Relevant and even prescient commentary on news, politics and the economy.

France is Stuck in the Mud

by Rebecca Wilder

According to the Eurostat flash estimate, Euro area GDP fell by 0.2% in both the euro area and the EU27 in the second quarter of 2012. In the first quarter of 2012, growth rates were 0.0% in both zones. On balance, the Euro area is very likely in recession despite the fact that the region successfully skirted the “two negative quarters of growth” rule of recession dating having stagnated in Q1 2012 following a 0.3% contraction in Q4 2011.

The underlying country GDP estimates for Q2, released by the various statistical agencies, do illustrate a deep divide among the growth prospects across the 17-country Euro area in Q2 2012. Here is a select list of reported growth results (all for Q2 2012 in % Q/Q not annualized):

Germany, +0.3%
France , +0.0%
Netherlands, +0.2%
Spain, -0.4%
Italy, -0.7%
Portugal, -1.2%

The French flash release, in particular, caught my eye: “No growth for the third consecutive quarter” is what INSEE titled its publication. The French economy has effectively stalled. Using Eurostat data, the economy has grown just 0.09% (the unrevised numbers) since July 2011. And since Q2 2011, the economy grew just 0.3%. In all, the economy is not technically in recession but it certainly isn’t expanding. To me, the question is, will it go up or down from here?

Compared to history, the current expansion in France has been nothing short of pathetic. Stuck in the mud.

Note: In the chart above, the French dating of business cycles is taken from the OECD, which is available through the FRED database. In the legend, those dates with a (2) indicate short recoveries with an ensuing recession (1 recession and 1 expansion with the same number of quarters as the 2009-2012 expansion). Therefore, the graphs are truncated when the next recession started over the period.

Rebecca Wilder

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World Trade Turning Down

by Rebecca Wilder

World Trade Turning Down

Something different for today: world trade. Recently, South Korea and Taiwan released July 2012 trade statistics, where annual export growth was seen contracting at a 8.8% and 11.6% rate, respectively. The annual pace of export growth in Taiwan contracted for the fifth consecutive month, where that in South Korea turned negative following a 1.1% annual rate in June 2012.

On balance, exports in key Asian markets, such as South Korea, Taiwan, and China, are seen as leading indicators for world demand due to their intermediate nature of production in the supply chain. And the signal there is not good for global demand.

The Netherlands Bureau for Economic Policy Analysis and JP Morgan make available world trade statistics and a global PMI, respectively.

The correlation between the 3-month percentage annual rate of change of world trade and the global PMI have a 77% correlation dating back to 1998. Although the world trade statistics are current as of May 2012, the June and July global PMI, 49.1 and 48.4, respectively, do confirm the weakness seen in the Asian country export data and portend deterioration in this measure of world trade.

A simple bivariate regression of the 3-month growth trend in world trade on the global PMI implies a 3-month annualized contraction of 0.66% in July. This is far from the pace of contraction in 2009 – according to this statistic, World trade declined at its fastest 3-month trend rate in January 2009 of 50.5%. Furthermore, there’s no precipitous downtrend in the PMI that would suggest a sharp contraction in world trade.

I can only conclude that it’s too early to call stabilization in World trade, rather the opposite. However, the pace of contraction could be quite mild if policy makers ease globally.

Rebecca Wilder

cross posted with  The Wilder View…Economonitors

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Euro Area Retail Sales Portend Negative Quarter of Real Consumption

Euro Area Retail Sales Portend Negative Quarter of Real Consumption

by Rebecca Wilder

Today Eurostat released its June estimate of real retail sales for the Euro area. On a month/month basis, real retail sales increased at a rate of 0.1%. However, on a trended basis, the 3-month/3-month average growth rate was down 0.7% in the three months ending in June. Given that the 3-month trended pace of contraction quickened compared to Q1, real consumption is likely to detract from Q2 GDP growth (spending components released on August 23).

On a Y/Y growth basis, there’s a 96% correlation between real retail sales and real private consumption by households and non-profit institutions. Using a simple linear regression, the annual growth rate of consumption should stabilize somewhat in Q2 compared to Q1.
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Across the region, real retail sales in Ireland, Estonia, and Germany are the only reported countries to see growth through Q2.

Note: the chart below illustrates the 3-Month/3-Month growth rate through June 2012 (Q2/Q1).

On balance, Q2 domestic consumption spending in the Euro area is expected to be buoyed by Germany through June. The problem is, German retail sales growth have just a 38% correlation with real consumption growth, so the bump in retail sales won’t necessarily feed through to consumption at the aggregate level.
Euro area real consumption is still contracting. The question then becomes: will the pace of consumption contraction increase or decrease in coming quarters? We’ll have to watch leading indicators such as retail and consumer confidence, both of which deteriorated in July.


Rebecca Wilder

cross posted with The Wilder View…Economonitors

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Evidence of Hampered Monetary Policy Transmission Channel in the Euro Area

Evidence of Hampered Monetary Policy Transmission Channel in the Euro Area

by Rebecca Wilder

Mario Draghi cautioned on the ‘hampered’ transmission channel of monetary policy in his now famous London speech last week:

To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.

I referred to the clogging of rates policy back in April via evidence from mortgage lending rates.

I address Draghi’s point that the ECB 1% refi rate will support economic activity through the lens of the mortgage market. Specifically, I find that the interest rate channel is clogged in the economies that are in most desperate need of lower rates: Spain, Portugal, and Italy.

Here I show that on a relative basis, while the household lending rate is quietly trending down for key periphery markets, the real problem lies in the non-financial corporate rates transmission channel. Specifically, rates in Portugal, Italy, and Spain have seriously diverged from both the trend in the refi rate (ECB policy rate) and those of other countries in the Euro area.

The trend in key periphery household mortgage rates is consistent with the ECB rate cuts: down
Note: All ECB refi rate data is through June 2012, so the latest rate cut to 75 bps is not included in the charts.








The magnitude still favors the core – the drop in German mortgage rates is 91 basis points since the max mortgage rate of the Euro area as a whole in August 2011 – but the trend is down for all countries.




In stark contrast to the trend in household mortgages relative to the ECB refi rate, non-financial corporate lending rates in Portugal, Spain, and Italy diverged from the other country trends.


If the ECB means business on improving the monetary transmission channel, they’ll need to attack the price of corporate loans in the Periphery markets.

Rebecca Wilder


Data Note: All non-financial corporate AAR lending rates is the annualized agreed rate on new business loans with a maturity of greater than 5 years and amount between €0.25 bn and €1 bn. Irish data is not available in Ireland and the Greek data is too sporadic.

cross posted with The Wilder View…Economonitors

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Euro Area Crisis Hits Confidence in the Core

by Rebecca Wilder

Euro Area Crisis Hits Confidence in the Core

France’s INSEE business confidence, Germany’s Ifo business climate, and theNational Bank of Belgium’s business survey demonstrate ongoing infection as the Euro area debt crisis hits business expectations in the core. Through July, business confidence in Germany and France continued to slide while that in Belgium rebounded, albeit from a low base.

Of note, the service industries in both Germany and Belgium may offer a “ray of hope” (the Ifo Institute puts it.), as these large economic sectors are perhaps stabilizing in the surveys.

Furthermore, consumer confidence in the Netherlands and Italy remain depressed. Notably, the July prints increased 8 and 1.1 points, respectively, over the month – is this the start of a trend, or rather a dead-cat bounce? If I were a betting girl, I’d go with the latter, given the weakness in labor markets and election cycles coming up (September in the Netherlands and TBA in Italy).

In Germany, the Ifo survey has deteriorated swiftly in recent months. This now brings this survey more in line with other business surveys, such as the German PMI, which had shown a more pronounced economic decline.

The Ifo Business Climate survey contains a wealth of information, but is generally dissected into assessment of the current business situation and expectations of the future business environment. The current environment survey, 111.6 in July, fell over the month but remains above the longer term average, 102. In contrast, expectations as regards the future business environment are falling swiftly. The Euro area crisis is impacting the business decision process.

Finally, as demonstrated in the Ifo Business Climate survey that highlighted its ‘significant deterioration’, the manufacturing base is leading the way down. In France and Germany, Markit Manufacturing PMIs hit the low 40s, 43.6 and 43.3, respectively in July. This implies a quickening of the pace of contraction across the French and German manufacturing bases with not much hope of near-term relief, neither from domestic nor foreign demand. The Dutch Statistical Agency, CBS, today reported further decline of Dutch manufacturing opinions in July, as manufacturers anticipate layoffs.

My only question becomes how much weakness is needed in the core (Germany) to get a(nother) significant response from the ECB?


Rebecca Wilder

cross posted with The Wilder View…Economonitors

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Wages driven down, now relative to market you’re over paid!

Update: spelling corrected in title.

I heard and then went to look see that Caterpillar is working hard to control it’s costs.

“Despite earning a record $4.9 billion profit last year and projecting even better results for 2012, the company is insisting on a six-year wage freeze and a pension freeze for most of the 780 production workers at its factory here. Caterpillar says it needs to keep its labor costs down to ensure its future competitiveness.” 

It has purchased 17 other business since 2008, 9 were non US companies. Two companies were purchased in 2011. Here’s the thing, a 6 year freeze? I guess there will be no inflation? I mean like zero. Though economist are saying inflation is needed as part of the solution to our slow economy. Of course, Obama having frozen government wages, I guess Caterpillar is just being patriotic. Nothing like We the People blazing the trail for how we want the private sector to treat We the People.

Caterpillar made $4.9 billion profit. If they raised these people’s pay $10,000 each, your only talking $7.8 million. It is 0.159% (0.00159)of Caterpillar’s profit. Inflation has averaged since 2008 about 2.075%.  Giving the worker $10,000 more per year does not equal the inflation rate as a share of the profit. If the worker were getting their due based on inflation they would get a piece of $101,675,000. This would be $130,352.56 each for the 780 workers. Caterpillar would still have $4,798,325,000.00 profit. Imagine what that $130,352.56 would do for the economy in Joliet! I’ll bet Caterpillar equipment sales would rise do to demand for construction.

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Euro Area Imbalances Are a Symptom of the Broader Global Imbalances

by Rebecca Wilder

Euro Area Imbalances Are a Symptom of the Broader Global Imbalances

Every year I travel to Germany to visit my in-laws, which is where I am now. Given the extra time on my hands, I’ve now mulled over a June 2012 NY Times opinion piece by Gunnar Beck. Beck displays an interesting medley of data in support of his view that Germany cannot afford to backstop the European Monetary Union (the single currency union referred to as the Euro area, or EA). Germany itself has been the loser, not the winner, of the single currency union. His comments are loosely based on the research of the Ifo Institute’s Hans-Werner Sinn.


Based on the ideas of Beck and Sinn, I start a short series on the benefits of membership in the EA, ex-post and ex-ante. The conclusion from this initial post: Some call the EA a microcosm of the world imbalances, i.e., Germany is to China as Spain is to the US. I disagree. I’d argue that the EA imbalances are a function of, rather than a mirror of, the broader global imbalances.

Let’s start by looking at the simple net trade statistics as rents derived by membership in the EA since 1999. I further Beck’s analysis on intra-EA trade (trade among the EA countries) for the original 1999 EA 11 economies. The 11 economies to meet the convergence criteria by 1999 were: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.

By definition, the trade balance is the difference between total exports and total imports, both of which are affected by relative prices and membership in the EA.

The chart below illustrates the change in the annual intra-EA trade balance as a share of GDP during the period 1999 to 2011. Spanning the years 1999-2011, intra-EA gains from the fixed exchange rate regime within the EA have been lopsided toward Spain, Portugal, and the Netherlands.

(Note: for consistency, I use the EA 17 economies as the ‘trading partner’ for the period in the chart below. Furthermore, notice that the axis points in both charts are equal for ease of comparison.)

Being a port economy, the Dutch trade ties to the EA are strong, and gains from EA trading partners have been robust, +11% of GDP spanning the years 1999-2011. Portugal and Spain have likewise benefited, however, their intra-EA net trade gains occurred exclusively since 2008. Of interest, Finland fares the worst, having seen a 5.1% (of GDP) decline in its net trade with EA partners. And Ireland, for all its praise (please see current account stats on Ireland here ), saw its intra-EA net trade decline by 5% of GDP while in the EA – admittedly, there’s been a 4.2% of GDP gain in net trade with the EA since 2008.

Who are the winners of intra-EA trade spanning the entirety of the Euro Area? As demonstrated above, not many countries. The gains from trade came primarily from net exports from developed economies outside the EA (while I do not include a country breakdown, the large net importers are the developed economies – see the IMF WEO database).

The chart above illustrates the change in the annual total trade balance (extra- plus intra-) of the EA 11 as a share of GDP spanning the period 1999 to 2011. Here, the gains from trade are a bit less lopsided and the ‘usual suspects’ are evident. Germany was the third best performing economy by this measure, where net trade increased an average of 2.8% of GDP over the period. The Netherlands benefited the most of the EA 11; but the improvement was based exclusively on intra-EA trade. Portugal experienced gains from net trade from the rest of the world and the EA, where the total trade balance improved by 3.2% of GDP (again, exclusively in the post 2008 period).

Of note, France performed poorly on both counts: intra- and total net trade, -3.2% and -4.9% of GDP, respectively. In contrast, Germany performed relatively well. Being the largest economies in the EA, and given that the absolute value of the total trade balances (either deficit or surplus) exceed that of their respective intra-EA balances, I hypothesize that the global imbalances exacerbated, even caused, the EA imbalances.

Thus, EA imbalances are not a microcosm of the broader global imbalances, rather a symptom of global trade policy.

Rebecca Wilder


crossposted with  The Wilder View…Economonitors

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Confidence Indicators Deteriorated Significantly This Week

by Rebecca Wilder

Confidence Indicators Deteriorated Significantly This Week
 
This week national confidence surveys rolled in with just one story: the economic infection in Europe is spreading. Business confidence indicators in France and Germany declined 1.1% and 1.6%, respectively, in the month of June. In Italy consumer confidence hit another record low since 1996 of 85.3 after falling 1.4% in June.

The National Bank of Belgium and Statistics Netherlands released their balance measures of consumer confidence. Both balances fell 2 points over the month of June. Notably, consumer confidence in the Netherlands is depressed, hitting a record low since 1986 at -40 in June.

These are highly credible indices with robust correlations with hard data like real retail sales and production. Given the precipitous decline in confidence, it’s hard to imagine how European economic sentiment will turn around without truly innovative policy action.


Rebecca Wilder

crossposted with The Wilder View…Economonitors

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Exchange rate pegs getting a new look?

This article at Voxeu reminded me that exchange rate pegs might come back in vogue. Voxeu has an article on the “trilemma” of ’emerging’ economies:

Do sterilised interventions allow countries a way around the fundamental trilemma of international finance by providing them with a means of systematically affecting exchange rates independent of their monetary policies? Japan, Switzerland, and China provide some lessons…

The fundamental trilemma of international finance maintains that a country cannot simultaneously peg an exchange rate, maintain an independent monetary policy, and permit free cross-border financial flows (Feenstra and Taylor 2008). At best, only two of the three are feasible.

Lifted from a note, Rebecca Wilder writes in an informal e-mail:

I found it rather difficult to read. But this idea of trilemma is not broadly applicable to developed markets except Switzerland – they did address that. I don’t know, the one thing that I do notice, is that the trade ‘imbalances’ are not really moving back into ‘balance’ neither in Europe nor globally. Thus, something’s gotta give at some point; I suspect that it’ll be exchange rate pegs.

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German Construction Is Looking a Bit ‘Bubbly’

by Rebecca Wilder

German Construction Is Looking a Bit ‘Bubbly’

Eurostat released its volume-adjusted estimate of construction for April (release here, .pdf). Over the month, Euro area construction declined 2.75% following a large 11.41% monthly increase in March. Across the countries that make monthly data available (8 countries total), Slovenia and Portugal saw the largest decline in April construction activity, -9.3% and -6.7%, respectively, while France was the only country to see an increase in construction, +2.3%. The trend is clearly down, as 3-month over 3-month Euro area construction declined 4.8% through April.

Germany is getting a bit bubbly as regards domestic construction. This shouldn’t be surprising, given that longer dated bunds (even the 10yr) are negative on a real ex-post basis, i.e., using historical measures of inflation.

Note: I re-scaled the volume-adjusted indices to 2001=100 to fully capture the bubble in countries like Spain – the bubble illustration wouldn’t be quite as obvious with Eurostat’s index to 2005. Furthermore, the chart illustrates the monthly construction, while some countries, like Greece or Ireland, for example, list construction solely on a quarterly basis. Eurostat simply estimates construction in these countries to produce the Euro area aggregate on a monthly basis.

Going forward, this construction data does give real-time evidence that the German economy is moving marginally toward domestic-led growth….or we’re seeing the outset of a bubble in German construction

crossposted with The Wilder View…Economonitors

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