Yesterday was a day where markets tried to settle down after the excitement of the day before which saw some large moves. Some of these are settling down a little for example the exchange rate between the Euro and the Yen saw the Yen shoot up from 112.58 to 109.5 in one day has now retraced a little to 110.7. With the Yen also at historically high levels against the US dollar the slight fall to 85.94 will be welcomed in Tokyo but be in no doubt the level of her currency is a big issue in Tokyo particularly in Japan’s exporting sector.
Commodity prices also resumed their upwards move with the CRB spot index rising to 445.31 up some 2.11 on the day. The main contributor to the rise was foodstuffs which rose by 3.32 to 379.84 with wheat now priced at US $7.50 per bushel. However those wondering about an increase or perhaps incidence of “agflation” will have to factor into their equations an oil price which has fallen this week with West Texas Intermediate crude oil now priced at US $76.37 per barrel. So the picture is somewhat mixed. Also I wonder if the RMI Independent Petrol Retailers Association whose forecasts for petrol price rises in the UK were something I analysed on Tuesday will be back in the media lowering their forecasts,somehow I doubt it!
The Greek Economy
The subject of Greece and her economic travails has been a regular subject for me. Whilst mentions of her in the general media have fallen away substantially I like to return to the subject to monitor what is happening in her economy as she is something of a bellweather. Apart from the issue of accuracy and fairness I question many of the official claims that come out of Greece made by politicians and officials. For example over the past month or two such people have been claiming that Greece’s economic growth will be better than previously forecast. The previous forecasts were in the region of -3 or -4% for this year as rather curiously the EU in its various incarnations had produced different figures.
Yesterday we received the figures for the second quarter of 2010. According to the Hellenic Statistical Authority.
Available data indicate (subject to the caveat discussed below) that in the 2nd quarter of 2010, the Gross Domestic Product (GDP) decreased by 3,5% in comparison with the 2nd quarter of 2009 and by 1,5% in comparison with the previous quarter. The decrease of gross fixed capital formation as well as the significant decrease of general government expenditure, have contributed to the decline of GDP. At the same time, the improvement in the external trade balance has partially offset the effect of the above factors
For those wondering gross fixed capital formation is investment and the caveat is that their has been a change in the way in which government transactions are measured making year on year comparisons potentially unreliable. Considering what has gone on with Greek statistics in the past I have re-read that section several times to see if I can detect a touch of irony! For those who have not followed the saga of Greece’s problems one of the factors in it was that whatever Greek economic statistics particularly her budgetary ones were measuring it often was not the Greek economy, so there is an irony in the new euro zone monitored ones having a caveat when of course the fabricated ones did not.
If we look at recent figures for retail sales we also see worrying developments.
The volume of retail trade (i.e. turnover in retail trade at constant prices) as it was published until December 2008, except automotive fuel, decreased by 7,2% in May 2010, as compared to May 2009 .
The unwelcome trend is reinforced by the latest figures on unemployment. The “Unemployment rate in May 2010 was 12.0% compared to 8.5% in May 2009 and 11.9% in April 2010”. I searched hard to find something a little more optimistic and saw that employment actually rose by 18,380 compared with April although it was down by 122,672 compared with a year earlier.
If we look at inflation there is not much relief there either according to the Hellenic Statistical Authority.
The Harmonized Index of Consumer Prices (HICP) in July 2010, as compared to July 2009, increased by 5.5%. A year earlier, the annual rate of change of the HICP was 0.7%. The HICP in July 2010, as compared to June 2010, decreased by 0.4%. A year earlier, the monthly rate of change of the HICP was -0.7%.
If we now move onto import prices then we see unwelcome changes in the trends there too.
The Import Price Index in Industry (MPI) in June 2010 compared with June 2009 recorded a rise of 6.2%. The previous year the MPI decreased by 4.8%
Comment and Analysis
I have presented a range of economic statistics to see what they tell us about the underlying state of the Greek economy and it is not good news. If we treat the annual fall in Gross Domestic Product of 3.5% with some caution we are still left with an unsettling 1.5% quarter on quarter fall. Adding to the unease is the fall in retail sales which is somewhat dramatic in volume terms which does not bode well either. If we move onto the issue of economic competitiveness which is one of Greece’s existing problems and a cause of her current malaise then an annual inflation rate of 5.5% combined with import price inflation on the same basis of 6.2% will only make it worse.
These statistics will have been influenced by some of the Greek austerity moves but there is more to come as the year progresses. So I am afraid that things in terms of economic growth and unemployment are likely to worsen in the second half of 2010 in line with predictions I have made before. If we return to the recent claims of Greek politicians and officials we are again in a situation where official claims have a mis-match with reality. I wish I could report happier news.
There is also a second order effect going on and this is something within the euro zone itself. An issue within the euro zone is differing degrees of economic competitiveness between individual members of which perhaps the polar extremes are Germany and Greece. On a quarter on quarter basis the Greek economy has just shrunk by 1.5% whilst the German one has expanded by an extraordinary 2.2%. Even since the euro zone came into being this was likely sooner or later to become a big issue as for example under it they have the same interest rates and monetary policy. At the moment it is plainly an issue and will lead to disagreements. Put yourself in Frankfurt in the European Central Bank’s office and imagine you are setting monetary policy which example do you follow and act on? Not easy is it?
One signal of Greece’s position is her ten-year government bond yield. Recently I have commented on falls in government bond yields around the world such as the US,UK,Germany, Japan and even other countries such as Spain which were getting grouped with Greece inside the euro zone. However Greece’s ten-year yield is 10.56% with no signs of a fall.
Germany and her extraordinary economic growth
The figures released this morning were rather extraordinary so I will repeat them, 2.2% economic growth on the quarter. On an American annualised basis they would be reporting growth of virtually 9%! This is a record for economic growth in reunified Germany and puts even the UK’s reported 1.1% into perspective let alone the recent American figures. The previous quarter was revised up from 0.3% to 0.5% as well. Should these numbers survive the revision process then Germany’s export locomotive is powering ahead. These were the initial or flash estimates so some caution is required as these are always based on incomplete data however it would require quite a downwards revision to make them look anything but good.
Another related issue which has emerged in the last few days is that the Eurostat the European statistics agency has recommended that the bank debts of nationalised banks should be included in Germany’s debt-to-GDP ratio which would rise from 75 to 90 per cent when this happens. In essence it would now include the debts of Hypo Real Estate. In the short-term this news will be probably be given much less significance than the growth news which may make some wonder at the timing.
Comment and Analysis
These extraordinary growth figures from Germany are obviously good for her but they do raise a problem. One of the contributors to the world’s current economic problems was the existence of global imbalances and this week has seen a rather familiar refrain of increasing imports in the US followed by signs of export strength from Germany, exacerbating yes you have guessed it a global imbalance. Such reports would not be out-of-place in the run-up to the credit crunch. I wrote about this concerning trend earlier this week and it is an issue as we seem to have returned to pretty much the same situation so quickly.
Another theme I have commented on is the divergence between equity markets and government bond markets. I have another divergence for you to consider as growth of 2.2% on the quarter does not go with a German bund ten-year yield of 2.42%. An investment in the German economy if you could invest in such a thing would nearly have returned one years interest in one-quarter. So there is a divergence or mis-match here too and such divergences are mounting.
Within the euro zone itself there are clear signs of economic divergence. I have already mentioned the difference between Germany and Greece. However the overall growth rate for the euro zone was 1% in the second quarter of 2010 which would have been pulled upwards by the German number. Moving onto other individual comparisons we find economic growth rates for France at 0.6%, Italy at 0.4% and Spain at 0.2% on the quarter. These do not make a one size fits all monetary policy and indeed exchange rate simple and we can expect more friction and divergences going forwards I feel as there are contradictions here.If you take the principle that Eurosat appears to have established that so called bad banks established out of nationalised lenders should be included in national debt calculations and national debt to GDP calculations then there are clear implications and issues for other countries such as the UK (Royal Bank of Scotland?), Ireland and Spain.
On a lighter note
Whilst writing todays blog a journalist came on the radio station I had on in the backgound and annouced he could explain Princess Anne’s apparent popularity in two words. These were “sheer hard work”.