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Friday, December 07, 2007

Italy Q3 2007 GDP Breakdown

Well, today, courtesy of ISTAT, we got the breakdown on Italy's Third quarter GDP.

As we can see, quarter on quarter growth was up slightly from Q2, although the underlying trend is obviously down.

So the question is, what is dragging things down and what is pulling things up? Well one of the big downside issues is definitely the surge in imports.

And in Italy's case I think we know the culprit: the high value of the euro. Faced with this surge in the relative value of the euro Italian exporters simply can't hack it, even in the eurozone, or among the EU10 effective peggers. The strength of ex-zone competition in some of Italy's key export areas is just too strong. In fact exports did not have a bad quarter, since they rose 0,9% q-o-q, but this was completely dwarfed by the 2.4% q-o-q surge in imports.

Household spending, which makes up two-thirds of Italy's economy, grew slightly (by 0.2 percent) but was down when compared with the 0.5 percent rise achieved in the second quarter, or the 0.7% one in the first quarter.

Be all this as it may, Italian domestic consumption, despite the increase in the working population via immigration and the low levels of unemployment registered recently, remains very weak.

As can be seen, Italian household consumption has been congenitally weak over a number of years now, and the only real bright spot has been at the end of 2006 and the begining of 2007. This took me by surprise I must admit, and mirrors what we have also seen in Germany and Japan, and it was undoubtedly this phenomenon that lead to all the speculation about uncoupling, but now, as we are seeing, things are returning pretty much to where we left off a couple of years back, which I think is important.

Due to the similarity in the structural components here between Germany, Japan and Italy (with Italy's weaker export performance being the only real distinguishing feature) Claus Vistesen and I are arguing that all of this is age related, and so just to close on a novel note, here are the comparative median ages for Germany, Italy and Japan, for 1990 to 2020 (click on image for slightly better viewing). This is definitely one area where all 3 are world leaders.

Thursday, December 06, 2007

Eurozone Blues and ECB Dilemmas

What follows is a substantially updated and rewritten (with new data) version of a post on Germany I made earlier in the week.

German retail sales fell fell at the fastest rate in more than three years in November according to the Bloomberg purchasing managers index, which fell to a seasonally adjusted 43.6 from 48.6 in October.

Any reading below 50 on this index indicates contraction, thus retail sales have only managed an increase - as measured by this index - in four months this year. Retail sales across the entire 13-nation euro region also fell in November according to eurostat data released yesterday, dropping by 0.7 per cent from October to a level which is just 0.2 per cent above the November 2006 level. Of course this average hides considerable variance, with the weakest performance coming from Germany, Italy and Belgium.

Also worthy of note is the performance of retail sales in Spain (the zones 4th largest economy) since strong growth in Spain has previously offset weaknesses in Germany and Italy at critical junctures. But this time it will be different, since Spanish retail sales have fallen in both October and November, and while the year on year readings are still in positive territory, they will not remain there for long since the earlier strong readings will eventually drop out of the data.

And since the spring the story in both services and manufacturing has been one of one long and sustained declined, as the data from the monthly Bloomberg/NTC Purchasing Manager Indexes reveal.

Meanwhile the consumer confidence index prepared by the Instituto de Credito Oficial continues to plummet the depths, registering at 76.1 in November a historic low for the third consecutive month.

This drop in confidence is also reflected in the data for new mortgages issued (latest data still only September unfortunately), where the slowdown is clear if you compare the numbers for 2007 with those for 2006 (and especially since the spring, although my feeling is that when we get numbers for October and November we will see the slowdown accelerating, as buildings contracted in 2006 reach competion. Of course we should remember that those buildings and flats sold on the basis of architects plans in June and July - ie prior to the August sub-prime "bust" - will still be giving work until next summer, even if the would be purchasers may be increasingly looking for an "escape clause" as property prices steadily decline).

If we turn to the emplyment sub component of the Spanish index we will see that the outlook has changed dramatically in the last three months.

and the underlying situation again becomes clear if we look at the unemployment numbers, where a comparison between 2006 and 2007 is again revealing. We can see that in the early months of this year the employment situation was up over 2006. Then the situation turned (around July), and since then it is "down hill all the way" unfortunately.

Returning now to take anothet look at Germany, what is most curious is how German consumers are reining-in spending and becoming ever more pessimistic even as the jobs market remains reasonably buoyant. Earlier last the week we learnt that German consumer confidence, as measured by the GfK AG's index had fallen to the lowest in almost two years.

Meantime German unemployment declined for a 22nd straight month in November, falling to the lowest level in more than 14 years (using ILO methodology), as companies took on more workers to meet increased demand. The adjusted number of people out of work fell by 53,000, according to the Federal Labor Agency in Nuremberg. The jobless rate, adjusted for seasonal swings, slid to 8.6 percent in November, the lowest since April 1993, from 8.7 percent in October.

In fact the total, unadjusted number of unemployed is the lowest for the month of November since 1992, when it was 2.97 million, according to Labor Minister Olaf Scholz. In addition the number of those employed continues to rise.

Also the number of those paying social security contributions continues its rise:

which is again worthy of note, since for some years the absolute number was falling:

So looking at these numbers, you might wonder what all the pessimism is about. Well the problem basically revolves around why increases in German wages and salaries have, despite this exceedingly positive general situation, remained generally weak.

What is notable about the above chart is the way in which the tightening labour market has not produced any substantial upward pressure on wages. Of course, one version of the story would tell us that this is because the German workers have been behaving like very good boys and girls. But is the more too all of this we might like to ask ourselves, especially since all of this is more or less a repeat performance of what has been happening in Japan.

And of course the weak earnings situation is passed on to consumption, with the consequences we can see in the chart below, which if for the quarterly development of private consumption in Germany since the start of 2005. No economic locomotive to be seen there, I fear. And before you leave the chart do note just one more time that spike in consumption in the last quarter of 2007. That's the VAT effect, you know, the one everyone tried to tell us didn't exist. Well it did, and just look what happened next to German consumption after the 3% hike. Relative prices, like relative exchange rates, do of course matter, and anyone who tries to tell you otherwise missed something in their basic economics course, I think.

Unfortunately one detail we don't have relates to the role of part-time employment in these numbers. I have been looking in detail at the Japan data, and there we do have this breakdown, and it is clear that the growing disconnect whereby we have significant GDP and employment growth by comparatively weak earnings and consumption performance may have something to do with this, and with the skill composition of the work being undertaken. Of course here I would see an age related dimension, but I guess for some that would be quite a tendentious point. Nonetheless we do have data from the recent past about the share of part time employment in total employment in Germany, and as we can see it has been steadily rising.

Be all this as it may, it seems that the path of Jean Claude Trichet will not be blocked, and that our stalwart central bank president - like the ubiquitous Ms Thatcher before him - is not for turning. This gentleman is not going to let himself be brow-beaten by mere fact.

Trichet in fact once more emerged from his un-announced early within-cloister retirement from the high-media-profile stage yesterday to give a talk in Berlin (in preparation, one imagines, for his ECB performance today) where he singled out Finnish nurses and German postal workers for particular criticism, holding they not taking sufficient account of their social responsibilities. What he means is, of course, that inflation is putting the ECB in a very clear double bind when it comes to taking a decision on interest rates.

But wages, as we have seen are not the pricipal issue here, at least in the German case (and the Finnish one is not that much different). The real culprits in the eurozone inflation surge - the last flash estimate from Eurostat put the eurozone average HICP rate at around 3% for November - are energy and food prices, and this inflation has more to do with global structural factors than it ever does with minimum wages in the eurozone (ie it is a result of the fact that the BRIC economies etc are driving the growth, and their rates of energy consumption are rising rapidly, while their population spends a higher part of their rapidly rising income levels on food products - maybe 25% of the extra income - than is the case in the developed economies).

Other explanations for the pessimism to be found in Germany (ie beyond the employment and wages data), of course, abound. Two prime candidates, oil and food price induced inflation and the rising euro tend to head the list. The euro, which rose to a record $1.4967 on Nov. 23 before dropping back slightly, has gained more than 12 percent against the US dollar so far this year and is trading at around $1.4673 as I write. Crude oil rose to a record $99.29 on Nov. 21 and was trading at $89.42 in electronic tradiong on the New York Mercantile Exchange earlier today.

The rising euro may well have an impact on Germany's export performance, while oil prices influence inflation, and through this consumer purchasing power. In fact inflation jumped in Germany in November to 3.3 percent according to the EU harmonised index, and this is the highest level registered in Germany since records began in 1996.

The European Central Bank, which has raised the benchmark interest rate eight times since the end of 2005 as part of a "normalisation" and anti-inflation process, meets today to decide on interest rate policy . So far the bank has been buying time by arguing we still cannot adequately judge the impact of the financial turbulence spin-off from the U.S. housing slump and in exercising this caution they are almost certainly right. As Claus indicates in this post, there are indeed tough times ahead at the ECB.

And indeed there are. Only yesterday the Italian Vice Minister for the Economy Vincenzo Visco was informing a parliamentary panel that "The economic situation and world markets are very uncertain and present risks. It is expected that the Federal Reserve will cut interest rates and it would be suicide if the ECB didn't do the same thing for the euro zone." And it is not only the politicians this time round, ECB council members Christian Noyer and Jose Manuel Gonzalez-Paramo have been indicating that they are prepared to start talking interest rate reductions in a not very distant future. Noyer is saying that there has to be a "question mark" over whether or not Europe can dodge the fallout from the U.S. sub-prime generated turmoil (and see this post for an examination of the extent of the credit shock in the European banking system), while Gonzelez-Paramo rejected the idea that cutting rates would amount to a bailout of investors who lost money on bad bets. Central banks are not encouraging risk taking if they lower borrowing costs "when financial turbulences develop into a fully fledged crisis and eventually affect growth prospects" he stated at a conference in Milan earlier this week. So while we may well see a stand firm "on hold" posture on rates today, a change in the air cannot be far away now.

Even on the euro front "the times they are a changin", and rapidly rapidly, with even German Finance Minister Peer Steinbrueck - who as recently as Nov. 27 was expressing his confidence that Germany had "become much more resilient to negative economic impetus" and was going through a "robust recovery" is now suggesting that what we have is "a disorderly adjustment and unwinding."

In fact German leaders generally are now expressing a mounting unease over the euro's rise against the dollar and other currencies , and especially as survival warnings from European planemaker Airbus ring through their ears.

And remember, the weaker dollar can help American exporters at a time when the U.S. economy is suffering from a housing slump, trouble in mortgage markets and a going-global credit crunch "Exports are a huge bright spot in the economy ... and a source of strength going forward," Janet Yellen, president of the Federal Reserve Bank of San Francisco, is quoted as having said on Monday. As I argue in this post, the longer term problems in the US economy aren't anything like what they are currently being made out to be.

Of course the euro is now more than 20 percent over its dollar value two years ago and has been hitting record peaks recently against the yen, while China's currency has lost ground to the euro even while it has gained it against the dollar. Yet despite this, the trade-weighted rise in the euro this year has been limited to just 4 percent.

But this is just the point, what we need to ask ourselves is where the exports are currently headed, and what the prospects are in those countries. It is very important to take note of the fact that Germany's strong export performance has been to countries like the UK, and Spain, who may now struggle in the wake of the sub-prime crisis, and to large chunks of Eastern Europe, where some key economies may now be on the point of undergoing a major correction. The fact of the matter is that German exports to the Czech Republic were roughly equal in value last year to German exports to China (and both of them were less than, say, German exports to Poland). That is a good measure of the importance of the Czech Republic for the German economy, but it is also a measure of just how poorly positioned Germany actually is in China, and generally throughout emerging Asia as we move forward. At the end of the day exchange rates do matter, and perhaps the recent visit of EU dignitaries to China (and what they have realised during their visist) has as much to do with Mr Steinbrueck's change of heart as anything.

Tuesday, December 04, 2007

The US Dollar and Global Recoupling

I am still in two minds as to what happens next on the dollar front. It is hard to see the downward march of the dollar going too much farther at the moment, but, OTOH, it is hard to envisage a major correction back towards $1:30 - 1:35 to the euro. This piece in FXDaily yesterday was interesting for this part:

"This week the moment of truth may be upon us. The US calendar is chuck full of important data including ISM Manufacturing and ISM Non-Manufacturing surveys, both of which are expected to be softer than last month, though still above the 50 boom/bust line. Dollar's destiny however, is quite likely to be determined by Friday's NFP data. The bears argument has been predicated on the assumption of an imminent recession in the US, but until and unless the jobs data shows clear deterioration there is little evidence that the US economy is in serious trouble. Last Thursday's weekly jobless claims which jumped by 10% certainly provide little cheer for dollar bulls, but the ultimate decision on the direction of the pair will be governed by next Friday's data. If the NFPs can expand by 100K or more the talk of doom and gloom may be overdone."

Especially the last sentence struck me. The gloom and doom very definitely is being overdone regardless of whether or not Friday's jobs numbers come in at over 100K (and regardless, for that matter of whether or not the US goes into recession in 2008).

If you want to see some justification for why I think the US is likely to prove much more robust than many imagine, take a quick look at the US population pyramids I present at the end of the post, it is hard to see a society with such a solid looking set of pyramids going forward (built like a brick s**t-house my old Ma would have said) having that many problems, baby boom or no baby boom.

I don't think you will find another set of pyramids like this anywhere, and undoubtedly they are a legacy of the US's unique demographic history (American exceptionalism yet one more time) driven as it has been by so much immigration.

Now demography isn't everything, as we well know, but given that the US has such solid and stable demography, just what else is it they are supposed to be doing wrong, I wish someone would please tell me? They have deep capital markets, lots of innovative ideas, patents etc, a well functioning job market, a machine to generate new companies on demand etc etc, and a proven ability to correct when they get into difficulty (which they have done, and which they are now correcting). Who are they supposed to learn from, Italy, or Japan perhaps?

Oh, I know, I know, they have the sub-prime mortgages issue, but so do a lot of other people (and Japan) so I don't see what is so special about the US issue here, except perhaps that the US has a proven ability to take the measures necessary (think Bernanke in Aug 2007, we will do what is necessary, or Paulson's mega-conduit).

Now the US of course have a problem in that they have been shouldering with their currency the burden of running Bretton Woods II, and this system is now in the process of unwinding with an ongoing recoupling of the global economy which involves a reduced role and importance for the US one, and continuing diversification out of the dollar. But as Claus Vistesen ably puts it in this post here:

You see, it appears that the old maid is a fitting metaphor for what at the moment seems to be a global game being played about not ending up being stuck with the Dollar.....the game is played and apart from the USD starring it could also seem as if a derivative of the old maid would be who in fact must step up to take the role for the USD as the structure of Bretton Woods II is ground down. Here of course, it will soon (i.e. after my exams) be time to re-visit old arguments but for now I will merely note that I always saw the current structure as very strong and fragile at the same time. It was/is very strong quite simply because de-coupling/re-balancing in the traditional sense where Europe and Japan ascends to take over the throne of the US would be virtually impossible. The fragile nature then comes in as an immediate consequence of this since if Europe and Japan cannot step up to the task who can and indeed will? As I say, fundamentals will tend to drive this and no-doubt the process of global re-coupling whereby the likes of India, Brazil, and Turkey takes over the clout of the US will materialize itself but a lot of glasses might end being shattered in the process.

So this is a delicate moment, that part is clear. The world economy is changing fast, as this chart which shows the shifting relative dollar values of Japan, the USA and the BRICs as % shares of global GDP. As can be seen in the chart the relative decline in the value of US GDP is virtually mirrored by the rising share of the BRICs.

And just this morning we learn that the Committee on Capital Markets Regulation - a group of executives and academics backed by US Treasury Secretary Henry Paulson - have discovered that the U.S. share of global stock-market capitalization has fallen to a 17-year low this year, as faster-growing overseas exchanges lure more and more companies. U.S. exchanges were found to be holding some 35 percent of worldwide equities by value as of September 2007 , down from 52 percent in 2001. The number of U.S.-based companies conducting initial public offerings only on overseas exchanges rose to 15 through September of this year, according to the Committee, while recently as 2001, no U.S. company sold shares exclusively outside the country.

On the other hand markets in India, Brazil and China are booming like never before. According to Bloomberg:

Financial, consumer and industrial companies sold about $48 billion in shares through IPOs this quarter, or 72 percent of all offerings globally. A total 131 companies in developing nations have raised $35.4 billion through IPOs in the same period, versus $32.7 billion raised by 117 companies in developed countries. Emerging-market IPOs also outpaced those from developed nations in the first nine months of the year, with $98.4 billion raised compared with $89.2 billion.

So things are changing, and the moment is a delicate one. But little by little we will get to the other side, and in the longer run this whole process will only be to the benefit of the US, since guess what, the trade deficit will correct, and US exports will once more become mightily competitive. Germany be warned.

Again Claus actually picks up on this point by drawing our attention to this extract from the recent Eurostat trade report:

EU27 trade with most of its major partners grew, with the exception of exports to the USA (-2% in January-August 2007 compared with January-August 2006), and imports from Norway (-9%) and Russia (-5%). The largest increases were for exports to Russia (+29%), India (+22%), Brazil (+17%) and China (+15%), and for imports from China (+22%), Brazil and India (both +17%) and Turkey (+14%).

Of course, there will be downsides to the great transformation in global economic dynamics that is currently taking place before our eyes. US citizens will have to get used to the idea of no longer being participants in the World's Number One Economy for a starter, but what do you do, c'est la vie. Some you win and some you lose, but life, well life like the river it is just moves on.

US Population Pyramids

Short Update

Three pieces of news out today (Wednesday) only add grist to my mill. First off productivity:

Worker productivity in the U.S. accelerated more than forecast in the third quarter, causing labor costs to drop by the most in four years. Productivity, a measure of employee efficiency, rose at an annual rate of 6.3 percent, the most since 2003 and up from a 2.2 percent pace in the second quarter, the Labor Department said today in Washington. Labor expenses dropped at a 2 percent pace, also the most since 2003. Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation. Lower labor costs will give Federal Reserve policy makers leeway to reduce interest rates to prevent the economy from slipping into a slowdown that will erode productivity.

Then the ADP employment projection:

Companies in the U.S. added 189,000 jobs in November, more than economists had forecast, a private report based on payroll data showed today.The increase followed a revised estimate of 119,000 new jobs in October, more than previously calculated, ADP Employer Services said.Job and wage growth have so far helped limit declines in consumer spending, which accounts for 70 percent of the economy. Companies filling more orders from overseas may be reluctant to lose workers even as a deepening recession in housing drags down economic grow this quarter.

and finally retail sales:

U.S. retailers' sales rose 2.5 percent last month, starting off what may be the slowest-growing holiday shopping season in five years. Consumers scaled back purchases in the last week of November following Thanksgiving weekend discounts, the International Council of Shopping Centers and UBS Securities LLC said yesterday, reporting preliminary sales figures.

Ok, ok, 2.5% is hardly the sort of retail sales growth they are getting in Romania, but then again, they are still much better than they are in Japan, and in Germany they are actually falling. I rest my case.