated about these figures, because the official quarterly data lag the many sources of more timely information on the economy. But this is an unusually sensitive time for the US economy. Many observers are beginning to fear the onset of a double dip recession, and even a slide towards chronic deflation. Since this is by far the biggest risk facing the global economy at present, I feel I should start this new blog on global macro-economics with a comment on what I learned from these figures. Three points stand out, all of them worrying.
First, the annualised growth in GDP in Q2 was only 2.4 per cent, a disturbing figure because it indicates decelerating momentum, compared with growth rates of 5.0 per cent and 3.7 per cent in Q4 and Q1 respectively. A growth rate of 2.4 per cent is no better than trend, and is not sufficient to bring unemployment down. The US labour market is currently trapped in its worst recession since the 1930s, with many troublesome signs which remind me of the dysfunctional European labour market in the 1980s. It cannot afford a period of sub trend GDP growth.
Second, the economy remains far too dependent on the upswing in the inventory cycle. This is an inherently temporary force which is now overdue to fade away. As the graph below shows, the swing in inventories has explained much of the recovery in the economy in the past year, but it is now well past its peak. Read more
Canada was the first G7 country to start raising rates, and has enjoyed consistent growth for nine months, bar a static April. Latest data show slight growth in May of 0.1 per cent.
However, data show non-farm payrolls fell in May by 0.2 per cent, or 25,000 people. To add to the mixed picture, the central bank reduced growth forecasts 10 days ago, even as it raised rates, and three days later, inflation fell to just 1 per cent. It seems Ben Bernanke’s oft-quoted description of unusual uncertainty, would apply equally well north of the border.
G20 nations must implement policies agreed at the latest summit, otherwise “large imbalances may re-emerge, with the attendant risk of disorderly adjustment.”
This from the Bank of Canada’s latest Monetary Policy Report, which finds Canadian growth “proceeding largely as anticipated” and risks to Canada’s economy roughly balanced. Read more