Sound bites: German ZEW economic sentiment continues along recovery track

Germany’s ZEW economic sentiment index continues to signal cautious progress in the recovery cycle. Let us just hope that economic spring is not going to turn into economic autumn. The German economy is still moving forward but it is still against significant headwinds. The weaker parts of the Eurozone economy are still casting a long shadow. German export recovery could drag under the effect of the slowdown in emerging markets. And there is still the threat of an early tapering in the US Fed’s monetary stimulus. Any one or all of the factors combined might pose a large headache for recovery confidence in German industry. For the time being the forward momentum in ZEW economic sentiment is looking reasonably self-assured, but it is not quite out of the woods yet. There is still a long way to go before Germany and the Eurozone are back on terra firma.

Sound bites: Germany's recovery outlook cautiously optimistic

There are two words which sum up Germany’s recovery outlook – cautiously optimistic. It is a Goldilocks growth outlook – not too hot, not too cold, but just right. Germany’s recovery is making positive ground with industrial orders and output both showing good underlying growth performance - and not at the expense of its Eurozone partners. Germany’s growth model maybe changing a little this time around, with exports less the leading edge and German consumers starting to show better signs of spending more thanks to low unemployment. If growth looks more balanced between domestic demand and exports, it should be to the net benefit of the Eurozone as a whole as import penetration starts to pick up for its Eurozone trading partners. German industrial production dipped by 1.7% in July, but this was largely the result of a correction from the strong 2% growth spurt in June. It is nothing to worry about as the underlying recovery trend remains intact. It is far too soon for German policymakers to be talking about the ECB normalising interest rates back towards higher levels. The German recovery is still in need of more nurturing, while the troubled Eurozone economies are still need significant nursing. While there is bound to be a battle royal between Bundesbank hawks and ECB doves, Draghi’s forward guidance on keeping rates low, if not lower, over the future should prevail. 

Sound bites: still too early to get excited about UK industrial rebound

The UK industrial output data underline that it is far too early to get excited about a vigorous rebound in the UK real economy. Recent economic surveys may be pointing to stronger recovery, but there is still a wide gulf between sentiment and what is slowly evolving in the real economy. The UK is still on a long slow road to economic revival after the twin recessions and there is not going to be any miracle turnaround to fast track growth for the foreseeable future. UK economy suffered untold damage in the wake of the credit crunch and it is going to take many years yet before the all-clear is sounded. Chancellor Osborne was quite right to caution about getting carried away with too much optimism about the economy. Bank of England Governor Carney’s low rate strategy looks well intact for the time being. There will be no early upward adjustment to UK interest rates. The markets have been getting too carried away with talk of early UK rate hikes and policy tapering, so the pound is long overdue a short term downward correction.

Sound bites: ECB obliged to keep super-easy bias

The ECB’s monetary radar screens should be signalling that rates must stay at record low levels for a long time – if not lower. Parts of the Eurozone are crawling out of recession but the threat of further growth wobbles is never too far away. Germany is an exception and pulling into recovery, but the troubled Eurozone economies are still in dire straights. The massive debt burden, bank balance sheet restructuring and over-tight fiscal policies continue to take their toll on the weak links in the Eurozone economy. Low core inflation, high unemployment and domestic credit contraction are all symptoms of monetary policy needing to give extra zest to monetary stimulation. Interest rates at 0.5% are helping in some part, but the ECB needs to pump prime much more monetary liquidity into recovery efforts. At some stage, the ECB will need to work a more effective means of quantitative easing into equation, or else the Eurozone will be blighted with double digit unemployment for many years to come. This poses the greatest risk to EMU’s survival in the long run, so it is a case of the ECB having to face up to the reality of sink or swim for the euro at some stage soon. Economic pragma and political reality will have to transcend ECB and especially German Bundesbank dogma.

Sound bites: the Bank of England stays steady

The Bank of England is under no pressure to do nothing other than sit on its hands on rates and further quantitative easing for quite a significant time. It looks like the implied forward guidance for no rate hikes until 2016 remains intact. The economy has got a better spring in its step, but the recovery still carries a sizeable limp from the recent twin recessions. The economy will still take some significant nursing and nurturing with rates held steady at 0.5% for a long while. There is no threat of any potential circuit breakers for higher rates. The only aspect that the BOE will need to pay some attention to might be possible overheating in the housing recovery, but this is still in its infancy with no guarantee of sustainability. The housing market is simply expressing a rebound from five years of stagnation. For the time being, Carney and the MPC would be best advised to stick to fence-sitting and wait and see.

Sound bites: German orders trend shows continuing recovery

Despite July’s 2.7% dip in German orders, the underlying trend remains strong and shows the German recovery gathering greater vigour. Given the 5% orders surge in June, the July correction is no surprise. Domestic demand is springing back and the export sector remains on track for continuing good growth. The economy is coming back onto its long term output growth potential. Given this backdrop it is no wonder there is a growing chorus amongst German officials for an end to the ECB’s super-easy interest rate policy. The call is going to fall on deaf ears as the economies outside Germany remain in a sorry state and still pose a heavy millstone around Germany’s neck. The ECB will stay the course on over-easy monetary policy until 2015 at least. If the ECB were to adopt a formal forward guidance policy on rates based on the Eurozone’s 12.1% unemployment rate, monetary policy could stay super-easy for a lot longer than 2015.