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.