Euro Area 1Q16 NGDP growth not so bad, better to come

A James Alexander post

We have already posted about our optimism for Euro Area economic growth due to the very strong growth in Base Money fuelled by the ECB’s “shock and awe” QE programme. We know it could be so much easier and so much better if they simply moved to properly flexible inflation targeting, price-level targeting or better still, NGDP level targeting. Unfortunately, central banks the world over just don’t seem brave enough to break with their peers on the issue. 2% projected inflation is the ceiling, de facto in the US, UK and Japan, de jure in the Euro Area.

However, out of the US, UK and Euro Area only in the latter is QE still growing strongly, and we remain encouraged by the plans for more.

While it will still be a few weeks until Eurostat releases 1Q16 NGDP figures we can estimate the result using those individual countries that have reported NGDP for 1Q16 like Germany and France plus the next four largest countries that have reported RGDP and “inflating” the figure to NGDP using their average GDP deflator over the past four quarters. It won’t be precisely right, but it will be good enough to get a feel of the first quarter trend.

The biggest six Euro Area countries account for 87% of Euro Area GDP and their estimated 1Q16 NGDP growth was 3.0% YoY, an uptick from the 2.9% seen in 4Q15. It is not quite as strong as the US at 3.2% YoY, but encouraging and actually in line with the longer run average. It was actually a really strong (for the Euro Area) 3.7% QoQ annualised – and the highest figure since 1Q11. But QoQ figures are noisy and we wouldn’t like the ECB to get any funny ideas about the strength of NGDP growth, especially as we know what followed 1Q11!


NGDP growth was driven by the strong NGDP growth figure for Germany at 4.1% YoY that helped offset a deceleration to 2.3% for France. Spain is still growing above 4% YoY and even Italy managed to maintain a decent result at 1.7%.

We could dwell on the mistakes of the past, the twin Trichet disasters of 2008 and 2011, and the failure of Draghi “to do what it takes” in 2013 when he let the TLROs run off with no replacement, thus crashing Base Money growth. But bygones are bygones. Now looking at current trends in QE and the effect on Base Money we are more encouraged and pleased to see the impact on Euro Area NGDP despite significant market and German scepticism. We are Market Monetarists but sometimes the markets can be rather obtuse, in my opinion. Still, all views are welcome and it’s what makes a market after all.

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