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Weekly European Recap From Erik Nielsen
Who thought one could write 2000 words to describe the beneficial and very transitory impact of a currency plunge in a fiat world where everyone's goal is now to devalue their own monetary equivalent. Yet that is precisely what Goldman's European analyst Erik Nielsen has done in his weekly recap of European events past and future. Below are the just released views of Chiswick's perpetually cheery resident.
Hello from a lovely, if slightly humid, August day in Chiswick; I’ve been back from vacation for a week and “my part of the world” is still ticking along beautifully. Here is how Europe looks to me:
- Europe continues to enjoy a robust – and pretty broad-based – recovery, although things are moderating a bit as they should do.
- The Bundesbank has revised its German 2010 forecast higher while the French government revised their 2011 forecast down (causing new tensions on fiscal policy next year). We agree on both. We continue to be happily above consensus for the Euro-zone for both 2010 and 2011.
- Axel Weber “pre-announced” continued unlimited liquidity by the ECB through year-end, but also reiterated the intended exit strategy for Q1. The Euro weakened on his statement; beautiful.
- We are heading into survey week in the Euro-zone; we expect both the PMIs and the Ifo to moderate a bit, but its from very high levels, and nothing to worry about.
- The UK will publish more details and (possible) revisions of Q2 GDP; we expect a small revision up to 1.2%qoq.
- Switzerland publishes its August Kof this week; like in the Euro-zone we expect a small decline from the present high level.
- The Polish MPC meets this week to decide on interest rates (we expect unchanged); maybe they’ll say something about the zloty strength.
- The Hungarian MPC also meets on interest rates - also unchanged, we think, and also worth listening to their press conference to hear if they have views on the host of present issues facing Hungary.
1. We are through another peculiar week in Europe. It was a relatively light one in terms of macro releases (but what we got was positive), but more bad news from the US soured markets. While we got no growth related news out of the Euro-zone, indicators from the countries surrounding (or encircled by) the Euro-zone provided further evidence that the European recovery is in good shape – and remember that there is no history of these small open economies doing well without the core of Europe having good demand growth. Specifically, Swiss exports rebounded strongly in July at +1.9%mom (but remember that these are volatile numbers and that the trend is indeed easing now), and Norwegian mainland Q2 GDP surprised on the upside with +0.6%qoq, non-annualised. Polish industrial production took a breather in July (-0.3%mom, but still up more than 10% yoy). Yes, the German ZEW was down, but that really tells you nothing, as Dirk Schumacher explained so elegantly in his German comment on Wednesday. Meanwhile, someone went shopping here in the UK (not me – and hopefully not my wife): July retail sales were 1.8% higher in volume terms than the average of Q2. But while the European recovery moves forward at a beautiful – although soon-to-be slower - speed, the US seems in trouble. Now, European growth outperformance of the US is not that unusual; indeed Euro-zone quarterly GDP growth has outperformed the US 40% of the time during the last ten years in spite of weaker population growth (see Wednesday’s European Chart of the Day), but with the correlation between European and US equities above 0.9 (compared with an average of 0.7 over the last 20 years; see European Chart of the Day from August 10) I guess that one just has to sit and stare at ever cheaper European stocks!
2. Meanwhile, the Bundesbank revised up their 2010 forecast for Germany as they incorporated the strong Q2 number and got convinced that domestic demand is coming along now; we agree that Germany is likely to see GDP growth above 3% this year. After taking a fresh look at their numbers this past week, the French government kept its 1.4% growth forecast for this year, but suggested some upside risk to the forecast. (We have 1.8%.) Maybe more importantly, the French government caved to the widespread criticism of their optimistic 2.5% 2011 forecast, revising it down to a more realistic 2.0%, triggering what appears to be tense discussions inside the government with respect to the (continued) pledge to limit the budget deficit to a still sizable 6% of GDP next year without raising taxes. On our numbers, the Euro-zone’s GDP will grow by about 1.5% this year (marginally higher than our previous 1.4% due to the Q2 number), and a bit more than 2% next year. We remain well above consensus and the official institutions on both forecasts – a position we have been, and continue to be, very happy about.
3. While investors don’t seem to care much about European growth and growth prospects these days, some central bankers are starting to take notice. The ECB’s exit strategy has been on hold since spring, but on Friday Bundesbank president, ECB CG member, and leading contender to replace Trichet as the ECB’s next president, Axel Weber, said that while they’ll continue their fixed rate full allotment policy until after year-end (probably scoring some brownie points with governments around Europe) the ECB’s “exit strategy” would be “focused on the first quarter” of 2011. Personally, I was surprised that Weber would pre-announce the liquidity policy ahead of September’s meeting (Trichet is certainly not going to be pleased with such communication), but there is certainly nothing wrong with the substance of his statement which happens to be very nicely in line with our forecast of eonia creeping up toward 1% early next year, setting the stage for the first rate hike (to 1.25%) in 2011’Q2 – unless, of course, the Euro appreciates significantly and persistently from before then. But so far so good on that front; the Euro weakened following Weber’s comments; the vast majority of those emailing or calling me reflected on these “dovish” statements by “hawkish Weber”. (I think this is a too simplistic way of thinking of it; I think it was pretty clear for a while that the ECB wouldn’t (and shouldn’t) pull the rug from the banks and I don’t know why it’s so dovish to talk about exit in Q1 - and I have never thought of Weber as more than marginally hawkish btw.) Incidentally, Weber also said in the interview that he didn’t think the ECB’s sovereign bond purchases (which he opposed) had played more than a minor role. I completely disagree on that one; in my opinion it was the critical component in preventing a collapse that very moment (certainly after Trichet had sent the market out to the edge of the cliff the Thursday before at the press conference in Lisbon.) Meanwhile, in the UK, the central bank seems less impressed by their recovery; Mervyn King’s letter to Osborne explaining the excessive inflation as well as the minutes from the last MPC meeting suggest a rather relaxed attitude to the inflation outlook (temporary due to the sterling depreciation); I sure hope they are right because 3+% inflation eats a lot of real income for a lot of struggling people (it is, of course, a less transparent way of lowering real income than asking people to take nominal wage cuts as is the case in some of the Euro-zone periphery.)
Turning to this coming week:
4. We are heading into survey-week in the Euro-zone. On a sequential basis, we have long been forecasting a slowdown of GDP growth in the second half of this year (to about trend-growth; i.e. 2% annualised), and while the July indicators were a good deal stronger than that (pointing to annualised growth of almost 3.5% in early Q3), we still expect a slowdown and hence somewhat weaker survey data for August. So, for the Flash PMIs on Monday, we see the Euro-zone manufacturing index easing from 56.1 to maybe 55.8, and its services counterpart from 55.4 to about 55.2 (both carry an EMEA-MAP relevance score of 5). We expect similar trends in the regional surveys – the German Ifo (due out Wednesday, EMEA-MAP relevance 3) should retrace some of its surge the previous month, falling from 106.2 to around 105.5. Finally, the Belgian manufacturing survey (a key input into our GLI which, incidentally, is looking pretty okay in spite of all the noise from the US) should also edge down slightly on Tuesday. Personally, I wouldn’t be the least surprised if lower indicators next week will be interpreted by the market as signs of the Euro-zone grinding to a stand-still. While not as pronounced as earlier this year, there is still an awful lot of inherent (but poorly argued) Europe-scepticism out there. The latest published GDP number for the Euro-zone (Q2) is at 4% annualised growth and available indicators point to only marginally lower growth in early Q3, so any easing is just a sign of some normality setting in. Nothing to worry about! The other major release (on Thursday) will be the ECB’s report on Euro-zone liquidity conditions in July, which will feature an update on bank lending flows to the private sector. Lending to households has been improving marginally over the first half of the year, but lending to firms is still anaemic; after a couple of months of flat lending growth, we got a small increase in May followed by a bigger decline in June. An increase in the July figure would be a welcome development, but our general H2 forecasts don’t assume any pick-up until late in the year.
5. In the UK, the only release of importance this coming week is the first estimate of nominal GDP growth in 2010’Q2 on Friday, along with a revised figure for real-terms growth and the first estimate of the expenditure breakdown. Following stronger figures for construction we expect a small upward revision to real GDP growth (1.2%qoq from 1.1%qoq ; there were also upward revisions to construction growth in 2010Q1, but these won't feed through to the GDP estimates till next month.) We expect the main drivers of Q2 growth to have been private investment and net exports.
6. It’s also survey view in Switzerland where the August KOF will be released on Friday. The KOF (EMEA-Map relevance score of 4) started its easing (from a very high level) in July; we expect another small decline in August to about 1.18 (from 2.227), but – like elsewhere in Europe – this is all part of a desirable normalisation process. M3 growth is the other noteworthy release this coming week. The annual growth rate rose further in June to 7.7% after 7.5% in May, reflecting the continuing generous liquidity provision by the SNB.
7. The Polish MPC will meet on Tuesday, and review data for the last two months (there was no meeting in July). As Magda Polan has explained, we agree with consensus that rates will be left unchanged; even though production data has been strong this year and private consumption holds up well, July inflation declined and wage growth has been very moderate (+2.1%yoy nominal or just +0.1% real in July). Maybe the most exciting thing out of Warsaw on Tuesday will be their reaction (if any) to the recent strengthening of the currency.
8. The Hungarian MPC also meets this week (tomorrow, Monday) to consider their interest rates. They’ll also leave them unchanged; 2010 inflation has been in line with NBH expectations and is set to decline further. The press conference might reveal the NBH’s view of the recent HUF recovery, as well as – more broadly – their reaction to the government's dismissal of a follow-up EU-IMF program and the President’s signature on a number of new measures, including extra bank taxes, and a ban on forex mortgages. Also in Hungary, look out for retail sales on Thursday; it’s an important indicator because sales have been on a declining trend for some six years now, with the speed of the decline accelerating in 2009. As Q2 GDP did not pick up over Q1 despite strong growth in the rest of Europe, private consumption was one of the drags on the GDP. It’s high time to get this economy back on the right track again!
… and that’s the way Europe looks to me. I wish you all a happy Sunday afternoon; I’ll devote mine to something healthier than sitting here in my study writing emails.
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“my part of the world” is still ticking along beautifully. Makes me want to puke. He is got to be the Poster boy for the top in arrogance. Screw the lamp post, bring back the guillotine.
There is actually pretty much proof that Europe is recovering slowly from the crisis. And in some cases even pretty fast.
The difference with America is scary.
Not so sure about that ....
Tensions Rise in Greece as Austerity Measures Backfire
The austerity measures that were supposed to fix Greece's problems are dragging down the country's economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back.
The problem is that the austerity measures have in the meantime affected every aspect of the country's economy. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies and unemployed are on the rise. The country's gross domestic product shrank by 1.5 percent in the second quarter of this year. Tax revenue, desperately needed in order to consolidate the national finances, has dropped off. A mixture of fear, hopelessness and anger is brewing in Greek society.
Prime Minister George Papandreou's austerity package has seriously shaken the Greek economy. The package included reducing civil servants' salaries by up to 20 percent and slashing retirement benefits, while raising numerous taxes. The result is that Greeks have less and less money to spend and sales figures everywhere are dropping, spelling catastrophe for a country where 70 percent of economic output is based on private consumption.
http://www.spiegel.de/international/europe/0,1518,712511,00.html
Controlling The Uncontrollable: Spain's National Addiction To The Use Of "Dinero B"Well, before we go any further, I would like to make clear that what I am going to talk about in this post is not anything illegal, or even irregular (things like this must be going on in almost all Euro Area countries even as I write). Bending of the rules? Perhaps. Taking them to their limit? Certainly.
What Spain's central, local and regional government does is take advantage of loopholes in Eurostat accounting regulations to generate debt that really is debt, but is not classified as such according to the Eurostat excess deficit criteria. Key areas involved are debts on the balance sheets of state (or regionally, or locally) owned companies, overdue payments for receivables (very common practice in Spain), and public-private-partnership-type leaseback-arrangements. None of these are (typically) classified as debt, though they do all have to be paid at some point, which means there is a stream of revenue (flow) impact rather than a debt (stock) one (unless and until Eurostat changes the rules). Which means that while they do not impact that critical debt to GDP number, servicing these liabilities does exaccerbate the annual fiscal deficit one. Which is why ultimately bringing Spain's fiscal deficit under control will almost certainly prove to be much harder work than it seems.
We are able to make this comparison since the Bank of Spain effectively maintains a double entry book keeping system, whereby it keeps one record under the National Financial Accounts of the total debt , while at the same time keeping a separate record of debt as classified for the EU Excess Deficit Procedure.
As we can see in the chart below, total gross government debt in Spain as classified in the Financial Accounts was some 751 billion euros (or around 75% of GDP), as compared with the 585 billion (or around 58% of GDP) in gross debt recognised under the EU excess deficit procedure classification.
http://edwardhughtoo.blogspot.com/2010/08/controlling-uncontrollable-spa...
That's just greece. Look at England:
http://www.telegraph.co.uk/finance/economics/interestrates/7957873/Interest-rates-may-hit-8pc-in-two-years.html
Same goes for France, Germany, Belgium, Netherlands.
At the moment, inflation is 2.7%. Now if you're in debt, that's a good thing. And that's what America isn't able to do. In America it's deflation all over.
Greece for Europe is like Colorado for America in a financial stand of view.
I hope you are not arguing for inflation!!! First, inflation is bad for everyone in the long run and especially bad for savers in the short run.
Second, inflation is soaring right now... Cost of living is soaring whether it's grocery prices or gas at the pump. The only deflation is in assets like houses and stocks that were overly valued in the first place.
I own a home... And I don't mind one bit if it's worth a whole lot less tomorrow because that means I will have lower property taxes.... Simply cause I plan on living in my house. I am not some speculator planning to sell in a couple of years. However the government can not have depreciating housing prices... Because the loss of property tax income will be devastating to local governments.
This was the whole reason for fanny and Freddie.... Not to make housing affordable and help people, but rather to raise property prices so they can collect higher taxes.
It's so simple, a caveman can understand this. Fuck you fannie and Freddie. Fuck you hot bottom Barney. Fuck you Tim and Ben. Fuck you sheeple for being fools.
"I believe that this will be the combined result of natural recovery-driven [pah!] growth and massive and unsustainable investment driven by huge monetary growth," said some guy from a think-tank.
It's not all roses over here (UK), Raging: we have the same unholy brew of deflation of one's current assets, and inflation of the necessities of living. It's probably just that if you electronically print £200bn it does actually make a difference to one or two useless economic indicators, because our economy is a bit of a tiddler. And we don't have a Eurozero Hedge (wherever the servers may be) attempting to keep things honest. Don't worry, when the US finally falls off the cliff, we'll be just behind you, if not shoulder-to-plummeting-shoulder.
did anybody read the article in Der Spiegel about the American Middle Class?
http://www.spiegel.de/international/world/0,1518,712496,00.html
In its current annual report, the US Department of Agriculture notes that "food insecurity" is on the rise, and that 50 million Americans couldn't afford to buy enough food to stay healthy at some point last year. One in eight American adults and one in four children now survive on government food stamps. These are unbelievable numbers for the world's richest nation.
http://www.spiegel.de/international/world/0,1518,712496-2,00.html
Tent camps in America:
http://www.google.nl/imgres?imgurl=http://obrag.org/wp-content/uploads/2009/04/tentcitypark.jpg&imgrefurl=http://obrag.org/%3Fp%3D5906&usg=__uRa8YndYLdtjXAcYAu3OysJjLJg=&h=374&w=500&sz=129&hl=nl&start=19&sig2=aDhnBeCTsuYYW4QRayBLrA&zoom=1&um=1&itbs=1&tbnid=fhEVKJ9IQLy1zM:&tbnh=97&tbnw=130&prev=/images%3Fq%3Dtent%2Bcamps%2Bamerica%2Bpoor%26um%3D1%26hl%3Dnl%26sa%3DN%26tbs%3Disch:1&ei=dlxxTJSkBozKswbxpdG5Bg
http://povertynewsblog.blogspot.com/2009/10/tent-camps-of-america.html
This buffoon, Nielsen, is making a serious, late run at the title of Biggest Douchebag of 2010. Krugman, Seigel, Liesman and Mishkin have already built a substantial lead, however. We'll see. Perhaps he'll just have to settle for the title of The Biggest Douchebag in all of Chiswick.
I know Chiswick quite well, and whilst the competition is very tough, it will absolutely be left in the (Mad Max?) dust by our hero, Erik.
Lord and Lady Douchebag
http://www.youtube.com/watch?v=K_b3oPslctA
That is simply outstanding. Thank you. +++
I am fairly sure Monty Burns has a picture of Erik Nielsen in his attic
Good assessment by Erik Nielsen. I'm currently in Poland. I did see signs of a slow down but it seems we are over it. At least for now. The budget situation doesn't look good for the next two years, but show me developed or emerging economy where it does?! In few years time there maybe problem with bad portfolio of mortgage debt denominated in swiss frank (60% of all mortgage loans), so banks are setting up reserves for bad debts and that would translate to contraction of credit and slowing economy. I do not think it will be that bad here. But it can't be said the same about Hungary or Baltic 'Tigers'! Never the less Germany-France-Poland should be the engine of continental EU. Still waiting for Greece to be forced out from eurozone for debt restructuring process...
"Still waiting for Greece to be forced out from eurozone for debt restructuring process..."
And the rest of your comment relative to that makes sense how?
Recovery??? What a joke. There is no recovery nor will there be one. Hyperinflation is inevitable for all countries as one tries to debase their currency faster than the other. The only standing country will be the one that doesn't try to debase their currency. We are in a cyclical bear market for the stock market. We are in a rapid contraction mode for the economy as a whole.
There is only one way out and that is cheap energy. Either a new oil rich field is found to sustain the engine or we discover a cheap renewable source of energy.
After the November elections, we will start seeing rising crime. Next year, we will start seeing destitution and poverty take hold of a significant portion of the population. Riots will start before 2011 is over and we will be collapsing at every turn in 2012. Now, if the sheeple continue their slumber and tolerate their misery for a few more months, I would really appreciate the extra time to prepare. Here is to hoping that I am completely wrong and pigs flying.
Europe gets a lot of tax revenue out of oil. Cheap energy isn't what they need.
Same for America. America will soon start to double and tripple their taxes on gasoline. Just wait and see.
The tax revenue is falling fast. Cheap energy going forward will be a huge problem for Europe. Russia fucks with them in regards to natural gas and with revenue down at Gazprom, look for more of the same in the future.
..."There are two problems, however. The first is that the stuff is running out. Production of North Sea oil has halved in the past decade; Britain has gone from being comfortably self-sufficient in oil and gas to being a net importer. This means the UK is now doubly sensitive to an increase in oil prices, and to any potential breakdown in energy supplies: witness Russia's brief and terrifying interruption of most of Western Europe's gas imports a couple of years ago.
The second issue is that since the oil arrived, we have treated it not as a luxury but as a staple of economic life. Unlike the Norwegians, who diverted a slice of their North Sea revenues into an investment fund designed to provide for them when the oil started to run dry, chancellors of every political hue treated North Sea taxes as current income."...
http://www.telegraph.co.uk/finance/comment/edmundconway/6505670/North-Se...
Energy Security. Rising levels of energy import dependence could impose significant geopolitical and foreign policy constraints on the EU. Currently, the EU imports roughly half of its energy resources. In its recently published “Green Paper on Energy Security,” the European Commission estimates that over the next 20 to 30 years, energy import dependence will rise to 70% overall and up to 90% for oil, in the absence of policy action in the near term to reduce dependence.12 One aspect of import dependence that raises concern in Europe is the increasing dominance of OPEC producers in the European fuel mix. OPEC currently supplies 51% of EU oil supplies, and the majority of that share originates in the Middle East. Also, since indigenous production is now declining, an increasing share of the EU’s natural gas supply comes from Algeria, Russia, and Norway, deepening Europe’s overall fossil fuel import dependence.
http://www.globalchange.umd.edu/energytrends/eu/3/
Tyler, the Greek 2-year yield went over the 10-year there---I am more than sure that all is just fucking peachy in Europe. Riiiiiiiiiiiiiiiiiiiiiiiiiiiight
NB : Greece = 2% of the EU's GDP...
Yup.
This is a joke. And a very bad one. The EU intends dumping Greece and the rest of the ........
http://www.bloomberg.com/apps/quote?ticker=GGGB10YR:IND
"The EU intends dumping Greece..."
evidence please?
Tyler namechecked by Ambrose Evans-Pritchard in today's Telegraph blog. Kudos...
http://www.telegraph.co.uk/finance/comment/7958823/America-no-longer-nee...
Brothers have faith in the Central Bank!
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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