Sound bites: German IFO business confidence takes another dive in April

The sharp dip in Germany’s IFO index marks another nail in the coffin for stronger recovery this year. Germany’s economic fortunes are seeing a dramatic reversal of fortunes. The earlier bravado that Germany could stave off the Eurozone debt crisis is taking a tumble. Business confidence is taking a much gloomier view of the outlook ahead, based on the hard landing in the Eurozone and growing signs of slowdown in the global recovery. Based on what we have recently seen from the latest  IFO, ZEW and PMI business surveys, Germany will be very lucky to avoid a near term recession in the recent  two quarters. The economy is still flirting with recession this year. With so much of Germany’s economy dependent on the success of its export machine, the downturn in global prospects is bound to be reflected in a weaker outlook ahead. The Eurozone debt crisis is the main millstone around the German economy’s neck. While the economic picture continues to fester in the Eurozone, German growth will remain in the doldrums.

There seems little way out of the dilemma. Even while German unemployment is trending lower, German consumers always remain chronically unable to take up the slack. Weaker business confidence will pull down output and investment intentions in industry. The German government remains committed to a balanced budget. This needs to change. The only way out of the bind right now would be a much more munificent policy response by the ECB and Eurozone governments. The ECB looks like it is gearing up for another rate cut, but a quarter point ease is unlikely to make much difference to economic sentiment at this juncture. The ECB needs to open up its monetary coffers with greater abandon. This means it has to embark on an expansive quantitative easing path like its central bank peers – the US Fed, the BOJ and the BOE. In addition, the Eurozone needs to grow its way out of the debt crisis. Eurozone governments need to enact a u-turn on fiscal austerity in order to get the growth wheels in motion again. We are just starting to see early glimmers of a sea-change in austerity targets easing in France and Spain. We need to see more of this throughout the Eurozone in the next two years.

GERMAN IFO INDEX 104.4 IN APRIL VS REUTERS CONSENSUS FORECAST FOR 106.2 (MAY 106.7)

GERMAN CURRENT CONDITIONS INDEX 107.2 IN APRIL VS REUTERS CONSENSUS FORECAST FOR 109.5

GERMAN EXPECTATIONS INDEX 101.6 IN APRIL VS REUTERS CONSENSUS FORECAST FOR 103.0

 



Bank of England MPC minutes augur change

The tone of the MPC minutes suggest that the BOE may have entered into the semantics of transition. The UK might not be in recovery mode yet, but the intonation seems to suggest the economy is over the worst and out of casualty. The key is how much more QE medicine the economy needs to speed up the healing process to get the economy back on the road to fuller recovery. That debate probably awaits the arrival of incoming BOE governor Carney to see what he has in his monetary medicine bag. The argument posted by some members about the risk that more QE might pose to increased inflation risks is nothing more than a foil. In the current climate, the BOE’s inflation mandate is set aside while the risks of another dip into recession lurk in the forefront. King’s support for a further QE extension simply keeps the easing seat warm for Carney when he comes on board. For the moment, until Carney picks up the monetary reins, BOE policy should be expected to stay unchanged. But the markets should expect the policy sparks to fly as he starts to inject some new thinking into the equation for extra monetary stimulus ahead. Sterling might be off the hook for the moment, but downward pressure on the currency should be expected to come into full force once Carney’s new regime comes into effect. Carney will go overboard for faster recovery and sterling should take the strain over the future.

Sound bites: German ZEW economic sentiment collapses to 36.3 in April from 48.5 in March

The chickens are coming home to roost for economic confidence in Germany. This is being foreshadowed by a dramatic collapse in Germany’s ZEW index. The problems are starting to pile up for business, with the debt crisis in Cyprus, the Eurozone recession and the slowdown in China all taking a greater toll on sentiment. Last month, problems in Cyprus were only just beginning to make their mark, but this month the impact is much more apparent. In recent months, there has been a growing confidence that German business could shrug off the downside risks and rely upon faster export performance to pull the economy away from the rocks of recession. This looks increasingly misplaced as it will be impossible for Germany to decouple from the problems besetting the Eurozone and the increased risks of slowdown in the global economy.

This has important consequences for the German outlook. If business confidence is peaking, German companies are going to be far less optimistic about output intentions, new investment and new hiring. It means that domestic demand is not out of the woods and recession risks are still just as acute for Germany this year and possibly next. The deepening cost of the Cyprus bail-out underlines that there is more bad news to play out for the Eurozone debt crisis. While the Eurozone remains subsumed by recession forces, it’s not only an on-going risk for the troubled Eurozone periphery countries, but for the German economy as well. Germany’s economic fortunes are inextricably bound up with the fate of the Eurozone. Right now, this remains deeply troubled. The bottom line message for Eurozone policy is that greater economic stimulus is the only way forwards.

Budget policy must be much more forgiving given the dire economic outlook. Policy must switch from austerity towards pro-growth fiscal reflation. At the same time, the ECB needs to follow the same path adopted by the US Federal Reserve, the Bank of Japan and the Bank of England, to crank up the gears of recovery in the Eurozone with monetary reflation. At some stage, the ECB will have their epiphany and realise that the only way forward will be unremitting quantitative easing to get the Eurozone economy out of jail and onto a much firmer recovery track.

While the euro is enjoying a moment of relief the outlook remains deeply negative for the currency once the ECB opens up the monetary floodgates again. A return to USD1.20 territory looks increasingly obvious.

Sound bites: Eurozone industrial production rises 0.4% m/m in February, down 3.1% y/y

It is time for the ECB to start thinking outside the box to revive growth prospects in the fast-flagging Eurozone economy. Eurozone policy makers should not be lulled by February’s 0.4% monthly rise in industrial output. Annual growth remains  in deep negative territory pulled down by severe recession forces sweeping through the Eurozone. Business sentiment is very downbeat, output intentions remain under water, while there are no glimmers of recovery on the near or far horizon. ECB hopes that the Eurozone economy will pick up later this year are simply wishful thinking while a large part of the Eurozone economy is suffering such serious austerity and economic sentiment remains so vulnerable.

Much of the 0.4% bounce in February can be explained by very cold weather effects, boosting energy output by 2.6% in the month. This is not expected to last as the weather improves. Weak domestic demand, faltering business sentiment and the uncertain global outlook will continue to dampen output intentions ahead. The ECB will need to cut rates again and will need to consider additional ‘non-standard measures’ like their G7 counterparts to help resurrect much better recovery down the road. With Draghi promising to ‘monitor very closely’ the overall picture, it means a rate cut should be due soon, but it will be to little avail considering the depth of the downturn in the beleaguered peripheral Eurozone economies. The ECB needs to stand and deliver a much larger quotient of monetary stimulus through quantitative easing as the US Federal Reserve, the Bank of Japan and the Bank of England have mustered before them. It is time to come off the fence.

Euro zone industrial production increased by 0.4 percent in February from the previous month, data from the European Union statistics agency Eurostat showed on Friday.

Industrial production - monthly variation pct change compared with previous month (seasonally adjusted)
                             Sep-12  Oct-12  Nov-12  Dec-12  Jan-13  Feb-13
 Euro Zone                                                          
 Total industry              -2.1    -0.7    -0.6    0.7     -0.6    0.4
 Intermediate goods          -1.9    -0.7    -0.9    0.2     0.0     -0.1
 Energy                      -1.4    -1.1    -0.4    -1.5    0.1     2.6
 Capital goods               -2.5    -2.0    0.2     1.0     -1.7    0.9
 Durable consumer goods      -3.4    -1.7    -1.3    1.8     -1.7    1.3
 Non-durable consumer goods  -2.4    1.0     -1.4    1.9     0.3     -1.5
 EU27                                                               
 Total industry              -2.0    -0.6    -0.6    0.6     -0.5    0.4
 Intermediate goods          -1.8    -0.6    -0.9    0.3     -0.1    0.2
 Energy                      -2.4    -0.9    -0.1    -0.8    -0.3    1.8
 Capital goods               -2.3    -1.6    0.2     0.9     -1.5    0.6
 Durable consumer goods      -2.9    -0.6    -1.7    1.0     -0.8    0.0
 Non-durable consumer goods  -1.9    0.6     -1.3    1.4     0.8     -1.3
 Industrial production - annual variation
pct change compared with same month of the previous year (working day adjusted)
                             Sep-12  Oct-12  Nov-12  Dec-12  Jan-13  Feb-13
 Euro Zone                                                          
 Total industry              -2.7    -3.1    -4.0    -2.0    -2.4    -3.1
 Intermediate goods          -4.3    -4.2    -5.6    -4.7    -4.0    -3.0
 Energy                      -0.7    -0.3    -0.3    -0.3    -0.9    -6.1
 Capital goods               -1.5    -3.5    -4.4    -1.5    -3.7    -3.5
 Durable consumer goods      -4.1    -5.2    -6.5    -2.7    -7.3    -4.8
 Non-durable consumer goods  -2.7    -1.9    -2.5    -0.5    1.8     0.1
 EU27                                                               
 Total industry              -2.6    -2.8    -3.6    -2.0    -2.4    -2.5
 Intermediate goods          -3.8    -3.7    -5.0    -4.4    -4.1    -2.5
 Energy                      -2.0    -1.5    -1.1    -0.6    -1.2    -5.9
 Capital goods               -1.5    -3.0    -3.8    -1.3    -3.1    -2.8
 Durable consumer goods      -3.5    -3.4    -5.6    -3.0    -5.5    -4.5
 Non-durable consumer goods  -2.0    -1.6    -2.2    -1.1    1.1     0.7

Sound bites: early signs of life for German new orders

It’s still far too early to say that there may be some signs of economic spring in German leading indicators, but at least a small bounce in industrial orders underlines that hopes are still being kept alive. German industrial orders rose by 2.3% in February, reversing a stronger revised 1.6% drop in January (was originally -1.9% m/m). It was encouraging to see that the bounce was led by a 2.7% m/m gain in non-Eurozone orders, underlining that there might be some early signs of recovery out there in the global economy. Emerging markets, especially in Asia, remain in the forefront of global growth and it was a positive sign that German capital goods orders rose by 3.5% over the month, suggesting that companies may be re-tooling for stronger growth ahead. The latest sell-off in the euro should provide a further welcome boost to export order books with high premium German investment goods looking much more competitive.

While the short term trends may suggest some signs of the downturn bottoming out, overall order books in Germany are still operating well below the long term growth trend. Factory performance is still being held in check by the on-going recession in the troubled Eurozone periphery economies. Germany remains one bright spot in an otherwise troubled Eurozone economy, but its star could still wane unless the Euro area manages to free itself from recession soon. It will still be a close shave whether Germany managed to dodge a double dip into recession in the first quarter of this year.

GERMAN INDUSTRY ORDERS    FEB 13       JAN 13
 Month-on-month change   +2.3         -1.6
 Index (base 2005)       103.4        101.1

                                 FEB 13             JAN 13
                           Index      Pct     Index      Pct
                                     change            change
 Total domestic orders     101.2    +2.2      99.0    +0.1
 Total foreign orders      105.2    +2.3      102.8   -2.7
     of which euro zone    94.7     +1.6      93.2    -3.8
        non-euro zone      112.5    +2.7      109.5   -2.1
 Intermediate goods        98.0     +0.9      97.1    -0.1
 Of which: domestic        98.0     +0.4      97.6    +1.0
           foreign         98.1     +1.7      96.5    -1.4
    of which euro zone     96.2     +2.2      94.1    -5.1
       non-euro zone       99.9     +1.1      98.8    +2.2
 Capital goods             107.7    +3.5      104.1   -2.3
 Of which: domestic        105.3    +4.4      100.9   -1.1
           foreign         109.2    +3.0      106.0   -3.0
    of which euro zone     93.3     +2.1      91.4    -2.4
       non-euro zone       117.9    +3.3      114.1   -3.2
 Consumer goods, durables  100.1    +0.1      100.0   -2.3
 Of which: domestic        96.1     +0.5      95.6    +2.2
           foreign         103.6    -0.1      103.7   -5.8
    of which euro zone     96.9     -3.0      99.9    -5.5
       non-euro zone       111.0    +2.9      107.9   -6.2

Two-month comparison Feb/Jan 13 with previous two months:

 Industrial orders                  +0.1
 Domestic orders                    +1.3
 Foreign orders                     -0.9
       of which euro zone           -1.3
            non-euro zone           -0.6
 Intermediate goods                 -0.2
 Capital goods                      +0.6
 Consumer goods, durables orders    -1.6

Unadjusted two month comparison Feb/Jan 13 with same period a year ago:

 Industrial orders                  -1.9
 Domestic orders                    -3.5
 Foreign orders                     -0.6
 Intermediate goods                 -5.4
 Capital goods                      +0.5
 Consumer goods, durables orders    -1.2

Sound bites: Eurozone retail sales remain on a very weak trend

The outlook for Eurozone retail sales remains very bleak. Consumer demand remains the weakest link in the economy , thanks to record high unemployment, deep debt distress, and contracting consumer credit. It all compounds a very weak picture for consumer confidence and sub-par spending trends for years to come. There is nothing on the near term horizon to offer any hope of relief. The policy environment remains restrictive, while Eurozone governments continue to press home severe austerity cuts and the ECB holds back on much bigger monetary stimulus. The recessionary environment looks set to last for at least this year, with a good chance of extending through 2014 given the very sharp squeeze on real disposable incomes throughout the Eurozone. It is not just the rising fear of unemployment and the impact of debt deflation, but the rising cost of energy is also leaving a big dent in household budgets.

At some stage a sea-change must come in the Eurozone policy environment. Either governments will start to break ranks on austerity cuts and go for growth with pro-cyclical budget measures. France seems to be straining on the leash in this respect. The alternative is that the ECB needs to be the lender of last resort in much greater size. It already has the examples set by the US Federal Reserve, the Bank of Japan and Bank of England, who have joined in a co-ordinated Great Monetary Reflation to kick-start recovery in the G7. The ECB can either throw much more caution to the wind, or else it will handicap recovery for years to come. As soon as the ECB opens up the monetary sluice-gates a lot wider, the outlook for the euro will become a lot more focused on the potential for economic recovery and survival in the longer  term.

Highlights 

RETAIL SALES VOLUME
Percentage change vs previous month (seasonally adjusted)

            Sep-12  Oct-12  Nov-12  Dec-12  Jan-13  Feb-13
 Euro zone  -1.6    -0.5    0.2     -0.7    0.9     -0.3
 EU27       -1.1    -0.6    0.3     -0.6    0.8     0.0

RETAIL SALES VOLUME
Percentage change vs same month of previous year (working day adjusted)

            Sep-12  Oct-12  Nov-12  Dec-12  Jan-13  Feb-13
 Euro zone  -2.1    -3.4    -2.2    -3.0    -1.9    -1.4
 EU27       -1.0    -2.4    -1.3    -2.0    -1.2    -0.2

ECB bites: time for a policy sea-change

It’s time for a sea-change in monetary policy in the Eurozone. The ECB need to take a leaf out of the Federal Reserve and Bank of Japan’s book and go for much bigger monetary reflation. With all the main Eurozone economies bar Germany, deep in the economic doldrums, the ECB need to act fast to turn back the recession tide that has flooded in on the heels of extreme fiscal austerity and perilously weak economic confidence. All the latest sentiment indicators underline that the Eurozone recession is getting a lot worse with no hope of any revival evident on the near term or far horizon. The ECB need to move swiftly to stop the downturn developing into a complete rout and depression risks taking root in some of the more endangered Eurozone economies. Greece, Portugal, Cyprus, Spain and Italy all remain stuck in this deadly risk category.

The Big Easy in monetary reflation happening in the US, Japan and the UK highlights that there is another way to think outside the policy box. The ECB needs to embark on a much bigger monetary stimulus to offset the damage being inflicted by restrictive Eurozone fiscal policy. It needs to stop sporadic fire-fighting and must start using unconventional monetary pump-priming tools, such as the big asset purchase programmes that have been adopted in the US, Japan and the UK. The fledgling revival in the US economy is strong proof that the monetary medicine is working. The ECB’s long term repo operations and country bank bail outs might have filled a temporary gap, but a massive programme of unrestrained QE needs to be concocted pretty soon. That may be complete anathema to the Bundesbank inflation hawks and unquestioningly remains outside of the ECB’s strict policy remit. But the events of the last few years, especially witnessed during the Cyprus crisis recently, have underlined that the ECB have torn up the rule-book in the past and can do so again in the future. If the ECB are going to save the Eurozone’s soul, then it needs to be inventive and act fast.

The ECB cutting rates by a further quarter per cent will do little to correct the mess. A rate cut is probably due in the next few months, but the ECB will need to consider other ways to get monetary life-blood into the economy. The continuing contraction in credit to consumers and the business sector is really worrying. While this partly reflects slower demand thanks to the recession, it also reflects shorter credit supply as Eurozone banks slim down their balance sheets, with new capital adequacy requirements bearing down hard. New credit must be the lifeblood and precursor to any recovery and without it, the Eurozone economy will remain dead in the water. How the ECB lead the banks to the new lending waters and make them imbibe at the same time will be a huge challenge of Gordian proportions. Better to slice through it with gusto if the Eurozone has any chance of recovery or survival.

At least Draghi’s language still sounds right. If the ECB is committed to keep policy accommodative for a long as needed, the outlook for the euro remains much lower. The euro’s demise is two sided now. The weak economy and much easier monetary policy will keep the currency battened down on one side. On the other, the latest IMF COFER report highlights that the euro is starting to lose its appeal as a reserve currency as central banks begin to question its ability to survive in the long run. The COFER report shows that developing countries are starting to ditch some of their euro reserve holdings in favour of other currencies. The Bank of Japan has held up its hand and admitted to a huge new burst of monetary stimulus to get the Japanese economy moving again. The ECB will have to effect a supernova monetary stimulus to return the Eurozone economy to bright star status again.

Altogether, the euro seems set on a much lower trajectory. In the near term, the target looks set to test USD1.25 again, with a further out objective of USD1.20 looking likely in the next 12 months. The possibility of a return to sub-parity remains a measurable risk the longer the ECB fiddles while the Eurozone economy burns.