Category Archives: Eurozone

26/8/20: Germany’s Exports Expectations: Some Bad News

 ifo Institute's latest exports expectations for Germany are out and the data is quite interesting:

Firstly, expectations moderated in August, compared to July, although on balance, there are still more positive sentiment responders as opposed to the negative ones. This moderation is surprising, because of the sharpness of prior COVID19-related collapse and because August saw more global relaxation of COVID19 restrictions. 

Secondly, it appears that expectations for exports growth are now starting to revert back to pre-COVID19 'norm' of anaemic growth. This can be best seen by looking at longer term expectations data:

For those nostalgically inclined, 2019 was a woeful year for global trade, as reflected in the 2019 average in the chart above. And this was before COVID19 pandemic. In fact, exports outlook has been deteriorating from around mid-2018, on. 

A return to the pre-COVID19 'normal', if confirmed, is not the good news, given that German exports did not recover from the knock-down they sustained during the COVID19 pandemic.

4/7/20: ifo Institute Eurozone Growth Outlook

Germany's ifo Institute issued a new growth outlook for Eurozone economy:

  • "Overall, the eurozone economy is likely to see a sharp recession in the first half of 2020. 
  • "GDP already contracted in Q1 by 3.6%. 
  • "In Q2, the decline of GDP is forecast to be historic (-12.3%). 
  • "On the other hand, the recovery is likely to be quick supported by massive stimuli in some eurozone countries with GDP growth reaching +8.3% in Q3 and +2.8% in Q4 2020. 
  • "Yet, the GDP level at the end of last year will not be reached by the end of this year."

In 1Q 2020:

  • GDP fell by 3.6%. 
  • "The greatest negative contribution came from private consumption. 
  • "... firms hold back their investments due to liquidity issues and uncertainty on future developments. 
  • "... external demand was weak and caused exports to plunge. 
  • "Economic activity went down by 5.3% (Italy), 5.3% (France) and 5.2% (Spain). Germany was affected less severely with GDP contracting by 2.2%. 
Dynamics into June:
  • "The European Commission’s economic sentiment indicator fell from 94 points in March further to 65 points in April, rebounded somewhat in May and increased strongly in June up to almost 76 points."
  • "The IHS Markit composite purchasing manager’s index reflects a similar development as it dropped from 30 points in March to as low as 14 points in April. In May it recovered to 32 and in June again up to 48 points." Note: Markit PMIs below 50 indicate continued, compounded contraction, as a rise in index from 32 to 48 between May and June means that contraction was weaker in June.
Summary of forecasts:

Headwinds to the above forecast:
  • "Currently, economic projections are made in face of high epidemiological uncertainty. ... This forecast assumes that a second COVID-19 wave will be prevented. The occurrence of a second wave, with containment measures to being introduced again, is thus a downward risk for our forecast. 
  • "Another uncertainty for this forecast is that we are still learning about consumer reactions to containment measures and it is still unclear, how quickly consumption behavior will normalize.
  • "In addition, the liquidity situation of many companies is deteriorating rapidly. An unexpectedly high number of insolvencies might disturb the economic recovery and cause bigger than expected problems for the banking sector. Currently, in many countries new regulations for postponing insolvencies were introduced, which means that these will become evident later than usual, probably not before autumn. 
  • "Also, numerous private households might run into solvency issues due to lower income and a worsening labour market situation."
In contrast, here are the IMF latest forecasts for the euro area:

Markit PMIs:

3/7/20: ECB Jumping the Proverbial Shark?

ECB's money-printing press has been running overtime these weeks. So let's put the Euro area central banks' monetary policy shenanigans into perspective, comparing them to the Global Financial Crisis (GFC) related measures, the Euro area sovereign debt crisis and the subsequent painful recovery:

Good thing: ECB has deployed COVID19 response at scale and fast. Bad thing: it is highly uncertain how much growth all of this activism is going to sustain. From 2000 through 1Q 2020, there is zero (statistically) relationship between current GDP growth (nominal) and ECB assets accumulation in the same year and in prior year:

Even ignoring statistical significance, the relationship itself is not positive, especially in the lagged data. In other words, there is absolutely no evidence of causality from ECB asset purchases to higher economic growth. While reasons for this results are complex (and not really a matter for this post), there are some serious questions to be asked as to how much tangible growth is being sustained by the Central Bank's activism. On the other side of the same argument, if we assume that the ECB purchases of assets are effective at sustaining growth in the Euro area economy, then we must have some serious questions as to what the Euro area economy is capable of producing in terms of GDP growth without such interventions.

In simple terms: we are damned if we do, and damned if we do not:

  • Either monetary activism is not effective at sustaining growth, or
  • If monetary activism is effective, then the state of the economic institutions overall is so dire, it remains comatose even with extraordinary supports from Frankfurt.

Neither is a pleasant conclusion. And there is not a third alternative.

Just in case you need a reality check on how poor Euro area's growth has been, here is a summary:

29/6/20: Eurocoin Growth Indicator June 2020

Using the latest Eurocoin leading growth indicator for the Euro area, we can position the current COVID19 pandemic-related recession in historical context.

Currently, we have two data points to deal with:

  1. Q1 2020 GDP change reported by Eurostat (first estimate) came in at -3.6 percent with HICP (12-mo average) declining from 1.2 percent in January-February to 1.1 percent in March.
  2. Q2 2020 Eurocoin has fallen from 0.13 in March 2020 to -0.37 in June 2020 and June reading is worse than -0.32 recorded in May. This suggests continued deterioration in GDP growth conditions, with an estimate of -2.1 percent decline in GDP over 2Q 2020. HICP confirms these: HiCP dropped from 1.1 percent in March 2020 to 0.9 percent in May. 
Here are the charts:

We are far, far away from the growth-inflation 'sweet spot':

26/6/20: Longer-Term Impact of COVID19 on Growth

IMF published updated forecasts this week, and here the summary:

World Economic Outlook, June 2020, Growth Projections table

IMF has stopped doing 5 year forecasts this April, due to uncertainty induced by the COVID19 pandemic. 

Looking at the longer run effects of the pandemic, based on October 2019 (pre-Covid19 trends), and earlier growth trend before the Global Financial Crisis (GFC) puts COVID19 pandemic into historical perspective:

The differences between the above trend lines are telling. 

Globally, GFC resulted in a permanent loss of real income that amounts to a cumulative decline of ca 17 percent over 17 years (2008-2024). COVID19 is forecast to result in additional permanent loss of 3.2 percent within 5 years 2020-2024.

Eurozone has been hit even harder. GFC resulted in a permanent loss of real income to the tune of 12.8 percent while COVID19 is currently set to yield a permanent additional loss of income to the tune of 7.1 percent over less than 1/3rd of the post-GFC trend line duration. 

The numbers above are rather 'indicative', in so far as any and all forecasts past 2020 are perilous at the very best. But you get the picture: we are witnessing two consecutive events that result in permanent deviation of economic activity away from the prior trends. And both events are sharp. Even with a 'V-shaped' recovery, we are in trouble (because a V-shaped recovery taking us into mid-2020 means recovering end-of-2019 levels of economic activity, while losing 1.5-2 years of growth momentum (recall, economy was slowing down in H2 2019 on its own, without COVID19). 

As we say... [ok, well, may we do not say it often, but...] this picture is f*ugly...