Since last summer the Euro area has seen a clear divergence develop between its real underlying economy which has weakened and financial markets which have strengthened. In some ways this is down to the intervention of the European Central Bank as its so far mythical promises of bond market intervention called Outright Monetary Transactions (OMTs) have acted as a type of Jedi Mind Trick. They have rallied bond markets and the Euro but so far done little or nothing for the deteriorating real economies. Even worse today sees a further repayment of last year’s monetary effort which was the Long-Term Refinancing Operation. So monetary conditions are getting an unplanned tightening via these repayments as I pointed out on the 7th of this month. Whilst there is a lot of media spinning about these early repayments let me put it simply, if you cannot make money on something which only costs 0.75% per annum -and that may be cut- it is a rum situation!
The Underlying Euro area economy
Those who were arguing the Happy Christmas War Is Over line for the Euro area economic deterioration such as the BBC’s Stephanie Flanders will have found yesterday’s business survey unpalatable.
The decline signals a steepening of the economic downturn, contrasting with the easing trend seen in the previous three months. Business activity has now declined throughout the past year-and-a-half, with the exception of a marginal increase in January last year.
The actual Markit composite reading fell to 47.3 from 48.6 in January. So we see a Euro area will contract in the first quarter of 2013 by around 0.2% if such March continues on this pattern. We also see that as well as problems with the periphery there are now increasing problems at the core with France and Germany diverging ever more. Remember the promises of convergence from the Euro founding fathers? However I wish to park the problems of La Republique for now and look deeper into the core where I see building trouble in the Netherlands.
Is there a new variant of the Dutch Disease?
Back on January 17th I warned that trouble looked likely to me.
In the labour market she has a toxic mix of falling employment and rising unemployment and the drop in real wages will ripple out further into retail sales. Whilst improved monetary conditions may be a stabilising influence on her housing market we see that her labour market remains a downwards one
So let us investigate further.
Unemployment and Employment
We get the gist here early from the “Sharp increase (in) Unemployment” from the title of the report from the Dutch statistical office.
In January, 7.5 percent in the Dutch labour force were unemployed, versus 7.2 percent in December. Unemployment has risen dramatically in recent months. The average monthly increase over the past three months was 19 thousand (11 thousand men and 8 thousand women).
Youth unemployment is on the rise too although mercifully a rate of 15% is much lower than in the Euro area periphery.
We do not get any direct numbers for my leading indicator which is employment but we do get an indirect one which is that job vacancies fell by 7000 to 101,000 at the end of 2012. So this and the unemployment numbers suggest a further downturn in employment was taking place.
House prices are falling fast
Here we see that things have got worse too.
Prices of existing owner-occupied dwellings sold in January 2013 were on average 9.6 percent lower than in January 2012, the most substantial price drop relative to twelve months previously since the price index of existing residential property was first recorded in 1995
There was a change in mortgage rules at the beginning of 2013 which by the write-up must be more restrictive. But the spinning of their effect forgets that this would have raised prices at the end of 2012 ahead of this fall. I would be fascinated if readers have insight into the changes. Either way we can get some perspective from this.
Prices of existing owner-occupied dwellings sold in January 2013 were at the same level as in the spring of 2003. They were more than 19 percent down from August 2008, when house prices reached a record high
So a lost decade then?
This of course ignores inflation so if we use the average for 2003 for the Euro area consumer inflation measure called CPI in the UK or HICP we see that prices have risen by 17% over this period. Apologies for the acronym mania and believe it not but next month will see CPIH in the UK too! Madness they call it Madness…..
Setting the tone
The Dutch statistics office summed up the last quarter of 2012 thus.
Compared to one year previously:
economic downturn 0.9 percent;
exports 3.2 percent up;
investments 5.2 percent down;
household consumption 2.3 percent down;
number of jobs declines by 93 thousand.
They could have added house price falls but we do get an extra guide here,especially if we add this to the export section.
With an 8.8 percent growth, re-exports made a significant contribution.
The reason why I raise this is that a lot of goods and products pass through Amsterdam and Rotterdam and many of them have little or nothing to do with the Dutch economy. How much is a matter of debate.
Also we know that even after yesterdays fall the Euro at a trade weighted value of 101 is some 7% above its nadir of July 2012 so exporting is not getting any easier.
What about consumer confidence?
This too has taken quite a pounding and the emphasis is mine.
The confidence of Dutch consumers reached a historically low level in February 2013. The consumer confidence indicator fell by 9 points to -44, the lowest level since the start of the seasonally adjusted time series in April 1986.
In particular consumers seemed to be indicating that they consider their own economic position to be grim.
Consumers were far more negative about their own financial situation in February 2013 than in the preceding month…… On balance, the component indicatorwillingness-to-buy dropped 12 points to -32, the lowest level ever.
The lowest level ever is a phrase that is sometimes abused but we do at least have a series which has existed for over 25 years here.
What was the retail sales position?
We see from the consumer confidence numbers that retail sales will be in a difficult environment going forwards. So where do they start from?
The value of retail sales was 4.1 percent down in December 2012 from December 2011. According to the latest figures released by Statistics Netherlands, retail volume shrank by 6.7 percent, retail prices were 2.8 percent higher relative to December 2011.
As ever care is needed as the statisticians feel that the shopping-day pattern was less favourable in 2012. But even if we indulge their view that this has an impact of 4% -which seems a bit steep frankly- we still have a year on year fall of 2.7% in volume terms.
It is not my purpose nor my style to say that everything is wrong with the economy of the Netherlands. For example she has increased her exports and after falls earlier in 2012 her manufacturing sector rallied at the end. But when we look at demand we see weak retail sales accompanied by even weaker consumer confidence and a house price fall which is on the edge of being called a plunge. If we consider the boost to consumption that many places saw from such factors as equity release from rising house price then we have to wonder what the effect of them falling will be.
Even the European Commission feels that the Dutch economy will shrink by 0.6% in 2013 although in an outburst of innumeracy it is apparently going to do so by growing in three out of four quarters and only falling by 0.2% in the one it does! Poor old HAL 9000 from 2001 a Space Odyssey would be worried about being lied to again. Anyway for those who would like to take the blue pill option in the style of the Matrix (not the other blue pill…) you can bathe in the luxury of forecast growth in 2014 and forget that they said that about 2013 and 2012 too!
For those of us in the reality of the red pill world we see that core-core the Netherlands is moving away from the centre which is Germany via its economic decline which makes me wonder who is left? Is Germany now a sole outlier rather than the one with which they all converge?