Mario Draghi faces up to extraordinary monetary policy only providing moderate economic growth

There is a link between yesterday’s article and this as I note a side-effect of the US Dollar Index pushing above 101 overnight. In fact it has made 101.25 the highest since 2003. This means that the morning espresso of European Central Bank President Mario Draghi will taste even better as he watches the Euro dip below 1.06 versus the US Dollar. He may even take the time to note that the Euro has fallen against the UK Pound £ which has regained 1.17 today. Only the Japanese Yen may interrupt his bonhomie and that is because it has fallen even faster.  Of course there is still a fair bit of ground to be lost for the Euro to get back to where it was earlier in 2016 but Mario will be pleased to see it heading in what he considers to be the right direction. He will love this from @RANsquawk which even manages a reminder of his alma mater.

EUR/USD has seen the longest losing streak since its inception having fallen 4.93% and Goldman Sachs expects parity by the end of 2017.

Trade Figures

This morning’s release will also give Mario something to smile about.

The current account of the euro area recorded a surplus of €25.3 billion in September 2016 . This reflected surpluses for goods (€30.3 billion), services (€4.8 billion) and primary income (€4.2 billion), which were partly offset by a deficit for secondary income (€14.0 billion).

A dip but the monthly numbers are erratic and the annual figures are very strong.

The 12-month cumulated current account for the period ending in September 2016 recorded a surplus of €337.5 billion (3.2% of euro area GDP), compared with one of €322.5 billion (3.1% of euro area GDP) for the 12 months to September 2015.

He enjoys recounting stories about the basic underlying strength of the Euro area economy although of course he will move swiftly on before people point out that with a falling currency and current account surplus he is exporting deflation to others.

The economy

Here the going gets tougher as Mario has pointed out in a speech in Frankfurt this morning.

Since the onset of the global financial crisis, 2016 has been the first full year where GDP in the euro area has been above its pre-crisis level. It has taken around 7.5 years to get there.

There is also something revealing in the language used here.

The economy is now recovering at a moderate, but steady, pace.

If we move to the Eurostat release we see the problem here.

Seasonally adjusted GDP rose by 0.3% in the euro area (EA19) and by 0.4% in the EU28 during the third quarter of 2016, compared with the previous quarter

Firstly the Euro was supposed to be a triumph but yet again it has underperformed the other nations in the European Union. Then we get the “moderate” bit as it has gone 0.3% twice now but you might question the “steady” if you note it went 0.5%, 0.5% before that. With negative interest-rates and 80 billion a month of QE surely we should be seeing an acceleration not a slowing? But as ever reality is not a friend here as I note this description of the slowing.

allowing the recovery to gather steam,

There is a genuine success in the first part of the quote before as we also get an interesting way of analysing the drop in this quarters economic growth for Germany to 0.2%.

And the recovery has become more broad-based, with less difference in economic performance across countries.

Also progress in boosting inflation is as slow as a Geoffrey Boycott innings.

Euro area annual inflation was 0.5% in October 2016, up from 0.4% in September…….. A year earlier the rate was 0.0%

Care is needed here as whilst it is official policy to boost inflation I think it is a bad idea. But returning to the official line this is happening more slowly than expected and hoped. Also whilst I am no great fan of core inflation measures the ECB will have spotted this. From @fwred.

Short-term dynamics in ECB’s ‘super core’ inflation measure look worrying, down to 0.85% (3rd lowest print ever).

Wages growth seems to be underperforming as well.

The banks

There are all sorts of problems here but then apparently not.

The first development that gives us comfort is the improving solvency of the banking sector……. Common Equity Tier 1 ratios in the euro area have improved substantially, rising from less than 7% for significant banking groups in 2008 to more than 14% today.

Or maybe there are.

may also have created some uncertainties, for instance over steady state capital levels, which are reflected in bank share prices.

Of course there are dangers in viewing things too much via bank share prices especially in the case of Monte Paschi which bounces around like the penny (Euro cent) stock it now is. But of course there is food for thought in the world’s oldest bank being a penny stock especially after so many bailouts. The outlook for profits is “challenging”.

Even though the euro area banking system is today more resilient, its profitability remains a challenge – one that is weighing on bank share prices and raising the cost banks face when raising equity.

We are getting something of a swerve here as we were previously told that negative interest-rates would be no big deal for bank profitability.

If we move to the lending figures then I will be watching the next set closely because whilst we have seen some growth that looked like it was fading in the last series as we wait to see if it was an aberration or a new phase.

Bond Yields

In spite of the fact that the ECB has continued with its 80 billion Euros a month of bond purchases a month, bond prices have fallen recently and yields risen. For example Italy finds itself with a yield of 2.12% on its ten-year bond and Germany 0.3% after a period where it was patd to borrow even at that maturity. There are still quite a few negative bond yields at the shorter maturities but there have been shifts away from this. Perhaps the most exposed is Portugal with its 3.82% ten-year yield and sizeable national debt. As an aside some seem to be more equal than others and France in particular in the bond buying. As even in the Euro area we see that we are promised rules but get something rather different.

But as I have written before this gives the ECB an opportunity to act again.

So even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support.


We arrive at a type of groundhog day as I note that this time last year we were discussing  monetary tightening in the US and a Euro area easing. Of course the US Federal Reserve has spent all of 2016 promising this and not delivering and the ECB move will be more minor but nonetheless there are similar themes at play to last year. Rather than a “taper” I expect the ECB to extend its QE for another 6 months and for its committees to find more bonds it can buy. Of course it is really only can kicking and at well over a trillion Euros an expensive can at that but that is central banking these days.

Meanwhile if this from Reuters is any guide Mario may be able to stop worrying about further Chinese devaluations.

Chinese policymakers have been unfazed by the yuan’s recent slide, but are ready to slow its descent for fear of fanning capital flight if the currency falls too quickly through the psychologically important 7-per-dollar level, policy advisers said…..The yuan fell on Friday to an eight-year low of 6.8950 per dollar, extending a sharp decline in the past week and taking its fall so far this year to 5.8 percent. If maintained, it would mark the yuan’s biggest annual decline since the landmark revaluation in 2005.

Maybe they feel that is enough for now…..





10 thoughts on “Mario Draghi faces up to extraordinary monetary policy only providing moderate economic growth

  1. Hi Shaun,
    Good one again!
    How much of this “good news” is down to the Germany economy? I suspect by lumping all the EU economies together it hides a lot of problems in individual countries. So, the overall picture looks modestly better, but there are many, probably the majority, in deep s–t.

    • once you dump Ireland’s funny figures you can see its the newer members who are doing 3% growth

      Greece continues to suffer though


    • Hi Forbin

      Ah Maltesers as well now. Mind you if we have smaller sizes and shrinkflation due to a weaker currency then what might be happening in the US? Some have suggestions….

      Ioan Smith ‏@moved_average 2h2 hours ago
      #toblerone announces that they had to change the bar in the US because of forex moves …

      • Hi Shaun
        Can’t talk about toblerone, but had a peculiar experience with a slab of Wensleydale today at the local Publix supermarket in Fort Myers. It was priced at over $20, which made it twice as expensive as Parmesian or Manchego sold at the same store. Now since Wallace and Gromit, this cheese has revived in popularity ( leaving aside that they liked Lancashire Wensleydale not Yorkshire) , but this is frankly a ridiculous price. Its not exchange rate movements I was told, maybe our cousins are buying the stuff to put on top of their turkeys next week!

      • Shrink flatiron has been going on for years and years.
        About 20 years ago Gordan’s Gin, for which you pay a premium price, reduced is strength from 40% to 37.5%, thereby saving costs and duty. Guess what , the price remained the same! If you still buy it, you pay more for less.
        I have always drunk Beefeater since – if you don’t like what manufacturers are doing, don’t buy it, there is always a substitute.

  2. depreciating currencies are for losers. The 0.1% like their own currency to depreciate, because it is a stealth wage cut for their employees.

    Mario gets well paid for his jester role, diverting attention from the Eurozone Leaders and their vetos.

    • Hi ExpatInBG

      I noted some people on twitter earlier pointing to an EU hint of a fiscal boost. I enquired whether this meant an end to austerity in France, Greece, Italy, Portugal and Spain? As the Germans seem to set against this there are not many other countries for it to apply to in terms of scale.

      • Europe needs to decide what it wants. Whether it is a customs union, or whether it is going to apply closer union.

        If the latter, the discredited & disfunctional EC needs a huge overhaul. The reason that northern Europe can afford welfare is accountability and functional taxation systems. Southern Europe has disfunctional taxation and is therefore broke.
        Why should Northern Europeans pay Greek pensions whilst millionaire Greek politicians avoid tax ?

        Likewise, the nuclear missiles in Kaliningrad, targetting London, Edinburgh, Paris, Berlin, and every other European capital ask questions of European politicians. And we cannot rely on Trump.

  3. Great blog as always, Shaun.
    You say that you are no great fan of core inflation measures but thought it worthwhile nonetheless to mention the drop in the ECB’s ‘super core’ inflation measure. I am probably more of a fan than you are, so would like to report on the methodology document that came out on the Bank of Canda’s new core inflation measures, that came out on Friday with the October 2016 CPI update. The good news is that the new CPI-common and CPI-median measures will be based on the CPIXT, the CPI adjusted for changes in indirect taxes, and not on the headline CPI as were the corresponding series the Bank of Canada had been publishing, the common component of CPI measure and the weighted median measure. The new CPI-trim measure will also be based on the CPIXT as was its predecessor, the trimmed mean (MEANSTD) measure. I had wondered why three new core measures were being introduced, since the new ones as described in the renewal agreement sounded virtually identical to the old ones. The CPI-trim measure differs from the old trimmed mean measure, not by its treatment of indirect taxes, but by the way it trims components from the core measure.
    In my opinion, all of the core measures used by the ECB should take the constant-tax MUICP as the frame, just as the core measures used by the Bank of England should use the constant –tax CPI as the frame, although this is not at all the case right now. This is particularly true of the Bank of England measures, since one can expect fiscal measures to be implemented in a more coherent way for a nation state like the UK than is ever possible in the euro area with so many member countries, and limited fiscal co-ordination among them. Although there are some obvious problems with the HICP itself, like the omission of housing costs, the constant-tax HICP is very well-designed, much better than its Canadian counterpart, which is all the more reason to make it the frame for any core HICP measure.
    The bad news is that the Bank of Canada still has not released any methodology document on its CPIXT series, and I depend on inside information for my knowledge of its defects. The Canadian public will also have to wait at least until the November 2016 update for publication of the new core measures. In my view, since the Department of Finance and the Bank of Canada had five years to plan for this renewal agreement, they should have published a back series for the new core measures up to September 2016 as part of the renewal agreement when it was announced on 24 October, and they should have been updated to October yesterday. Monetary policy in Canada is no longer being determined based on the old (and much superior) core measure, but we will have to wait at least another month to know what the new measures look like. It doesn’t say much for the ability of the DOF and the Bank of Canada to properly organize themselves, but none of our cut-and-paste journos seem to mind.

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