14th August 2014 by The Harried House Hunter
It was only a week ago that European Central Bank President Mario Draghi was cheerily telling us that he was off to take a holiday in Italy. However the cheer will be on hold as he observes today’s data from the two largest economies in the Euro area. As discussed in the comments section yesterday, it was going to be touch and go as to whether there was economic growth in France and Germany. It turned out that one did not have any and the other contracted although not the one you might expect.
Not two words you generally associate but here is the news from the Federal statistics office.
The German economy is losing momentum. In the second quarter of 2014, the gross domestic product (GDP) decreased 0.2% on the previous quarter after adjustment for price, seasonal and calendar variations.
So not quite what you expect from the economic “locomotive” or “powerhouse”. Also if you are thinking that adding drugs and prostitution will soon fix that, actually they are already there!
These results are based on the new ESA 2010 methodology for the first time.
If we look for the factors which weakened the German economy we see that they are ones usually considered to be its strengths.
In a quarter-on-quarter comparison, the increase in exports was smaller than the increase in imports, so that the balance of exports and imports had a negative effect on the German economic development. Also, capital formation, especially in construction, fell markedly, one of the probable causes being anticipatory effects due to the unusually mild winter of 2013/2014.
So a contraction, although some care is needed as on an annual comparison the German economy is still moving forwards.
The price-adjusted GDP in the second quarter of 2014 was up by 0.8% (1.2% when calendar-adjusted) on the second quarter of 2013.
Although we do have a nuance to this as this is supposed to be the Euro area recovery phase and German growth was hoped to be much better than that. Oh and Germany seems to have adopted the British ‘blame the weather’ attitude to poor economic statistics.
However, one of the reasons probably was the extremely mild weather leading to high growth rates at the beginning of the year.
The travails and problems of the French economy have been a theme of this blog for some time now and they are not getting any better.
In Q2 2014, French growth domestic product (GDP) in volume* remained steady (0.0%).
That means that the French economy has flatlined so far in 2014. So the hopes of the official forecasters that the 0.2% growth of the last quarter of 2013 would continue have turned to dust. In the latest quarter this is in spite of the fact that consumption rose (+0.5%) and the fact that (in spite of the austerity claims) government spending rose too. However in a similar pattern to Germany net trade and investment subtracted from growth.
Thus we are left with a ‘same as it ever was’ theme for France where even what is supposed to be a recovery period does not seem to have helped the economy much. The French government has already stated today that it will not now be able to hit its austerity and budget deficit targets for 2014.
What about the whole Euro area?
I do not think that this is the type of stability that several ECB Presidents have lauded.
Seasonally adjusted GDP remained stable in the euro area1 (EA18) during the second quarter of 2014.
This meant that the annual rate of economic growth dropped from 0.9% to 0.7% in the Euro area. Also the ECB will note that weak growth is being accompanied by low inflation.
Euro area annual inflation was 0.4% in July 20142 , down from 0.5% in June. This is the lowest annual inflation rate since October 2009.
I am reminded of the period about 18 months to two years ago when the Euro area Presidents Juncker and Von Rompuy promised us that their focus would be “growth, growth, growth” which does not seem to have quite worked out. Mind you according to the Algarve News there is growth for some.
Luís Durão Barroso…. has landed a top job at the struggling Bank of Portugal.
The 31-year old formally was taken on without having to suffer the stress of an interview as no other candidates were sought by Portugal’s struggling central bank.
Luís’ father is José Manuel Durão Barroso, the 11th and current President of the European Commission.
What about the Purchasing Managers’ Indices?
This is a dual edged sword for the Purchasing Manager’s Index (PMI) series as published by Markit. First let us start with the praise which is that the PMI series has indicated economic problems in France when the official series have predicted growth. However we were told this about Germany.
robust growth in Germany……An ongoing robust expansion of output meant the region‟s largest member state continued to enjoy its best spell of growth for three years….
This was from May 24th and is symbolic of a what turned out to be over-optimism about Germany’s prospects. This also led them to forecast this for the wider Euro area.
GDP looks set to rise by 0.5% in the second quarter after the lacklustre 0.2% rise in the first three months of the year
So the series was over-optimistic and over emphasised the gap between France and Germany’s economic performance. So we advance in a more sanguine and humble fashion as yet another economic indicator shows its flawed nature.
There is something of a curate’s egg here. The downside is definitely the impact of the Ukrainian crisis and the sanctions on Russia which will have a depressing effect on the economy in this quarter. However on the other side of the coin there may be the beginnings of a boost should the recent fall in the oil price be sustained. The price of a barrel of Brent crude oil has dipped to around US $104. Although in an irony this may show up first in even lower inflation numbers which will create something of a media storm.
Also the Euro has drifted lower since the heights of the spring and has now fallen below 1.34 versus the US Dollar. Although some of the gains will be negated by the fact that the previously strong UK Pound is weakening against the Euro.
The ten-year bond yield in Germany fell below 1% this morning in response to these figures and is as low as records have seen. If you prefer this in price terms then the futures contract on it also passed a benchmark as the September contract rose above 150. For perspective it was nearly 2% as 2014 opened.
Firstly congratulations to anyone running a portfolio long of German bonds. However as we analyse the situation we see that there are plenty of worms in this particular can. The Euro area crisis saw German bonds surge but now prices are higher and yields lower which implies another type of crisis in itself.
Putting it another way, if investors are willing to accept a return of 1% per annum for ten years what does that imply for expectations of economic growth and inflation in Germany? I have written before that it is my opinion that the ECB keeps telling us “inflationary expectations are anchored” to try to obscure the fact that they are plainly not, and perhaps also to try to convince itself.
The current situation in Euro area bond markets has many of the features of a bubble and is likely to be volatile but it is asking questions which the economic and political establishment are simply not listening too.
Another example of this is the French ten-year bond yield. It was not that long ago that I was writing about it falling below the equivalent UK Gilt (last summer if I recall correctly). At the time of typing it is now 1.4% whilst the UK Gilt is 2.4%.
The recovery in the Euro area seems to be thematically asking a question that Muhammed Ali had the courage to ask George Foreman in the “rumble in the jungle” all those years ago.
That all you got, George?
If it is then there is more trouble ahead as debt burdens mount.