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Euro area credit: did the ECB wait too long?

by Rebecca Wilder

Euro area credit: did the ECB wait too long?

The ECB released its February report on monetary developments in the Euro area. This is an important report, since it will highlight whether or not the ECB’s LTRO is ‘working’, rather if the new liquidity is passing through to the real economy via new lending. On balance, it’s probably too early to tell, since there are long lags in monetary policy – however, early signs are not good for the real economy.

Ostensibly, the ECB LTRO did its job, as interbank credit has re-emerged in aggregate. Repo credit increased 4.2% over the year in February – this followed an 11.5% annual surge in January. Furthermore, short-term debt holdings jumped at a 21.3% annual pace. Banks and sovereigns have seen relief in the short-term credit markets, a product of long-term funding from the ECB.

But credit availability to the broader economy is more challenged. The chart below illustrates the working-day and seasonally adjusted lending by Monetary Financial Institutions (MFIs) to the household and non-financial corporate sectors. I use the 3-month/3-month average growth rate to illustrate the credit impetus over the LTRO period. In the three months ending in February, household lending fell 0.18% compared to the average spanning September through November 2011. The drop in quarterly lending did slow, but remains in decline. Loans to non-financial corporations fell a larger 0.82% in the three months ending in February. For non-financial corporations, the pace of decline quickened since the three months ending in January.

Across the Euro area, the charts below illustrate the contribution to annual growth in Euro area credit across the 17 EMU economies by sector: household (and nonprofit) and non-financial corporate. The usual suspects are seeing large declines in household and non-financial corporate lending, including Spain, Portugal, Greece, and Ireland. France is the bright spot across both sectors, contributing a large share (multiples of its GDP share) to household and non-financial corporate lending.
Chart Note: the Charts below illustrate the country-level contributions to the annual growth rate of Euro area Household and non-financial corporate loans in February 2012.

Household lending The contribution to annual EA credit growth from Irish households (consumer plus mortgages) has been negative for 40 consecutive months, or 13 consecutive months in Spain. Portuguese household loans dragged annual EA loan growth consecutively since September. The credit impetus is very negative in consumer and mortgage lending for these economies. A positive point is that German consumers are borrowing for credit consumption and home buying. German household lending contributed 0.32% to annual EA loan growth in February – this compares favorably to the 0.17% average contribution spanning 2004-2006.

Non-financial corporate lending By this metric the Spanish business sector is effectively imploding, as Spanish non-financial corporate lending dragged the pace of annual EA lending by 1.1% in February. The contribution from Spanish corporate lending has been negative for 32 months, and the pace of contraction has picked up some speed since September 2011 on an annual contribution basis.

The credit impetus remains reasonably strong in the core countries, at least on a Y/Y basis (with stark exception of the Dutch household sector). And to some extent, the drop-off in credit to the periphery was to be expected. However, with the domestic drag in periphery credit markets already underway, and limited upside potential to global demand for exports, one questions whether or not the the ECB waited too long (given the long lags in monetary policy).

Megan Greene highlights the risks to the Euro area. With these risks in mind, restrictive fiscal policy amid deteriorating labor markets makes the Euro area extremely vulnerable to external shocks.
Statistical reference: the Euro area aggregate statistical data links can be found here. The country level data can be found in the statistical warehouse tree here.

originally published at

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Panel Discussion with: Krugman, Sachs, Phelps, Soros

Just wanted to let everyone know about a presentation that aired on Cspan’s Book TV.  It is a 2 hour panel discussion titles: Global Economy: Crisis Without End.  It was held 2/17/12.   Click hereto bring up the show.
What I found most interesting was the different perspectives between Krugman and Sachs. I’m not sure, but I don’t think either realized they were talking about the “crisis” from 2 different perspectives which leads to 2 different answers to what needs to be done. Thus, they come across as if the other is wrong, when in my opinion, they are both correct. Krugman says we need to do more now. Yes we do. Sach’s says we need to take the long view and start changing the direction we are going, namely calling for higher revenue raising by the government to be spent on the nation’s infrastructure, and he did not just mean physical infrastructure. I guess you would say he was calling for the government folks to get real about raising capital and then doing capital expenditures. Not exactly the thinking I would have expected from Sach’s considering his start in economic life: Shock Therapy.
Maybe I was just seeing the difference in Keynes vs Neoclassic Econ meets Bono?  So as much as Sach’s appears to be calling for the correct long term solution, I don’t trust him as the one to lead the charge.
It was a very good discussion and there is more there than what I have keyed on.

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Housing Bubbles: Less Frothy but Europe is Behind

by Rebecca Wilder

Housing Bubbles: Less Frothy but Europe is Behind

Wolfgang Muenchau’s article in the Financial Times, There is no Spanish siesta for the Eurozone, inspired me to update my post on housing bubbles around the world (really just Europe and the US). He argues that Spain’s bubble was much more extreme, and that the price adjustment is less mature compared to the others. I would add here that it’s European housing markets more broadly that look overvalued compared to that in the US, as measured by the price to rent ratio.

The chart below illustrates the housing bubble, as measured by the house price to rent ratio, in the US, Spain, the UK, and Ireland that is normalized to Q1 1997 and through Q1 2011. The price to rent ratio can be compared to a price to earnings or a price to dividend ratio in finance. It measures the relative value of the asset: the price of the asset (purchase price of a home) divided by its flow of fundamental value (rental income earned or the value of having a roof over your head). As the price-rent ratio falls, the market home values moves closer to fundamental value.

Spanning the years 2005 to Q4 2011 and indexed to 1997 Q1, home values peaked at roughly 1.7 times rent in the US, 1.8 times rent in Spain, and north of 2 time rent in Ireland and the UK. Since the peak, though, US home values have fallen to 1.0 times rent – a considerable reduction in asset prices toward fundamental value. In contrast, home values in Spain, the UK, and Ireland remain quite elevated to rents, 1.3 times, 1.6 times, and 1.4 times, respectively in Q4 2011. If 1.0 is deemed equilibrium, either home values in Spain, the UK, and Ireland must fall further and/or rents rise to normalize home values. That’s a tall order: rising rental values amid defficient and contracting domestic demand in Spain and possibly Ireland.

The UK has more of a fighting chance, given its relatively easy monetary policy, compared to Ireland and Spain, where more accommodative monetary policy is very lagged amid fiscal contraction. Without growth, though, default is probably the only answer left to normalize housing markets in Spain and Ireland.

originally published at The Wilder View…Economonitors

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Does the US Corporate Saving Rate Portend a Lower Unemployment Rate?

by Rebecca Wilder

Does the US Corporate Saving Rate Portend a Lower Unemployment Rate? An interesting thing happened in Q4 2011: the corporate saving rate declined following two quarters of gains. Nominal net saving by the domestic business sector fell 3%, while nominal gross fixed investment and inventories surged 6% – the two pushed the saving rate down nearly 40 bps to 2.94% of GDP. The corporate saving rate (gross saving less gross investment) has been on a downward trend since the end of 2009, a welcomed trend by the labor market.

There’s a very strong correlation between the corporate saving rate and the unemployment rate, 80% according to a simple bivariate OLS regression. I’ve argued in the past that there is some causation to this relationship – but that’s not the point of this post. The point here is that the trend in corporate saving has fallen sufficiently to portend some material declines in the unemployment rate in coming quarters….ALL ELSE EQUAL. For example, a simple bivariate regression would forecast a 7.5% unemployment rate if the corporate saving rate falls another 30 bps to 2.6%.

The all else equal is important. The primary driver of this quarter’s decline in the corporate saving rate was the 6% increase in nominal investment spending, the largest quarterly gain since 2010 Q2. Amid relatively weak manufacturing orders and the expiration of the depreciation allowance, I expect that this momentum is unlikely to be matched in coming quarters. Will firms start drawing down nominal saving to finance new hires?

Better put: will the unemployment rate drop to meet the saving rate? Or will the saving rate rise to meet the unemployment rate?

Rebecca Wilder

originally published at The Wilder View..Economonitors

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Euro Area GDP Report: Not Pretty

by Rebecca Wilder

Euro Area GDP Report: Not Pretty

Today Eurostat released the second estimate of Q4 2011 Gross Domestic Product. Real Euro area (EA) GDP declined 0.3% over the quarter (-1.3% on an annualized basis). In this release Eurostat provides a breakdown across region, spending categories, and industry, and is much more detailed than the preliminary flash estimate. It’s not pretty.
The expenditure side was very weak. Household and government consumption declined 0.4% and 0.2%, respectively, while gross capital formation tumbled 0.7%. Inventory depletion accounted for much of the reduction in investment and fixed investment deteriorated to a lesser degree. Exports fell 0.4%, while imports dropped a full 1.2%; therefore, net exports contributed +0.3% to overall GDP growth. The only positive contribution to GDP growth was imports – this type of technical growth is not sustainable.

As the chart below illustrates, exports has been a major driver of growth during this recovery. However, export demand is dropping off at the margin, and more weakness is expected. The level of new export orders (a component of the Markit PMI) fell for eight consecutive months through February.

So it it’s up to domestic demand to spur further recovery. I also have my doubts there, given that fiscal austerity pushed the unemployment rate to a historical high of 10.7% in January (rather vertically, I might add).

A second part of the EA GDP report was the disturbing minority of countries that posted positive growth: just three out of thirteen. French growth clearly added balance to the average, given its large weight in the index. However, there are plenty of things that can go wrong there with higher energy costs, the rising unemployment rate, and minimal business confidence.

Going forward, it’s either up or down again for the EA. With the tight fiscal and now tightening monetary policy, the economy surely faces a lot of headwinds – down again would be my bet.

originally published at The Wilder View…Economonitors

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European Daily Catch: Retail Sales Stabilizing?

by Rebecca Wilder
European Daily Catch: Retail Sales Stabilizing?

Today’s real retail sales gave the ECB and EU heads of state another reason to keep their fingers crossed for stability of the Euro area economy (.pdf of release). In January, volume adjusted retail sales increased 0.3% in the Euro area (EA) and broke a 4-month trend downward. On a 3-month annualized basis, though, real retail sales are falling at a 2.2% pace. Therefore, on a trended basis the second derivative may be stabilizing but the first derivative remains conspicuously negative.

I suppose that the ECB and EU heads of state will take this month of reprieve to pat themselves on the back for policy well done. However, in looking at the cross section of the monthly gains, France was the primary driver of the regional improvement, +2.1% over the month. We’re not out of the woods yet.

Greece, Spain, and Italy haven’t reported for January, so we’ll have to wait on the over or under regarding revisions. I’ll take the under, however, given that Spanish and Italian service PMIs are in the low 40′s with the employment component a serious drag (.pdf of the Markit release).

originally published at The Wilder View…Economonitors

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All of the Euro Area Usual Competitive Suspects in One Chart…But with a Twist

by Rebecca Wilder

All of the Euro Area Usual Competitive Suspects in One Chart…But with a Twist

The European Commission’s Economic and Financial Affairs initiated the Macroeconomic Imbalance Procedure (MIP) Scoreboard. The MIP Scorecard will be used to identify emerging or persistent macroeconomic imbalances in a country. In their inaugural release, the EC listed 12 EU countries in need of further review for potential imbalances (program countries are exempt from this review process).

The accompanying database of the factors in the MIP score is made available at Eurostat. This database is particularly exciting for a data geek like me. Included in the MIP database is an indicator that I’ve wanted to construct for some time: country level exports as a share of world exports. World export share is a much broader measure of competitiveness than the commonly reported export share of country GDP.

Belgium, which is one of the 12 countries on review for potential imbalances, has experienced an 0.5 ppt drop in world export share, 2.4% in 2002 to 1.9% in 2010. Seems like a big drop – but what does a 1.9% export share mean in terms of the size of the Belgian population in the Euro area 12 (EA 12)? In 2010, Belgium’s world export share was 2.2 times what it’s EA 12 population share implies – loss of competitiveness, yes, but still competitive.
The chart below illustrates the following: (country world export share as a share of EA 12 world export share)/(country share of EA 12 population). The data can be downloaded at Eurostat: export share, and population).

If the index level > 1, then the country has a greater share of the EA 12 world export share than that implied by its population as compared to that of the EA 12 – competitive; If the index level < 1, then the country has a smaller share of the EA 12 world export share than that implied by its population relative to that of the EA 12 - not competitive.
Some takeaways from this chart are:

  1. All the usual ‘competitive’ suspects are at the top: Ireland, Netherlands, Belgium, Austria, Germany, and Finland. These countries hold in excess of 1.2 to 3.1 times EA 12 world export share than their relative size in the EA 12.
  2. All of the usual ‘uncompetitive’ suspects are at the bottom: Greece, Portugal, Spain, Italy, and France. These countries hold anywhere from 30% to 70% less world export share of that in the EA 12 than their population share would imply.
  3. Ireland is the most competitive in this respect, and Greece is the least.
  4. Germany is more in the middle with just a 27% higher export share of the EA world export share than that implied by its population share….

That’s it for today. I’d like to hear your feedback.


originally oublished at The Wilder View…Economonitors

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Does Latvia Give Us Any Clues?

by Rebecca Wilder

Does Latvia Give Us Any Clues?

Short answer: yes, as long as global trade growth is negligible.

Over the weekend I came across a December CEPR paper about the Latvian economy. Authors Mark Weisbrot and Rebecca Ray highlight the Latvian experience with internal devaluation, which may prove to be a case study for the current Eurozone model of internal devaluation by the program countries (Ireland, Portugal, and Greece). Weisbrot and Ray find the following (emphasis mine):

The paper also finds that Latvia’s net exports contributed little or nothing to the economic recovery over the past year and a half. This means that “internal devaluation” cannot have succeeded in bringing about the recovery. Rather, it appears that the recovery resulted from the government not adopting the fiscal tightening for 2010 that was prescribed by the IMF, and also from an expansionary monetary policy caused by rising inflation. The data contradict the notion that Latvia’s experience provides an example of successful internal devaluation.

Note: Internal devaluation is Europe’s favored prescription for any country seeking liquidity assistance; it refers to the process by which an EZ country that cannot devalue its currency reduces relative costs (wages) and prices by raising the unemployment rate in order to shift export income in favor of the deflating economy.

Internal devaluation didn’t work for Latvia, as evidenced by export demand. I wondered, though, how has real export demand performed for the current program countries, Ireland, Portugal, and Greece? Have these countries followed Latvia’s path?

To date, as regards to export income, internal devaluation appears to be working in Ireland and Portugal but not in Greece. For comparison to Latvia, I illustrate the path of real exports and imports spanning 2005Q1 through 2011Q3, as demonstrated for Latvia on page 14 of the CEPR paper.

Similar to Latvia’s experience, real import demand deteriorated in the face of fiscal austerity, especially in the case of Ireland and Greece. In contrast to Latvia’s experience, though, real exports in Ireland and Portugal are roughly 6% and 8%, respectively, above levels in 2007Q1. The Greek experience looks more like that of Latvia, as real imports and exports plummeted below pre-crisis levels, having yet to recover.

As I highlighted in a December post, relative unit labor costs have been cut in the case of all program countries, so internal devaluation is evident. (Note: the chart in the post illustrates the 4-q average Y/Y growth in nominal unit labor costs compared to the EA overall – it’s not intended to be a thorough examination of real exchange rates.) But has that been the driving force behind the export growth?

The resurgence in global trade has been an influential factor in the case of Ireland and Portugal. The chart above illustrates the Dutch estimate of world trade. Notably, there was a resurgence of trade spanning mid 2009 to Q1 2011, which support European exports broadly. It’s difficult, in this respect, to attribute all of the export success to internal devaluation.

Going forward, Ireland and Portugal are very likely slaves to global demand for exports. Prospects there are not looking too bright, given the slowdown in Asia.

Ultimately, I do think that Latvia serves as a warning for EA program countries. Internal devaluation is impossible for those countries with high private sector leverage without a burst of external demand. Unfortunately, the burst of external demand seems to have passed.
(Insert here a discussion of the 3-sector financial balances model, and why Ireland depends exclusively on generous export income to facilitate economic growth).

originally published at The Wilder View…Economonitors

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Euro Area Portfolio Flows

by Rebecca Wilder

Euro Area Portfolio Flows

Today the ECB released the Euro area balance of payments for December. This is a statistical release that is worthy of only the biggest data geeks – but it is quite interesting, especially in forming relationships between FX and capital flows. I’ll demonstrate what’s been going on in EA bond, equity, and money markets in one just chart. The data come from the ECB, and can be seen in the Monthly Bulletin, Table 7.3.

The chart illustrates portfolio flows as the 3-month sum total flows in and out of Euro area bond, equity, and money markets, or portfolio investment. The red line plots the dynamics of investment flows by foreign residents in (positive) and out of (negative) the Euro area. The blue line plots the dynamics of investment flows by Euro area residents in (positive) and out of (negative) the Euro area.

When the blue line is positive, Euro area residents are bringing assets home, or repatriating capital. This is rare. When the red line is negative, foreign residents are moving capital out of the Euro area by selling euro assets. This is also rare. Both occurred in 2011.

Foreign investors reduced exposure to euro-denominated assets, -€78.9 billion in Q4, while Euro area investors brought assets back home, +€55.8 in Q4. Spanning 2011, foreign inflows into equity, bond, and money markets turned 180 degrees from +€183 net accumulation in the 3 months ending in June to -€78.9 in Q4.

For 2011 as a whole, foreigners accumulated similar amounts of euro-denominated assets as in 2008 (the last time the foreign flows turned negative), €233 billion versus €266 billion, respectively. In contrast, the repatriation flows did make a big 2011 dent compared to the 2008 comparable year of repatriation, +€60.2 billion of inflows for the year as a whole versus -€4.9 billion in 2008.
We’ll see if 2012 is a year of normalization – EA resident outflows and positive foreign inflows. Certainly recent actions by the ECB have helped to assuage foreign investors, as evidenced by the +€5.3 billion portfolio inflow in December 2011. The January release will be an interesting one!

Happy Presidents’ Day, Rebecca

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Unfounded Obsession With the Greek Minimum Wage

by Rebecca Wilder

Unfounded Obsession With the Greek Minimum Wage

The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Times cites competitiveness gains as a rationale for the minimum wage cut:

The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs.

Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view.
First, the Greek people aren’t lazy at all. In fact, Greek workers spent more hours working 2010 (in annual hours actually worked per worker) than those in Chile, Hungary, Czech Republic, Poland, Estonia, Turkey, Mexico, Slovak Republic, Italy, the US, New Zealand, Japan, Portugal, Canada, Finland, Iceland, Australia, Ireland, Slovenia, Spain, the UK, Sweden, Luxembourg, Austria, Belgium, Germany, Norway, and the Netherlands – and in that order. (You can download and view the data from the OECD 2011 Employment Outlook.) Marc Chandler also highlighted this fact back in January.

Sure, one could argue that the Greek workers work a lot of hours, but it’s for less output. Furthermore, labor costs have risen substantially relative to other Euro area countries, so the country’s worse off. That’s the uncompetitiveness route. If you care about productivity and relative wage gains, why not look at the drop in Greece’s relative unit labor costs?
The chart below illustrates the average accumulated gain/loss in nominal labor costs (labor costs per hour) across the EA 12 in the run-up to the crisis, 2005-2008, and then since the recession, 2009-Q32011 (Finland data unavailable). By this measure, Greece is certainly doing what the Troika want of it: relative devaluation in nominal labor costs. Since 2009, Greek labor costs have fallen 5.3%.

(Note: the data are constructed as the percentage gain/loss of the average 2008 quarterly labor costs over the average of 2005 labor costs versus the average of Q4 2010 to Q3 2011 labor costs over the average 2009 quarterly labor costs, all working-day adjusted.)

French and Austrian labor costs appreciated 12% and 10.7%, respectively, spanning 2005-2008, and another 5.7% and 4.0%, respectively, since 2009. In Ireland, the 1.8% average reduction in labor costs since 2009 pales in comparison to the 2005-2008 14.7% surge. Greece saw a lower accumulated gain in labor costs spanning 2005-2008 than most countries and cut labor costs since 2009. The ‘wage’ cost anger towards Greece seems to be misdirected.

Now I’m really wondering what is this obsession with the Greek minimum wage? True, the Greek minimum wage did rise 0.8% spanning 2010-2011 (you can see Eurostat data here). However, as a proportion of average monthly earnings, the 2010 minimum wage in Greece is roughly in line with other program countries, Ireland and Portugal, and lower than that in France, Luxembourg, and the Netherlands.

Only in 2011 do Greece’s policies stick out when monthly minimum wage as a proportion of average monthly earnings surged to 50.1%. However, simple calculations demonstrate that for Greece the higher 2011 ratio of minimum wage to average monthly earnings was largely a function of falling average monthly earnings, -18.7%, rather than the rise in the minimum wage, +0.8%.

Perhaps I am not understanding things clearly here – I am sure that you all will correct me if I am not – but what’s this obsession with minimum wages? It looks to me like the fiscal austerity driven recession is indeed resulting in a reduction in Greece’s relative labor costs irrespective of minimum wage policy. Isn’t that the point?

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