Category Archives: Euro area GDP

15/5/18: Beware of the Myth of Europe’s Renaissance

My article for last Sunday's Business Post on why the Euro area growth Renaissance is more of a fizzle than a sizzle, and what Ireland needs to do to decouple from the Go Slow Europe: Hint: not an Irexit... and not more Tax Avoidance Boxes...

9/9/15: That poverty of low [Euro area GDP growth] expectations…

So, apparently, "strong eurozone growth" for 2Q 2015 is fuelling hopes for economic recovery and pushing markets up. Which makes for some funny reading, considering the following:
1) Eurozone GDP grew by a mind-blowing… 0.4% in 2Q 2015 in q/q terms. Which, hold your breath there, matey… was a decline on 0.52% (revised) growth in 1Q 2015.
2) It gets better, yet: growth 'improvement' was down to a rise in exports due to devalued euro (err.. now, who would have thought that to be a reason to cheer?). Exports increase accounted for 0.3% of the total 0.4% of 2Q growth. Full details are here.

The glorious achievement of the Great Patriotic Eurozone Economy under the wise stewardship of [insert a name of a Brussels Directorate or one of the EU Presidents here] was so blindingly obvious that one can't miss it using a mapping of historical past growth rates.

Yes, yes… that is right - the "strong" rate of eurozone growth in 2Q 2015 was exactly the same as that attained in Q4 2014 and identical to Q3 2010 (remember, that was 'blistering' too). 1Q 1999 - 1Q 2008 average quarterly growth rate in the eurozone was 0.56% and that was the period when the euro area was actually showing structural weaknesses compared to other advanced economies. Over the period of 12 months through 2Q 2015, average growth is 0.4% and we call this… err… "strong".

That poverty of low expectations…

17/8/15: Euro: The Land Where Growth Goes to Die

So we have had a massive QE - even prior the current one - by the ECB. And we are having a massive QE again, courtesy again, of the ECB. And the bond markets are running out of paper to shove into the… you've guessed it… the ECB. And the banks have been repaired. And we are being fed our daily soup of alphabet permutations (under the disguise of the European Union 'reforms' and policy initiatives): ESM, EFSF, EFS, OMT, EBU, CMU, GMU, TSCG, LTRO, TLTRO, MRO, you can keep going… And what we have to show for all of this?

2Q 2015 growth is at 0.3% q/q having previously posted 0.4% growth in both 4Q 2014 and 1Q 2015. This is, supposedly, the fabled 'accelerating recovery'.

So what do we have? Look at the grey lines in the chart above that mark period averages. Pre-euro period, GDP growth averaged 0.9% in quarterly terms. From 1Q 2001 through 4Q 2007 it averaged 0.5%. Toss out the period of the crisis when GDP was shrinking on average at a quarterly rate of 0.1% between 1Q 2008 and through 1Q 2013 and look at the recovery: from 2Q 2013 through 2Q 2015 Euro area economy was growing at an average quarterly rate of less than 0.27%.

Meanwhile, monetary policy is now stuck firmly in the proverbial sh*t corner since 2012:

You'd call it a total disaster, were it not for Japan being one even worse than the Euro area… and were it not for the nagging suspicion that all we are going to get out of this debacle is more alphabet soups of various 'harmonising solutions' to the crisis... which will get us to becoming a total disaster pretty soon. Keep soldering on...

27/7/15: IMF Euro Area Report: Growth, of European Standards

The IMF today released its Article IV assessment of the Euro area, so as usual, I will be blogging on the issues raised in the latest report throughout the day. The first post looked at debt overhang while the second post presented IMF views and data on the euro area banking sector woes.

Here, let's take a look at headline growth outlook.

Based on the IMF view: in the Euro area, "the recovery continues. After weakness through mid-2014, growth picked up late last year and has continued in 2015, driven by domestic demand. Private consumption remained robust, reflecting rising employment and real wages, while fixed investment has expanded moderately. Among the large economies, Germany continues to grow slightly above 1½ percent, while Spain is rebounding strongly. Italy is emerging from three years of recession, and activity in France picked up at the beginning of this year."

This sounds good. Until it ain't. Chart below shows that growth drivers remained in 1Q 2015 the same as in 4Q 2015:

And more: stripping the uplift in inventories, headline GDP growth in 1Q 2015 would have been worse than in 4Q 2014. And, despite collapse in oil (energy) prices and increase in consumption, imports have increased their drag on GDP growth.

Meanwhile, Industrial Production is virtually flat, as is Construction activity:

So the net medium-term result is bleak: "Despite the cyclical upturn, growth of only about 1.6 percent is expected over the medium term, with potential growth averaging around 1 percent. The output gap would close around 2020 with unemployment still near nine percent and inflation reaching 1.7 percent, somewhat below the ECB’s medium-term price stability objective. The picture is more disappointing in comparison to the U.S. with the per capita income gap now the largest since the start of EMU, and projected to widen further."

How much further? Oh, take a look at these:

A positive scenario uplift can only be expected from long-term and painful reforms. IMF lists them here:

"A scenario combining monetary easing, fiscal support under the SGP, and comprehensive structural
reforms would include:

  • Monetary easing. Current interest rate policy continues through 2020 and QE through September 2016.
  • Fiscal space within the SGP. For the eurozone, fiscal space available within the SGP could amount to 0.6 percent of euro area GDP. This includes (i) room under countries’ Medium-Term Objectives (MTOs) (0.3 percent of euro area GDP); (ii) SGP flexiblity that a few qualifying countries could use for structural reforms (0.2 percent of euro area GDP); (iii) windfalls from lower interest payments due to QE (0.1 percent of euro area GDP) for one-off investments or structural reforms for a few countries already meeting their MTOs; and (iv) growth-friendly fiscal rebalancing for countries with limited fiscal space to lower the labor tax wedge by two percentage points, financed by base-broadening measures.
  • Centralized investment. An increase in private investment of 0.2 and 0.8 percent of euro area GDP in 2015 and 2016 is assumed, which is equivalent to 1/3 of the targeted amount of European Fund for Strategic Investments (EFSI) projects.
  • Clean-up of bank and corporate balance sheets A fully functioning credit channel is simulated as a decline in corporate borrowing rates, by 80 basis points in Italy, 25 basis points in Germany and France, and 50 basis points in the rest of the euro area. This would bring the spread between selected and core countries roughly to pre-crisis levels.
  • Structural reforms. Gradual implementation of product and labor market-related reforms in the 2014 G20 Comprehensive Growth Strategy could increase total factor productivity (TFP) by about 0.1 percent in 2015, 0.5 percent in 2017, and 0.9 percent in 2020. The implied TFP changes would differ substantially among member countries, with France, Italy, and Spain enjoying the largest gains."

So combined effect of the above over the longer term: "The growth dividend of a balanced policy mix can be large. The EUROMOD module of the IMF’s Flexible System of Global Models (FSGM) points to a substantial growth dividend, particularly from fiscal policies and the improvement of the credit channel. Real growth for the euro area would increase by 1.3 and 1.4 percentage points to 2.7 and 3.0 percent for 2015 and 2016, and HICP inflation rate in these two years would rise to 0.6 and 2.1 percent. The output gap would close by the end of 2016, about four years faster than in the baseline, and unemployment would be 0.8 percentage point lower than in the baseline by 2016."

Which is, honestly speaking, laughable because of two points worth noting:
1) There is an ongoing and deepening reforms fatigue which is pushing the reforms horizon out toward the next downturn cycle (in other words, we are unlikely to see majority of real reforms to be enacted before the next recession strikes); and
2) Even with all things going the IMF way, unemployment will remain atrociously high. In other words, growth uptick even in the best case scenario is likely to be largely jobless.

So summary of growth uplift drivers is in the chart below:

Expect the expected: looser fiscal policy being the largest new contributor to growth in 2016; labour markets and product markets reforms being marginal - adding at most 0.25-0.3 percentage points to annual growth rates. The fabled 'credit conditions improvements' (banks doing their bit for growth) is expected to be minuscule (despite all the hopes attached to them by the likes of Irish authorities and all the resources of the state devoted in 2008-2011 to repairing them). And headline growth expectations for baseline scenario still resting at 1.7% and 1.6% GDP growth in 2016-2017.

Here is the summary of IMF projections out to 2020:

Yep, the first line of projections above shows perfectly well the poverty of low aspirations that Euro area has become, while the unemployment rate projections confirm the same. Everything else - all the talk about structural reforms, growth drivers and the rest - is pure unadulterated bull. Even in the age of massive QE, collapsed oil / energy costs, and improvements in [sliding back on] fiscal 'reforms', the euro area remains the sickest economy in the advanced world.