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.