Europe overtakes US growth

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.

Shared misery is more comforting

This could only come from someone like Trichet:

Lackluster growth in the euro area is just as miserable as that seen in the U.S., the former president of the European Central Bank (ECB), told CNBC on Friday, defending the central bank’s policies.

“I would like to underline something that is not something well-perceived. I compared over the last 12 months real growth in the U.S. and real growth in the euro area and, to my great surprise, the euro area had growth of 1.6 percent over 12 months whereas in the U.S. it was 1.2 percent,” Jean-Claude Trichet told CNBC on the sidelines of the Ambrosetti forum.

“The euro area is, of course, posting growth which is totally insufficient but we share that insufficiency with the U.S…so we shouldn’t present growth in the euro areas as totally miserable. We share this misery with the other advanced economies in the current period,” he added.

Further arguing that:

Trichet defended the central bank’s track record, however, saying that it had done a “fantastic job” over a “very difficult time.”

Which, as the chart indicates, he made much more difficult!

Trichet´s Misery


Hot potatoes? Encouraging news from Euro land

A James Alexander post

It’s been lonely blogging that the Euro Area economy was not nearly as bad as consensus reckons, even consensus amongst our fellow Market Monetarists. But the data has consistently shown Euro Area NGDP growth doing better, and at least as good as the long-term average.

The long-term avearge is dragged by the twin recessions and growth is still way below trend but it is far from hopeless. The Euro Area PMIs for July out today are quite good in themselves and especially good given they were taken after the Brexit shock and incorporate the impact of the growing Italian bank crisis and the terrorist tragedies in France. The Composite Index may be at 18 month lows but it was expected to be much worse that the still positive 52.9 reading.


Monetary policy is just about as easy as it could be given it is operating with the handbrake firmly on. The ECB balance sheet is roaring up and taking Euro Base Money with it. Draghi has said that he will keep the policy of QE for as long as it takes.

There is constant worrying chatter about the challenges of finding appropriate stuff for the ECB to buy – and this is great news. It is the “Chuck Norris” effect in action as it demonstrates the ECB’s commitment to QE on top of the actual financial asset buying it is undertaking. It will make economic actors begin to believe nominal growth really will accelerate even if the ECB doesn´t take further concrete steps (or “steppes”). The hot potato monster  may be stalking the land again.

German and Spanish NGDP growth rates are a great cause for hope. Draghi must know Italy desperately needs stronger NGDP growth to help solve its bad debt problem as our friend Lars Christensen has shown in a “one graph”  version. If Italy doesn’t get it then the EU may soon suffer another exit.

Releasing the handbrake represented by the foolishly self-defeating 2% inflation ceiling would mean that none of this money growth is actually necessary but, hey-ho, that is the way of the world with inflation ceilings or inflation targets that morph into ceilings.

Southern Blues

Why do problems emanate in the South, even if you discount Greece (Deep South)? For the purposes of this post, South comprises France, Italy, Spain and Portugal, respectively the second, third and fourth largest Eurozone economies. North considers Germany (the largest EZ economy), Belgium, Netherlands and Austria.

In 2006, spending (NGDP) in the South was 28% higher than in the North. Today, it is only 14% higher! These eight economies make up 91% of Eurozone NGDP, both in 2006 and today.

In a recent post, Scott Sumner wrote:

Let me try to head off some comments that might talk about individual countries. As far as the ECB is concerned, the health of individual countries (including Germany) is TOTALLY irrelevant. What matters is the Eurozone as a whole, where monetary policy has been and is still far too tight.

But what we seem to have is a two-speed Eurozone: The “do-well” North and the “flailing” South. The charts indicate that the ECB monetary policy has “discriminated” against the South. That could be indicating that the South does not satisfy the conditions to be part of the monetary union. In that case, problems will only get worse with time!

Southern Blues

GDP deflators show Germany a relative loser, long may it continue

A James Alexander post

While still waiting for the 1Q16 official Eurostat NGDP figure for the Euro Area of 19 countries it has been interesting to have a look at the implied deflators for the currency bloc and its constituents. (Ireland, Slovakia, Cyprus and Luxemburg are all hopelessly late delivering GDP figures, and the first two don’t even seem to do it to Eurostat standards for calendar-adjusted data.)

Why look at the implied GDP deflators? They are perhaps the nearest thing we can get to an accurate measure of inflation. They are the difference between the growth rate of two very large numbers, RGDP and NGDP, and therefore theoretically perfect as measures of inflation – you just have to assume that RGDP and NGDP are measured accurately. No small assumption, especially for RGDP.

The various CPI indices by contrast, like the Euro Area HICP, merely measure price changes for baskets of goods and services, not inflation. Paradoxically, the ECB targets the HICP when it should be targeting a GDP deflator, at the very least. It really should be targeting growth in NGDP.

Two things stand out.

Euro Area inflation is nothing like as bad as the headline HICP that the ECB frets about. It is closer to HICP ex-energy, but slightly healthier, and showing an improving trend in inflation. It is not adequate, being still well below the average for the 2002-2007 period, and so not enough to drive a healthy level of NGDP growth, but it is not quite as disastrous as the 0% seen in the headline HICP.

JA EZ Deflator-HCPI_1

As things stand, we see the ECB striving to ignite “inflation” but to a frustratingly low and self-defeating “less than 2%” target, but against the better target they aren’t doing too badly.

The GDP deflators also shows a much more interesting picture of Germany vs the Euro Area average. Just looking at HICP, it seems like there is price inflation harmony between Germany and the Euro Area.

JA EZ Deflator-HCPI_2

But when you look at the GDP deflators a much more interesting picture emerges.  We see the Euro Area average growing almost twice as fast as Germany during the 2000’s, although nothing like a rate to scare any inflation hawks. The non-German Euro Area countries consequently enjoyed high levels of RGDP growth versus Germany, although still to the benefit of “the sick man of Europe”, as Germany struggled to overcome the burden of reunification. We see that rather stealthily Germany became more competitive – even independently of the much vaunted 2004 labour reforms.

JA EZ Deflator-HCPI_3

In the crisis we see a massive switch as both the GDP deflators and nominal growth collapse for the Euro Area as a whole. However, newly competitive Germany is able to take advantage of the nominal growth chaos in the rest of the Euro Area, having got used to much lower trend growth. In 2011, therefore, Germany was blithely happy with the monetary tightening at the massive expense of the rest of the Euro Area.

Over the last four years, since Draghi assumed the Presidency of the ECB, the central bank has managed to wrest monetary policy away from being solely for the benefit of Germany and we now see a gradual loss of competitiveness in Germany versus the Euro Area average. If we had taken the Euro Area ex-Germany, the contrast would have been even more stark.

Some in Germany may be alarmed to see themselves losing competitiveness against the Euro Area average. But they shouldn’t be despondent. It is not an absolute loss, just a relative one. And a relative loss is just part of the price of being good Europeans. Long may it continue.

Update This morning Eurostat did finally release an official figure for Euro Area NGDP growth. First quarter 2016 YoY growth was 3.0%, down slightly from upwardly revised figure of 3.1% in 4Q15. The figure is in line with the 20 year average NGDP growth rate but well below the 4% trend prior to the 2008 crisis. During the seven years 2007-14 NGDP growth averaged just 1%, nearly a decade of misery.

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.

Euro Base Money continuing to grow to US$ levels, Helpful….

A James Alexander post

I remain a bit disappointed that Euro Area QE and negative rates are not proving more of a hit with the markets and thus the economy. But are things really as bad as painted by our friend Lars Christensen?

It is hard to know exactly what is the best measure to use to gauge the subdued market expectations. Euro Area equities should be a useful guide and have most certainly been very dull but are dominated by utilities and quasi-utilities like banks. Most of the best German companies are privately owned, the same in Italy.

European government bond markets are a horror show when it comes to prospective growth expectations, especially nominal growth – even  many years out. German Government 10 year benchmark bonds are flirting with going negative, following Switzerland and Japan.

The Euro currency itself stopped falling many months ago, a sign of lack of easing but has been in a  relatively tight trading range as we discussed last week.

Perhaps we are too impatient, but we are also Market Monetarists so we pay attention to what the market expects to happen – and believe it is by far the best guess as to what will happen. Still, it seems to me that the power of the ECB’s QE is being overlooked. Sure the ECB is way behind the curve versus the Fed’s earlier bouts of QE.  But the plan is clear, over the next one and half years of bond buying at €80bn per month it will overtake US levels of QE – assuming the Fed keeps its stock of bonds flat. And the growth rate of base money will continue to be way better than the US.

For Market Monetarists the biggest benefit from QE and other “instruments” is the signalling effect, just how committed a central bank is to its targets. And the ECB is clearly signalling its intent with  QE.

Unfortunately no amount of firepower will be of any use if it is aimed at the wrong target. 2% inflation is the wrong target.  A level target for nominal growth is far superior. A level target for prices  is not so bad nor is a properly communicated flexible price inflation target, its close relation. The ECB does not use these targets but insists on a very strict inflation ceiling of “close to but not above 2%”. Just as the Fed will struggle to live down its December 2015 rate rise, so the ECB is still struggling to shake off a market view that it would repeat the 2008 and 2011 rate rise mistakes at the drop of a hat, or rather an approach towards 2% by its own inflation forecasts.

HICP inflation is maybe 2% or more above real inflation, so the ECB’s HICP target of below 2% growth in this measure is already a deflationary stance. So it’s a tough call. The ECB is using massive firepower and remains highly committed to using it, but for a purpose that is not convincing. It’s like driving flat out fast towards a destination that  isn’t where you should want to go, and whenever you get close to it you promise to apply the brakes.

The Japanese central bank is apparently so fed up with its inability to hit its CPI target despite  QE that  at the end of the month  it is rumoured they may switch to NGDP Targeting. Sure it could even keep its 2% inflation target but subject it to a test of 4-5% NGDP growth being met first. The ECB could do the same. It isn’t meeting its target of price stability so it needs to look at redefining it.

Market expectations will do the rest of the job once freed of the fear of monetary tightening any time projections for HICP or CPI or even PCE PI begins to approach 2%.


Some better (economic) news for France, with more to come

A James Alexander post

Last week Eurostat released the 3Q15 RGDP numbers of the Euro Area. The numbers were OK and broadly in line with expectations.

They aren’t that interesting to Market Monetarists, we want to see NGDP numbers. For what it is worth Euro Area RGDP  growth YoY in 3Q15 was up at 1.6% vs 1.5% for the 2Q15. Slightly better news, although it should be remembered that these are very early estimates.

Frustratingly, Eurostat doesn’t release the NGDP  until 10 weeks after the end of the quarter. We only get NGDP numbers for selected European countries. Here there was better news for France, especially.

French RGDP came in line with expectations at 1.2%, up from 1.1%. Small changes on small numbers, I know, but at least heading in the right direction. But French NGDP accelerated to 2.7% YoY dragging up that RGDP.

It looks like the French long-term  RGDP  growth rate has been around 1.5% since 1990 or 1.8% if you include the more volatile, but higher RGDP growth, 1980s. In order to get just the 1.5% real growth, France needs 3.2% NGDP growth. In order to get to the heady heights of 1.8% France has historically had to “endure” (irony alert!) 4.3% NGDP growth.

JA France_1

Market Monetarists suggest a target for expected NGDP Growth of 5% for the US, in line with long-run averages. If France could also cope with 5% NGDP growth, who knows, she might get over 2% RGDP growth. Would 3% inflation be such a disaster? Obviously, if it led to a volatile NGDP growth as seen in the 1980s, maybe not. But target a steady 5% and who knows what RGDP might be able to deliver!

And what additional human happiness might higher RGDP engender, to help ward off greater tragedies. Lars Christensen posted a link to a fascinating piece the other day, testing for a link between NGDP shortfalls and freedom. ECB monetary policy makers and their political masters should take a look. Inflation doesn’t lead to the loss of freedom, but deflation does. What a lot Jean-Claude Trichet has to answer for in trying to prove that French central bankers could be as hysterically anti-inflation as German central bankers. But then France experienced a similar failure in the 1930s, with the most extended Great Depression of any major country. They never seem to learn. Thank you, someone, for Mr Draghi!

For balance, we have also examined German RGDP growth. Over the last 25 years, which includes the unification boom and bust, Germany has averaged just 1.3% average RGDP growth, lower than France. And NGDP growth has only been a tad lower at 3.0%.

JA France_2

Momentum in the last few quarters seems to be with France. We hope it will continue. The good thing about the encouraging trends is that the ECB seems very concerned with low headline inflation and is set to ease policy further. Sadly, by “easing” we only expect more QE for longer, i.e. more pushing water uphill rather than the simpler, more effective and quicker option of just altering the targets.

The first step to really effective easing would be to raise the inflation target and do away with the crushing, dispiriting, and downright counter-productive “close to, but not above 2%” language and adopt flexible inflation targeting or, better still, the ECB should suggest adopting NGDP level targeting and stop chasing such flaky and meaningless numbers as HIPC.

Eurozone inflation ceiling still mostly offsets the good stuff

A James Alexander post

Yet again today we saw the “zero (long and variable) lags” in monetary policy. Central bankers moving markets and thus changing NGDP Expectations happens all the time. It’s perfectly rational too.

JA Draghi

The ECB has been on the front foot for a while this year, especially in the first quarter when it surprised markets with the size, scope and unlimited length of its QE programme. Since the long summer break things have drifted and monetary policy has in effect tightened again. The Eurozone had got caught up in the US tightening concerns as much as anywhere.

Mr Draghi wasn’t happy and made this clear at the press conference today in Malta. The currency duly weakened and stock markets rallied. Although this may have been more due to the hint that US rates will not rise.

However, Nominal GDP growth and thus Real GDP growth cannot get that much better in the Eurozone as a whole while the overarching target remains the self-defeating one of the <2% inflation ceiling. Draghi can prevent tail risks with the QE programme, lower rates for longer and even more negative rates. But it will never be enough to see healthy growth. The inflation ceiling offsets almost all of the good work from the other policies.

Overall, monetary policy is just not that accommodative. Draghi says he and his fellow governors and their staff are working hard:

“the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.”

Please, Mr Draghi, it is the mandate itself that is the obstacle. In the UK we may be looking soon at the mandate  and there were hints that the European Parliament is also looking into the mandate. At least talk about NGDP Targeting and you can then “Feel The Power” in time for the pre-Christmas release of Star Wars 7.

Germans: “We have them (Greeks and the other lot) by the balls”

From 2011: “The real reason for Germany’s optimism

…Look, I said, I’m a born pessimist. For the sake of argument, let’s assume a worst case or nearly worst-case scenario for Europe. I don’t believe the euro zone can survive in its current form, and I think Europe is in for a deep recession, not a short shallow one. What would the impact of that be on India, China, and all the other developing countries, particularly in Africa, whose trade is rapidly expanding with developing world’s two giants?

Forget what the response on the panel was. It was unremarkable. What’s interesting is what happened later, during a coffee break, when I got into a discussion with two senior German executives attending the meeting.

The nature of these meetings is that the hallway chatter is always more interesting that the formal program. Part of the reason why is that, particularly when talking to journalists, the businesspeople or politicians tend to regard those conversations as off the record. So I’ll abide by that here. One of the German execs was a consultant, and the other headed what I’ll call a quasi-official German organization.

They were slightly irritated by the pessimism I’d expressed earlier in the day. “Don’t you realize,” one of them said, “that the cost to us (Germany) of bailing out Greece is far less than it cost us to reintegrate East Germany after the wall came down in 1989?”

I almost choked on my croissant. Yes, I replied, I am aware of that. I lived and worked in Berlin as a journalist in the mid 1990s, when that very painful (economically speaking) process was taking place in Germany. But doesn’t that, I said politely, rather beg the question: Germany integrating their brethren, who’d been isolated and impoverished during the cold war, was a dream come true, whatever the cost. Germans, on the other hand paying to bail out Greece is, to average German, rather the opposite of a dream come true, is it not?

He waved me off. No no, he said, it will be taken care of. The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.

Why Germany needs the euro

Here was my ‘choking on my croissant’ moment number two. Most economists would agree with what my friend at the meeting had said; but he seemed either oblivious (not likely) or simply unconcerned (more likely) with the flip side of what he had just uttered. Italy, to take the third-largest economy in Europe, one with a sizeable and modern industrial base, is stuck with a currency — the euro — which is stronger than the old lira would be under current circumstances. But membership in the euro zone means Italy can’t devalue to bring some relief to its exporters.

I pushed back politely. Look, I said, it’s not Greece I’m worried about. It’s Italy. Third-biggest bond market in the world. Bond spreads this morning again heading over 7%(before the ECB intervened this to push them back down again.) Too big to fail, too big to save. Is the government, even one under a new Prime Minister, going to push through sufficient austerity to avoid a default?

Now the consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.”

Apparently, it´s not exactly working out that way!