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Thursday, September 27, 2007

Where is He? The Mysterious Dissapearance of Jean Claude Trichet

Well this is a rather frivolous post about a fairly serious issue. Has anyone seen Trichet? (No, not Kelly, Trichet). I imagine the financial markets would like to know what he thinks. Or rather, maybe they wouldn't, but they need to.

Basically this isn't a case of quietly fiddling while Rome burns (and this) but it damn nearly is (burning I mean, or was that Paris), and the Reichstags won't be far behind. Meantime hardly a flat or house is being sold in Spain.

So with all eyes focused on US data while the eurozone economy is visibly tanking, or rather wilting by the day, where the hell is Trichet? Hasn't anyone else noticed how he has suddenly gone missing? Strong vigilence is obviously over, but when the hell is he going to start explaining that he might have to lower interest rates, and when he finally does this how will the financial market activists respond? I mean some of them seem to have very little idea about what is actually going on at the moment. Over at DailyFx, for example, they seem to be under the impression that the eurozone is a country or something:

"As an export dependent nation, the Eurozone has a lot to lose if the Euro continues to rise."

I think they meant Germany there, since France certainly isn't dependent on exports, and Spain has a whopping trade and CA deficit which puts the US one really in the shade.

Actually the general tone of what the DailyFx analyst has to say isn't so far from the mark:

The Euro made a new record high today despite larger than expected drops in German business confidence and import prices. Economic data out of Europe continues to get worse and if the Euro does not stop rising, the European Central Bank will be forced to verbally intervene in the currency. Don’t forget that the Euro topped out in late 2004 after Trichet called the moves brutal and he may have to do so again as German business fell to a 19 month low in September. This is a result of deteriorating credit conditions, a strengthening currency and tight monetary policy. As an export dependent nation, the Eurozone has a lot to lose if the Euro continues to rise. The only major benefit of a strengthening currency is lower inflationary pressures. We are already seeing the initial impact with import prices falling for the first time in nearly 2.5 years. Less inflationary pressure means less pressure on the ECB to raise interest rates. If we see a material slowdown in economic data, softer inflation may actually give the central bank the flexibility it needs to begin talking about lowering interest rates.

So this is the point. We are soon going to be into declining rates at the ECB, and then what is going to happen to euro/dollar. I ask you? Are the markets ready for this?

Even ECB-adviser and hawk Joaquim Fels now has the current ECB rate as neutral, and of course, if the fundamentals are deteriorating, neutral quickly becomes "overtight". No wonder Trichet is hard to find at the moment.

If you are looking for more serious analysis of all this, Claus Vistesen has some over at Alpha Sources.

As for Trichet, after a long search I have finally located him, he has been in Holland, talking about the importance of demography for Europe's future. Obviously he is rather more focused on the longer term right now. I can well understand why.

Euro Libor Rates

Basically, following up on this post earlier this month I wish to report that the 3 month euro libor rate is still stuck where it was, way above the ECB refi minimum bid rate. Here is a chart with the latest data we have from the BBA:

Also the FT reports this morning that the European Central Bank’s emergency lending fund, which attracts a penal interest rate, was tapped yesterday for €3.9bn – the largest sum asked for since October 2004.

The surge in demand for the ECB’s “marginal lending facility” pointed to the difficulties still being faced by European banks as a result of the global credit squeeze. The ECB revealed no details but it is likely that more than one borrower was involved. Use of the marginal lending facility attracts a 5 per cent interest rate – significantly higher than market rates.

Oh, Jean Claude, Jean Claude, wherefore art thou, my beloved?

Incidentally, the BBA link to the libor data is here.

Wednesday, September 26, 2007

German Business And Consumer Confidence Tumbles

Well following hot on the heel of my German export driven economy post yesterday, events didn't take too long in bringing themselves home to roost.

Firstly we have the IFO Business Climate Index:

The index for the Munich-based Ifo institute which is normally though to act as an early indicator of likely trends in German economic activity, fell for the fourth consecutive month from 105.8 in August to 104.2 for September. Expectations for the next six months were the gloomiest for almost two years, as the component measuring confidence in the economic outlook six months from now fell to 98.7, which was the lowest level recorded since November 2005, and down from 100.4 in August. Indeed this months general business climate reading was itself a 19-month low, and reflected growing concerns among German industrialists that the strength of the euro and the increasing cost of credit will sap economic growth. The IFO results are entirely in harmony with the Bank of Scotland PMI readings we saw earlier in the week and the ZEW institute reading last week.

German consumer confidence also fell - in this case to the lowest level in five months - according to the GfK AG's confidence index for October. The index fell to 6.8 from 7.4 in September, the market-research company said in Nuremberg today.

The general concern is the same as that being expressed in the IFO index, the fear that Germany's economy may lose momentum as a U.S. housing slump pushes up borrowing costs and at the same time the euro's appreciation to a record against the dollar weighs on exports.

The individual components of the index also make interesting reading:

The component measuring consumers' confidence in the economic outlook fell to 40.7 from 48.4, while the income expectations component dropped to 2.3 from 9.2 and the indicator of households' willingness to spend slipped to minus 2.4 from 6.4. These are quite substantial drops, and reflect a growing pessimism about the outlook for the coming winter.

In this climate it is hard to appreciate why people imagine that the dollar can quietly pulmb the bottoms while the euro scratches the ceiling. A correction is undoubtedly coming here, since the current narrative makes no sense at all. The first indication of the change, well haven't you noticed, M Jean-Claude Trichet has gone very quiet all of a sudden. Somehow I don't think he relishes courting the limelight too much right now.

Japan Trade Surplus August 2007

Japan's August trade surplus widened to 743.2 billion yen ($6.5 billion). On an annual basis exports rose at more than twice the pace of imports, according to the latest data released by the Finance Ministry today. The surplus has nearly quadrupled - and increase of 287% - from this time last year.

At the same time shipments to both Europe and Asia rose to monthly records. The overall picture is however, a more complex one. In the first place total exports in July and August were both down on the June peak, as can be seen in the chart:

The big difference between July and August is that imports held up in June, while they dropped back in July. This is undoubtedly the impact of two factors, slowing domestic demand in Japan itself and fluctuations in energy costs. In fact petroleum imports did drop back from 1,137,199 million yen in July to 1,081,920 million yen in August, a drop of 55 million yen or so, or some 50% of the change in the balance.

In fact the monthly fluctuation in the trade surplus is not a very interesting or reliable data point at all (since it in part depends on fluctuations in earlier data), as the following charts will show. Firstly the chart for the monthly trade suplus since January 2006:

So as we can see, the August trade surplus was not particularly large at all, but experienced a fairly large annual increase due to the fact that the August 2006 surplus was very small. Economic data are full of anomalies like this.

The situation becomes even clearer if we look at the monthly year on year changes in the surplus since January this year. The anomalous nature of the August reading becomes even clearer, and we shouldn't take it as a reading on anything very special.

Now for some more interesting data. Exports to the EU, the US and China.

What we should note from this chart is that while exports to the EU have held up reasonably well since the start of 2007, and while they have been strong to China, exports to the US have been wobbling notably, which is understandable once you take into account the relative decline in the dollar (although not especially against the yen) and the fact that the US economy has itself started to wobble.

Another detail which is worth noting before I wind up, and that is that even while exports to China form a vital part of the Japan "recovery" panorama (they are now not that far short of direct exports to the US, and Japan will feel any slowdown in China ) Japan in fact runs a DEFICIT in goods trade with China. Here's the chart:

(please click on image to see more clearly)

In this context it is interesting to ponder what might possibly happen if the yen were ever to appreciate notably against the Chinese yuan. At the present moment however this eventuality seems rather unlikely and the yen was trading at 114.91 per dollar at 12:34 p.m. in Tokyo up from 114.57 before the report was published, but still within an acceptable range from the Japanese export point of view.

At the end of the day, and given what we know about the Japanese economies dependence on exports the future evolution of the export data will be crucial for determining just how well the Japanese economy is able to weather the storm caused by cooling global economic growth following the financial turmoil associated with the crisis in the U.S. subprime mortgage market.

So going back to our charts, rather than simply reading Chinese tea leaves, my feeling is that we need to keep a close eye on the evolution of Japanese exports to those three big customers - the EU, the US and China - if we want to get an early indicator of whither the Japanese economy is headed at this point.

Tuesday, September 25, 2007

The German Economy, Employment, Export Shares and Age Structure

Ok, well yesterday I gave a brief resumé and outline of the state of the German labour market, about why the recent drop in unemployment isn't everything it seems to be, about why German wages have deflated, rather than inflated, during the current economic expansion, etc etc. That post is a prerequisite for what now follows which will be an attempt to describe how the German economy actually works.

First off, and as is well known, German society is ageing, and the German population is declining. Here is a chart - thanks to Claus Vistesen who has been doing this part of the work (and see also this very important recent post from Claus on DM) - of the German population evolution:

As can be seen, after the late 1990s the rate of population growth in Germany began to decline rapidly, and then more recently the population actually started to decline.

This changing population pattern has also been accompanied, as is again well known, by an important ageing of the population. This can be seen clearly from a chart - again from Claus - for German median ages:

Now this rapid recent rise in the median age of the German population makes Germany a much older society than many other OECD countries. In particular the United States is much younger (as are the UK, France, Ireland, Iceland etc) as can be seen from a comparable chart for US median ages (again thanks to Claus).

As can be seen the US is an incredibly young society, having attained median ages during the 1970s and 1980s more typical of a developing than a developed society, and even today the US is only where - in median age terms - Germany was some 30 or so years ago. So when we talk about "ageing societies" we should remember that while all our societies are ageing, some of them (Japan, Italy, Germany) are doing so much more rapidly than others. This difference in fact has profound implications, ones which were never foreseen, and given what we now know it should not be surprising to see these age structure differences expressed - as we will see below - in very different core characteristics in each of the societies concerned.

Now, not only is Germany's median age rising, the proportion of the population in the key 25-49 age group is now falling. Let's look at the chart:

As can be seen from the chart this crucial age group touched its highpoint in 1997/98. This could be imagined as the moment of maximum capacity for the German economy. This is the case for two reasons. Firstly the 24 to 49 age group includes the crucial 25 to 49 household-former, first-time-homebuyer group. In terms of credit expansion, it is this group which drives a significant part of internal demand, since this is the group with the greatest propensity to borrow forward, and this is vital.

The 25 to 49 age group also includes another important group, the 35 to 50 one. It is this group which drives an economy in productive terms, since these are the prime age workers. So if you think of a society as a 100 metres sprint athlete, then there is an age when this athlete is at the maximum of his or her running potential, an age after which each time they can only run the 100 metres more slowly. Well a society is the same in terms of its collective economic potential, after the 25 to 49 age group peaks an economy can only move forward more slowly, and logically, since without addressing either fertility or immigration, every time more and more slowly, as this group declines inexorably as a % of the total population.

Is there any evidence for this kind of assertion. Well, yes, as it happens, there is actually.

Lets have a look at German GDP. First off a long term chart.

As we can see, and as is well known, German GDP growth has been very weak since the turn of the century. As is also well known 2006 was a very good year for the German economy, which is what lead all the commentators to cry - at last! There is a German recovery. But have they been too quick in drawing this conclusion? There are good reasons to think that they may well have been (and of course, in reality we are all about to find out as we go through the coming winter). Let's have a look at the evolution of the composition of German GDP over the years.

Now, there is a lot to be seen in this chart for the careful observer. The first thing that strikes they eye is the way private consumption has hovered pretty close to the 60% mark for many years now, while government consumption - after moving sharply upwards as a total share in the first half of the 1970s has subsequently remained pretty constant, moving around the 19% of GDP mark. The big difference has been in the importance of fixed capital formation (GFCF) which reached a peak around the 22 - 24% of GDP mark - guess when - just when the 25 to 49 age group was reaching its historic peak, in the years 1992 to 1995. So why should this be significant, well quite simply since fixed capital formation includes the HOUSING share, and it is this component which has steadily declined as a share of German GDP since the mid 1990s, and which is why there is a "hole" in German (and Japanese, which is the same story, only told a little earlier) GDP, a hole which can only be compensated for by exports. It is now interesting to ask whether in Spain, where the age group in question has just peaked, and the property market may be in the process of a historic bust, we may not soon see the same process at work.

So what we can see is that the year between, say, 1974 and 2000, when GFCF remaind a more or less constant share of GDP, constituted - to use the language of neo-classical economics - the constant growth period of the German domestic economy. The years prior to 1975 were the convergence, or "catch-up" years - especially of the 1960s, after Germany finally broke out of the destruction and devastation of WWII - while the years after 2000 constitute what the neo-classicists would call the "balanced growth period", although as we can see, it isn't very balanced, and there certainly isn't a steady state. This is because the ageing population components in German growth are now coming to dominate over the shifting age structure components of the constant growth period, and we are seeing an effect which is very similar to what is known as the "demographic dividend", only it is acting in reverse, which is why I call it the demographic penalty. Basically the majority of economists want to argue that what I have just said isn't the case, but I would simply suggest they look at the data, as I have been looking at it, and explain why it isn't the case, since the facts and the correlates seem pretty clear to me, once you "parenthesise" (or put in brackets) traditional steady state growth expectations and take a fresh look at the data. Simply saying that what is happening, isn't (the denial stage) since that won't change things, and it would seem to me to be more sensible to accept reality and to devise policies which try to address the real issues.

If we now move on to look at exports we also find something interesting. While fixed capital formation declined as a share of GDP from 24% in 1991 to 17.76% of GDP in 2006 (ie a 6% drop), the German trade balance moved from a DEFICIT (yes, you heard right, deficit) in 1991 of 0.4% to a surplus of 5.44% of GDP in 2006, ie a rise of 6 percentage points. The comovement in the two shares match each other in virtually symmetrical fashion. Incredible, and facsinating, isn't it? Here is the time series chart for the two components.

As I say, the correlation of these two since the mid 1990s is really quite striking.

Right two last charts just to finish up. Firstly annual private consumption growth in Germany (in percentage change terms):

As can be seen, this has been - barring the boom years of the mid 1990s - steadily declining in its ability to drive German growth, and it would be rather foolish to expect this to suddenly change now.

Lastly export growth and GDP growth:

As can be seen, since the mid ninetees, every time the German export performance flags GDP tanks. Claus and I haven't gotten round to doing the correlation coefficients yet (but we will do). But the relationship is pretty clear, so if the markets in the US and Eastern Europe slow noticeably this winter, just you watch what happens to German GDP.

So, as they say:

Quod Erat Demonstrandum

Or, if you prefer, "game, set, and bloody match". Anyone got some glasses handy, it's time to cork out the champagne I think. Or no, since this is Catalonia, a nice glass of Cava will do me fine. Have a nice day everyone. I will.

Monday, September 24, 2007

Employment and Unemployment in Germany

German unemployment fell for the 19th consecutive month in August according to figures released by the Nuremberg-based German Labor Agency earlier last week. The number of people out of work in Germany when adjusted for seasonal swings, declined 15,000 from July and hit the new recent low of 3.76 million.

Now, this seems like very good news indeed, doesn't. And of course it is. But is there more than just good news here? Perhaps there is, since, as we know, after 30 or so years of sub-replacement fertility the German population is now falling, so what about the labour force? Well maybe the first clue that all here isn't exactly as it should be can be found in this little admission tucked away in the press release from the German Federal Statistics Office:

Another positive impact on the labour market is exerted by a decrease in labour supply which, according to estimations of the Institute for Employment Research, will decline by 100 000 on an annual average in 2007.

Now fortunately the Federal Labour agency makes available monthly detailed statistics for the evolution of the German labour force, and it is to an analysis of this data that we will now turn.

Firstly the unemployment rate itself. Now there are various measures of this rate which you will find in current use, but whichever you look at it is plain that unemployment has been steadily coming down during the present expansion. In the chart below we illustrate this with the measure used by the Federal Labour Agency:

Now, if we come to look at the chart for the total numbers of those employed and unemployed (not seasonally adjusted) we can begin to notice some interesting details:

In the first place and clearly the number of unemployed has come steadily down. And the number of those employed has risen, although this is not such a clear picture, since the recent rise has only recovered the employment high-point which was achieved at the end of last year.

Now, if we come to look at a longer time series chart for the economically active and employed population in Germany, we will see immediately that - as indicated by the quote from the federal statistics office above, the economically active German population reached a high point in the third and fouth quarters of 2004, and since that time it has been trending down.

This is, of course, good news, if you work for the German Labour office (what is it they say - "Another positive impact on the labour market") and it is your job to find work for people since you will have less customers and hence less work to do, but it certainly isn't good news if your job is to generate a smoothly oiled economic machine capable of generating sufficient wealth to be able to sustain and support and adequate health and pensions system for all those members of that rapidly expanding over 65 age group. Also, and again as we can clearly see, the "massive job creation miracle" may have touched its ceiling sometime towards the end of last year. The German economy is now slowing, and it is not impossible that German employment will never again reach those giddy heights.

But there is another detail which should interest us here, and that is the type and quality of the work which is being created. Lets take a look at the data from the German Federal Labour Agency for those in work which is liable for the payment of social security contributions:

what we can see here is that the numbers of people in jobs which are liable to such payments reached a peak in 2001/02 and that subsequently it was declining up to the end of 2005. If we now take a look at a monthly chart since the start of 2006 we will get a clearer picture of the more recent situation:

What we will observe is that the trend has been rather upwards since the start of 2006, but that the total registered, at 26,880,000 is still significantly below the high point of 27,790,000.

I was in fact put on the track of all of this by an article a couple of months back in the Economist. They make the point in that article that Zeitarbeit, as temporary work is called in Germany, may only account for 1% of total jobs, but it does at the same time account for more than half of all those new jobs created in Germany the past year.

One example of the new breed of employers is time & more, which specialises in health care. It has around 400 people on its books, of whom 300 are nurses; two years ago it had 250. Its founder, Bernd Sydow, who sold his firm to Adecco in April, says that it supplies almost all Berlin's hospitals as well as hospitals in other big cities. Around three-fifths of time & more's nurses are called on for stints of one to three days, often at short notice. Having reduced permanent staffing levels and carrying no reserves, hospitals turn to the agency as their requirements fluctuate. Mr Sydow reckons that eventually about 5% of his clients' nurses will come from an external pool."

Now why is all this interesting. Well for two principal reasons. Firstly because of the most striking similarity with what has been happening in Japan (that other global leader in population ageing), and secondly for the light which all of this may throw on the evolution of domestic consumption in Germany. Basically the German jobs machine has been generating a large number of non-traditional and part time jobs, and these jobs are nothing like as remunerative as the traditional ones they have been replacing. There is nothing strange or even surprising in this, as Germany's workforce is ageing, and many of those in the over 50 age group who are seeking work may well find themselves working in just this sector.

As I say, the similarities with what has been happening in Japan are very striking here, and I do, of course, have a Japan blog, and you can find some of my arguments about what is happening to internal consumption, wages and the labour market in Japan on that blog.

Now, if we turn to the impact of all of this on German wages and salaries, then we will find that, naturally enough, and under the circumstances, they have not been rising anything like as fast as some imagined they would be, given the supposed "tightening" which was taking place in the labour market.

As we can see, the response of German wages and salaries to the "new economic revival" has been extremely muted, and this should not surprise us in the least if we think about the changing age composition of the German Workforce.

Eurozone Economies Slow Visibly

Well the FTs Frank Atkins may be going a bit far in make comparisons with the aftermath of 09/11, but the fact of the matter is that there does seem to be a significant slowdown in progress.

The eurozone economy has this month suffered its biggest jolt since the aftermath of the September 2001 terrorist attacks, with global financial turmoil hitting the services sector particularly hard, according to a closely watched survey.

The unexpectedly steep fall on Friday in the eurozone purchasing managers’ index – the third consecutive monthly drop – could knock policymakers’ previous confidence that the 13-country eurozone economy would escape largely unscathed from the US subprime mortgage crisis.

Here is the chart for the Bank of Scotland PMI for the last few months:

Manufacturing seems to have peaked out in mid summer, but services do seem to have started to screech towards a halt (in the sense that 50 marks the neutral, non-expansionary, reading) since mid-August. This would be consistent with other reading we have in the sense that Germany and Italy have been slowing prior to the sub-prime issue, but now - from everything I can see around me here in Barcelona - the construction component of the key Spanish economy is also rapidly grinding to a halt. The reason is obvious I think : banks simply aren't so ready to lend money, and certainly not such a large proportion of the asking price as has been the case hitherto. Conclusion: young people will now have to start to save, and this saving will be noticed in Spanish consumption. And it won't be a one day wonder. Spain will be living with the aftermath of the boom for some years, I think.