A James Alexander post
It’s taken a while but the evidence is now in. Euro Area NGDP growth has overtaken US NGDP growth. Congratulations to the ECB, commiserations to the Fed. Go Europe!
Sadly, it is not quite so simple. While the Fed has much to atone for letting NGDP drift so far off trend, the ECB has much more below trend growth to make up as the growth “gap” since the Great Recession makes very clear.
For those who prefer “Real” GDP, i.e. a real number GDP deflated by inflation, then we can also see a similar pattern of Europe overtaking the US.
The main reason for this Euro Area relative resurgence is that monetary policy remains on a tightening bias in the US despite these terrible trends in Nominal and Real GDP, while the ECB is still very much in easing mode. The trends are equally visible in Base Money growth: 6% down YoY in the US, 30-40% up in the Euro Area.
The regional drivers of Euro Area growth are the big four countries who make up 75% of Euro Area GDP, while BeNeLux makes up a further 10%. Their report cards show:
- Germany (29%) – NGDP slowed to 3.2% YoY in 2Q 2016 from a 3.6% trend over the last five quarters. It seems to have been driven by a fall in the deflator rather than RGDP growth which was stable at 1.7% YoY.
- France (21%) – still growing at over 2% YoY NGDP doesn’t sound exciting but is very good for that country which has a terribly sluggish nominal economy hidebound by labor regulations and other restrictions. QoQ growth was 0%, which wasn’t too bad given the country had terror attacks and a major football championship keeping people away from the shops. Equally, keeping large parts of the labor force out of the economy as evidenced by its very low Labor Force Participation and Employment/Population ratios helps France´s productivity statistics but doesn’t make the country happy or grow very fast.
- Italy (15%) – Despite the long-drawn out saga of the low nominal growth-inspired banking crisis, NGDP growth in Italy is above 2% for a second quarter running, helping keep RGDP positive YoY. ECB monetary policy is set for the average grower inside the Euro Area and Italy is very definitely average.
- Spain (10%) – NGDP picked up after a 1Q2016 dip but did not regain the 4% recorded in 2H 2016. Still, it is very welcome given the political chaos engendered by not having a government and as the country has much catch up to do in terms of lost NGDP growth during the double dip recession.
Even writing these mini-report cards on various regions within the Euro Area, one feels very conscious that one is approaching the monetary area the wrong way. It is, or should be, seen as one bloc but the national politics keeps interfering. It mirrors the tension between the permanent Federal Reserve governors and the regional Fed presidents on the FOMC. The US is far more of a single market than the Euro Area but can still see tensions, especially when the central governors are two seats short due to nomination blocs by Congress on Presidential appointees.
Perhaps the sheer diversity of ECB council members strengthens the central officers in a way Janet Yellen can only dream. Who knows? But what is clear is that the ECB is on the right path at the moment while the Fed is not.
Historinhas 
Hello, Marcus / James. Quick question, do you take inventory changes in you NGDP estimates? Normally this would not be an issue, but this time around it seems that inventory reduction is reducing significantly the GDP numbers …. congrats in the great work, as always!
Our NDGP data here is just the published data. for our forecasts (coming soon elsewhere) we use 12 month ahead NGDP forecasts that should smooth out inventory movements. The market should look through inventory movements. This commentator has an interestingly negative take that suggests “looking through” inventories may not be so safe a thing to do:
https://mishtalk.com/2016/07/12/inventory-to-sales-ratios-extremely-elevated/
Thanks James!
It’s news to me that we at Alt-M weren’t aware of the 2008-9 collapse of NGDP! (I’ve certainly referred to it many times there.) But as for the suggestion tight money being the central bank norm, the post-Great Depression data just don’t support it. And one only has to widen ones view to include any considerable number of central banks from the rest of the world to see the absurdity of suggestions to the effect that they tend favor deflationary policies. Why, look at the masthead and repeat Benjamin’s thesis out loud, and see whether you can resist smiling!
Great to hear from George Selgin.
Well…is not Europe in deflation, Japan in deflation, and the US but one recession away from deflation? Australia, Great Britain close. Singapore in deflation.
India is an exception. And also one of the better economies, despite horrid structural impediments.
I think the global track record since the early 1980s is towards disinflation and then deflation, and I think this is a monetary phenomenon. Is this debatable?
I would like to see widespread recognition in the right-wing and elsewhere that fiat-money central banks can be too loose, and they can also be too tight. And for sustained periods of time.
When was the last time a right-winger screamed about the chronic tightness of the Fed? It simply is not done.
A sensible concern about fiat-money central banks being too loose has congealed into a dogma about monetary policies, and a phantasam that central banks print money to finance statist social welfare outlays, and debauch money held by wealthy lenders.
Please, let us review central banks by what is happening in the real world!