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Goldman: "Some European Economies Already Qualify As A Japanese-Style Stagnation"

Tyler Durden's picture




 

For the longest time anyone suggesting that Europe's economic collapse was nothing short of a deflationary collapse (which would only be remedied with the kind of a money paradopping response that Japan is currently experiment with and where, for example, prices of TVs are rising at a 10% clip courtesy of the BOJ before prices rise even more) aka a "Japan 2.0" event, was widely mocked by the very serious economist establishment, and every uptick in the EuroSTOXX was heralded by the drama majors posing as financial analysts as the incontrovertible sign the European recovery has finally arrived. Well, they were wrong, and Europe is now facing if not already deep in a triple-dip recession. Which also explains why now it is up to the ECB to do all those failed things that the BOJ did before the Fed convinced it it needs to do even more of those things that failed the first time around, just so the super rich can get even richer in the shortest time possible.

So we were a little surprised when none other than Goldman Sachs today diverged with the ranks of the very serious economists and the drama major pundits, and declared that "recent trends in some European economies already qualify as a Japanese-style stagnation."

Oops.

Full note from Goldman:

The Costs of Euro area Stagnation

 

Over the course of 2014, there have been important changes in the global growth outlook. The most noticeable of these have been mark-downs in GDP growth forecasts for some of the largest economies, including the US, Euro area, Japan and China. Within that set, the persistent sluggishness of growth in the Euro area has become an increasing source of concern in market discussions, as it appears to be tracking unpleasant patterns associated with the Japanese experience of the 1990s---leading commentators to hypothesize about a so-called ‘Japanization’ of the Euro area.

 

But the phenomenon of stagnation belongs to some continental European economies as much as it belongs to Japan. Recent trends in France, Italy, Spain and other countries in the region already qualify as stagnation experiences. Moreover, our historical analyses show that Western Europe has featured prominently in the list of the most serious stagnations.

 

In this Daily, we discuss three of the main costs associated with these experiences: (1) Growth wedges with respect to peers; (2) market underperformance; and (3) shortfalls in competitiveness. Our focus is on the most recent stagnation experiences looming over the Euro area, in an attempt to contribute to the debate with a more concrete assessment of how costly these experiences can be. This also has global ramifications: Consider that Japan’s weight in global output was around 9% when its stagnation started, compared with roughly 15% for the Euro area in the aftermath of the financial crisis. Thus, continued stagnation in the Euro area would be potentially more damaging for the global economy than Japan’s experience was back in the 1990s---because of its larger economic weight and the stronger financial linkages with the rest of the world. 

 

More Continental European Countries in ‘Stagnation’

 

Three years ago we argued that the risks that some of the largest economies would fall into a long period of stagnant growth had increased following the macro contractions and stock-market crashes we had just seen (GEW, ‘From the ‘Great Recession’ to the ‘Great Stagnation’?’, September 2011). Back then, we identified five countries in stagnation (Canada, France, Italy, New Zealand and Portugal) and noted that several more were at risk (including Austria, Australia, Belgium, Japan and even the US).

 

Fast-forward to today, and our most recent analysis finds three new cases of actual stagnation: Belgium, Spain and Norway (for the latter, the distinction between a non-stagnant mainland and a stagnant offshore economy are, however, relevant). On the brighter side, New Zealand is no longer in stagnation, while the US, the UK and Japan (for a change) appear to have come out of stagnation (GEW, ‘Still wading through ‘Great Stagnations’’, September 2014).

 

From that perspective, concerns around the stagnation of the Euro area are not entirely unwarranted: Average GDP growth in the Euro area over the 10 years leading to 2014 will likely print below 0.8% (or below 0.7% if we only take the last 5 years), which is similar to Japan’s 0.9% average growth during its stagnation experience (1992-2003). A large economy like Italy has experienced very little growth in GDP per capita even in the decade preceding the great financial recession.

 

Historical analysis shows that around two-thirds of stagnation experiences have occurred in developed economies, with a large fraction of these occurring in Western Europe. Moreover, among the most recent experiences, the most notable are precisely those of European economies (ordered by growth shortfall with respect to peer group): Spain (2008-13), Italy (2002-13), Portugal (2002-13), Belgium (2008-13) and France (2002-13).

 

The growth discontent: Wedges in GDP per capita between 10-30%

 

Recently stagnating economies in the Euro area have been growing at rates that are not only lower than their post-WWII average, but also substantially lower than their peers (economies of similar level of development judged by income quartiles). Over time, these differences in growth rates have opened sizeable wedges in levels of GDP per capita with respect to what they would have attained if they had grown at the average rate of their peers.

 

As of 2013, our calculations show that those wedges in GDP per capita are substantial: Spain (18%), Italy (27%), Portugal (21%), Belgium (13%) and France (18%). Among these, Italy is noteworthy. IMF data show that Italy’s GDP per capita as a share of Germany’s GDP per capita went from 96% in 2002 to 76% in 2013; the same share with respect to the US went from 69% to 57%; and even with respect to Spain it went from 109% to 102%. As a reflection of this stagnation, combined with the ascent of emerging economies to the global stage, Italy’s share of the world’s output has declined from 3.2% to 2.1% over the same period.

So with that in mind are you going to buy European stocks? Think again suggests Goldman:

The market's discontent: Lower stock returns, higher bond returns

Our historical analyses show that stagnations tend to be characterized by lower stock returns and higher bond returns than normal (GEW, ‘A Market View of Stagnations’, October 2011). Recently stagnating economies fit those patterns. Total returns on stocks for these economies average -1.4% per year in real terms, considerably below the historical average of around 8%. In turn, total bond returns for these economies average 3.7%, above the historical average of around 3%. Finally, total bill returns have been slightly negative, at -0.2%, compared with a historical average of around 1%.

So the overall picture of financial returns in recently stagnating economies has been unfavorable for risky assets, with relatively low valuations (average Price/Earnings ratio at 13.9) and inflation lower than nominal yields (particularly once the zero bound has been reached), resulting in real rates above those in some countries’ trading partners. While global events over the past few years have affected the performance of the broadest asset classes across these and other developed economies, the underperformance of stocks in stagnant economies is a sign that market pricing reflects shortfalls in growth.

Wait, Goldman not pitching a buy? That can only mean one thing: the Goldman prop desk is buying European equities hand over fist ahead of the ECB's QE, even as Goldman has been selling US equities with both hands over the past few months.

 

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Fri, 09/26/2014 - 20:57 | 5261781 Youri Carma
Youri Carma's picture

Like standing in a pit of fire and shouting: "I see a house burning in the distance."

Fri, 09/26/2014 - 21:08 | 5261797 El Oregonian
Fri, 09/26/2014 - 21:58 | 5261901 knukles
knukles's picture

No shit, Itodjaso, Liquidity Trap

Sat, 09/27/2014 - 06:54 | 5262331 TeethVillage88s
TeethVillage88s's picture

Unrelated maybe: Pentagon Now Arming Colleges with MRAPs

http://www.youtube.com/watch?v=833WefEZ10Q&list=UUvsye7V9psc-APX6wV1twLg

I see Nothing! Nothing!

Fri, 09/26/2014 - 21:19 | 5261821 disabledvet
disabledvet's picture

Japan and Europe are now massively devaluing. So whatever one thinks of the deflationary collapse of Europe vis a vis Japan in the 90's that analogy is no more.

They're both generating massive amounts of inflation now "by design."

There has already been whif's of an outright "dollar panic" in Russia. I don't see Germany staying in "the Union" much longer.

They can devalue and compete on their own just fine.

Fri, 09/26/2014 - 21:55 | 5261896 limacon
limacon's picture

Stagnation is a favourite way whereby the elite propagates the imbalance between wealth and money necessary for their existence.

Get on top , stay on top by freezing everything .

See http://andreswhy.blogspot.com/2014/09/drowning-in-gold.html

Fri, 09/26/2014 - 22:00 | 5261906 NoDebt
NoDebt's picture

Funny how massive social program spending always leads to debt and stagnation.  Different reasons for Japan and Europe, but same outcome.

We aren't far behind.

Fri, 09/26/2014 - 22:01 | 5261908 moneybots
moneybots's picture

"Goldman: "Some European Economies Already Qualify As A Japanese-Style Stagnation"

 

Then there's Detroit.

Fri, 09/26/2014 - 22:11 | 5261922 hairball48
hairball48's picture

So what will happen if one of these big levered up(100:1?) European banks like Deutsche Bank finally "fucks up a call" and a lot of their derivitive shit like interest rate swaps, triggers a big unwind with other banks and so on? Could that be an event to burst the bond bubble?

Fri, 09/26/2014 - 22:17 | 5261935 Caviar Emptor
Caviar Emptor's picture

That will never be allowed

Fri, 09/26/2014 - 22:39 | 5261973 hairball48
hairball48's picture

Maybe a French bank then. BNP Paribus? The French can fuck up anything--allowed or not :)

I take your point though.

hairball

Sat, 09/27/2014 - 10:16 | 5262496 OceanX
OceanX's picture

"The French can fuck up anything"

Spoken like a truely indoctrinated American...

Fri, 09/26/2014 - 22:15 | 5261932 Caviar Emptor
Caviar Emptor's picture

The Very Serious Economists are afraid to call it Biflation. Because then their teachings and writings and the whole orthodoxy of classical economics would implode since they claim it is not possible to have inflation and deflation simultaneously. And yet we see proof daily. Like scientists from as recently as the nineteenth century who claimed that bacteria could not exist and were proven wrong by Pasteur and others. Their policies created Biflation rather than "reflation". That is why there can be no rebound post crash

Sat, 09/27/2014 - 07:44 | 5262342 smacker
smacker's picture

"...the whole orthodoxy of classical economics would implode since they claim it is not possible to have inflation and deflation simultaneously."

Do you mean "deflation" or "disinflation"?

Fri, 09/26/2014 - 22:56 | 5262008 hairball48
hairball48's picture

Let me ask another way.

When markets begin to sell off, "circuit breakers" be damned, where will whatever liquidity that is  generated, where will it go? Won't a large fraction go into "real stuff"? Tangible wealth, including PMs? Bidding the prices of tangible wealth up?

Therefore you could have "paper/digital wealth" deflation as stocks, bond, derivitives sell off.

And inflation of "tangible wealth" as the price of "real stuff" is bid up.

But then what happens to the sheeple's credit cards when the above scenario gets fucked by credit markets freezing (like 2008?)p....and nobody uses "cash" for small transactions anymore....except those of us who do :)

What happens when events occur that the banksters can't control and thus can't "not allow" to happen?

hairball

 

PS

I'm an ill educated redneck so don't use too many big words telling me :)

 

Sat, 09/27/2014 - 04:21 | 5262268 Bearwagon
Bearwagon's picture

What happens, you ask? That's easy to tell: War happens! It's already underway.

Fri, 09/26/2014 - 23:25 | 5262039 yogibear
yogibear's picture

"for example, prices of TVs are rising at a 10% clip courtesy of the BOJ before prices rise even more) aka a "Japan 2.0" event"

Hey Federal Reserve idiots, your Japanese printing experiment is destroying the country. Next onwards for Draghi to destroy Europe's!


Sat, 09/27/2014 - 00:05 | 5262082 q99x2
q99x2's picture

What if Goldman Sachs did not suck enough life force out of the populations to be able to inject it back into society in the form of a totalitarian NWO regime. It is time for Goldman Sachs to be dismantled.

Jump Bankster Jump.

Sat, 09/27/2014 - 00:25 | 5262106 Notsobadwlad
Notsobadwlad's picture

It may not be obvious to the brainwashed, but there is nothing wrong with no growth unless you are participating in a Ponzi scheme... or your investments cannot return cash profits.

... Oh wait, that includes everyone that the Fed and the parasitic criminal banks support.

Sat, 09/27/2014 - 00:41 | 5262122 starman
starman's picture

Recession in 3 2 1! 

Sat, 09/27/2014 - 00:58 | 5262136 disabledvet
disabledvet's picture

Super Dollar will put a floor in equities.

Again "crazy to say long Asteroid Mining" and "Space manufacturing" but India just reached Mars in 9 months on only 70 million US!

That's less than a single F-35 Fighter...

Watch out for NASA. They're becoming the FAA of Space. Real time maps, charts, weather...all for Space.

"Gotta pay for that" though. Life in a vacuum is a lot different than how we live. Super cold...except where it is super hot. Zero G. Super fast.

The moon is looking like an overnighter at this point.

Space manufacturing is already happening.

The first three D printer in space has arrived. We've been growing crystals in space for some time.

Sat, 09/27/2014 - 07:48 | 5262347 negative rates
negative rates's picture

Come on silly, mars held the water the earth uses today, the earth was a sun, ( a giant ball of butane), needing to be extinguished and inhabited. God then split the remaining ground in 6 days leaving the America's and others far apart. The ice age occurred, the dust settled and a few thousand years later we landed in hell with the hopes of utopia. Now if you want to spend money to visit a barren wasteland, be my guest, but don't attract others to join you in that ridiculous venture.

Sat, 09/27/2014 - 01:39 | 5262169 Karaio
Karaio's picture

My uncle on his mother's - Austrian - spoke in the 70s: 

- Sobrinho, who sends the money builds palaces. 

The Catholic Church built cathedrals in droves. 

When I get scared Bank headquarters. 

hehe.

Sat, 09/27/2014 - 01:57 | 5262179 Jano
Jano's picture

US has to suck all money out of EU and send the EU off the clip. AT the end this will destroy US as well, as they stay alone and their Tel Aviv masters abandon them as well.

Ad it is good so. Finnished off EU and a lone US behind the ocean.

Sat, 09/27/2014 - 06:57 | 5262333 jubber
jubber's picture

The Nikkei hit new highs yesterday of 16400, bankrupt italy FTSEMIB was up 600 points and their 10y hit a new ATL.

The Central Banks , Fed ECB BOJ & PBOC have already met and decidied the close for 2014 and their 24h dealing program software has been configured to meet this target whatever the market throws at it.

We have Draghi spunking  another trillion Euro's at the market next week which will probally send everything that isn't already there to new ATH's

The only thing I can see that will stop this in likely order is the one thing they didn't see coming, a global Ebola Pandemic, apart from that it will be either an attack and overthrow in Saudi Arabia, which is possible I guess, or a major conflict with Russia/China which I view possible but nowhere in the immediate future.

The weight of Private investors to move the market is Zero, and any hedge fund that wants to trade short Indexes CANNOT fight the trillions the CB's have in ammunition.

...There is only one trump card out there and that is Gold in the context that if the Chinese economy really goes down the toilet and the Chinese flee in to Gold and Silver in numbers then even the Central Banks can do nothing...however whether that would cause the stock markets to fall is just conjecture

Sat, 09/27/2014 - 19:22 | 5263558 Umh
Umh's picture

For as long as bureaucracy reigns we will have these issues. Goodhart's law – When a measure becomes a target, it ceases to be a good measure.

 

 

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