Some days several economic themes come at us at once and this morning is an example of that. Only yesterday I was pointing out the problems of establishment Ivory Tower economic forecasting via the continued failures of the Office for Budget Responsibility or OBR. For many in the media it was a case of carry on regardless in spite of the fact that it was a Budget essentially based on past OBR errors. Perhaps they did not realise as they gave credibility to the GDP forecasts that they were based on the new establishment Ivory Tower theory that the economy cannot grow at an annual rate of more than 1.5%. A few decimal points were added and taken away at random to give a veneer of ch-ch-changes but that is the basis of it. Let me give you an example of this sort of Ivory Tower thinking from the OBR Report yesterday and the emphasis is mine.
In March 2017 and then again in November 2017, we reduced our estimate of the equilibrium rate of unemployment, in both cases reflecting the fact that unemployment had fallen below our previous estimate with little apparent impact on wage growth.
Actually those who recall the Bank of England using its Forward Guidance, which of course turned out to be anything but, pointing us towards a 7% unemployment rate will understand the intellectual bankruptcy of all this. But on this “output gap” rubbish goes mostly unchallenged.
Also what is not explained is why the future is so dim after so many extraordinary monetary policies that we keep being told were to boost growth.
The Italian Job
Those themes come to mind as yet another one has been demonstrated yet again by Italy this morning. From its statistics office.
In the third quarter of 2018 the seasonally and calendar adjusted, chained volume estimate of Gross Domestic Product (GDP) was unchanged with respect to the previous quarter and increased by 0.8 per cent over the same quarter of previous year.
This brings us back sadly to the “Girlfriend in a coma theme” where Italy cannot grow at more than 1% per annum on any sustained basis.
The carry-over annual GDP growth for 2018 is equal to 1.0%.
There was even a sort of a back to the future element if you take a look at the breakdown.
The quarter on quarter change is the result of an increase of value added in agriculture, forestry and
fishing and in services and a decrease in industry. From the demand side, there is a null contribution by
both the domestic component (gross of change in inventories) and the net export component.
If we now switch to forecasting it was only last Thursday lunchtime that Mario Draghi told us this at the ECB press conference.
Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed……remains overall consistent with our baseline scenario of an ongoing broad-based economic expansion, supported by domestic demand and continued improvements in the labour market.
Just like in the song New York, New York it was apparently so good he told us twice. As to looking at Italy specifically we got a sort of official denial.
On Italy, you have to remember that Italy is a fiscal discussion, so there wasn’t much discussion about Italy.
An interesting reply as we note that no doubt they did have an estimate of the number and without the third-largest economy can you call an expansion broad-based? Actually the latest Eurostat release challenges that statement much more generally.
Seasonally adjusted GDP rose by 0.2% in the euro area (EA19) and by 0.3% in the EU28 during the third quarter
of 2018…. In the second quarter of 2018, GDP had grown by 0.4% in the euro area and by 0.5% the EU28. Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.7% in the euro area and
by 1.9% in the EU28 in the third quarter of 2018, after +2.2% and +2.1% respectively in the previous quarter.
As you can see the annual economic growth rate in the Euro area has been falling throughout 2018 as we recall that in the last quarter of 2017 it was 2.7% as opposed to the current 1.7%. This poses a question for a central bank doing this.
Regarding non-standard monetary policy measures, we will continue to make net purchases under the asset purchase programme (APP) at the new monthly pace of €15 billion until the end of December 2018. We anticipate that, subject to incoming data confirming our medium-term inflation outlook, we will then end net purchases.
The simple fact is that if we allow for monetary lags then the reduction in monthly asset purchases from the peak of 80 billion Euros a month has been followed by a fall in economic growth. If we switch to the quarterly numbers we see a fall from 0.7% to 0.2% and there must be further worries for the last quarter of 2018.
Eurozone GDP growth continues to ease in line with PMI data, according to initial Q3 estimate. Flash October data signals further loss of momentum at the start of Q4. ( Markit PMI)
Back to Italy
Returning to an Italian theme there are genuine concerns of further trouble combined with some perspective from @fwred on twitter.
Italian GDP misses: stagnation in Q3 (+0.02% QoQ) and still 5% below pre-crisis levels. Material risk of a ‘triple dip’. Economic reality comes at you fast.
Let us hope that Italy has the same luck with a “triple dip” that the UK had back in 2012. But the real perspective and indeed measure of this part of the Euro area crisis is the fact that the economy is still some 5% smaller than a decade ago. No wonder voters wanted change.
A catch comes if we switch back to looking at forecasts again as we note that the new government has veered between optimistic ( 1.5%) on economic growth and what Cypress Hill described as “Insane in the membrane” with 3%. Politicians like a 3% growth rate as for example it was used by both sides in the UK 2010 general election. Why? It makes their plans look affordable and if (when) it goes wrong they simply sing along with Temptation(s).
But it was Just my imagination,
once again runnin’ away with me.
It was just my imagination runnin’ away with me.
If it goes really badly then they deploy Lily Allen.
It’s Not Me, It’s You
Meanwhile the tweet below describes the consequences.
Comment
There is a lot to consider here so let me start with the ECB. It now staring down a future like the one I have feared and written about for some time where the Euro area economy behaves in a junkie economics manner. Once the honey is withdrawn so is the growth. As ever that is not the only factor in play as economics does not have any test tubes but governing council members must be thinking this as they close their eyes at night. Well the brighter ones anyway.
What does it do then? It may still end monthly QE but that is mostly because it has been running out of German bonds to buy. My view that Mario Draghi intends to leave without ever raising interest-rates gets another tick. Maybe we will see the so far mythical OMTs or Outright Monetary Transactions deployed and Italy would be an obvious test case.
Also let me offer you one more morsel as food for thought. We keep being told about the OBR and ECB being “independent”. Have you spotted how “independent” bodies so regularly do the will of the establishment and sometimes manage to do more than the establishment itself could get away with?
Notayesmanseconomics's Blog 
Hi Shaun
Surely you are not suggesting that all these economists
are yesmen, whatever next!
JRH
Hi JRH
That is not quite fair as some of them are women 🙂
Hi Shaun
Is it possible that the stubborn refusal of wage growth to rise in accordance with expectations is a result of the official unemployment figure being massaged downwards to within an inch of its life?
Sorry: That should read “the official employment figure”,
Oh dear … employment massaged upwards.
Back to bed for me, I fear!
I think GOVT has manipulated so many in the economy with their complicated tax and credit incentives that gloop is preventing citizens from making any certain change in their circumstances. Wages won’t move because it does not pay a living wage to cycle around with cold food in a box on your back… and yet there are folk who are ready to do this so the whole wage/earning proposition must be truly smashed to pieces.
Spot on. You can tell how complex the whole thing is by the commentaries on the budget yesterday. For example, the raising of the tax exempt earning figure was described as manifestly unfair on the poor. I tried to think why and then someone explained on the radio that this only helped people in work, so it was unfair to those on benefits. While universal credit is obviously not perfect, I was astonished to see that it replaced 21 other benefits, each of which had to be applied for separately…
It seems to me that the whole concept of in-work benefits has something wrong about it – I am not making a political point, but it just seems odd that a government should have to top up the earnings of a full-time worker. Is it really an efficient way to run an economy, to have people paid low wages by a company, with other taxpayers picking up the rest of the payroll?
Draghi talks about the “Euro area economy” but there is no such thing; there are the economies of 19 separate sovereign nations. And that’s the rub.
Each of the 19 is at a separate stage in the economic cycle so to talk about “EZ” growth is meaningless. If you talked about Northern Hemisphere growth what would it tell you? Nothing because the economies are too diverse and are managed separately. The ECB has enough power to make a mess of things but not enough to do much good. The setting of interest rates where there s no fiscal union seems to me to imply a divergence of performance over time and this will simply exacerbate the problems of the bloc; they will grow further apart not closer.
The use of QE and the related Target 2 balances are reflecting the strains in the system which cannot be resolved.
As far as OMT is concerned you may be right but it is, to me, a “firefighting” programme which, again, symbolises the deficiencies in the Euro monetary structure.
Hi Bob J
If I may address your last point first the history of the Euro in the credit crunch era has been one of firefighting. It has never even looked like getting on the front foot. For a while NIRP and QE pumped things up but the growth has faded as the QE has been cut back.
As to the 19 nations that is a big deal and people try to dismiss it by pointing to differences in the UK and US. They are right to say that there are differences between say London and the North-East but they forget that individual Euro area countries have that too. For example comparing the North of Italy with the South.
Shaun, too right in your later observations. I am concerned that OBR may be funded with Govt money and that the chancellor asked them to “look down the back of the sofa”, effectively run their model based on different parameters….and hey presto 13bn in loose change was found.
As you say, arms length apart but knowingly influenceable because of their paymaster.
Regarding Italy, they deserve some deficit spending. If the ECB deny that based on national debt then the ECB deserve to cancel some of the debt with German surplus money.
Hi Paul C
I would not be too worried about the £13 billion as that is mostly already in existence via past forecasting mistakes. The real problem is the way money is spent but once factors like the 4% equilibrium unemployment rate are thrown in the answers are pretty much predetermined. As computer programmers put it GIGO or Garbage In Garbage Out.
When it goes wrong as it invariably does then we are told it is nobody’s fault and the ordinary person is deceived/
I loved the attempt to show that Italy actually grew during the quarter – up 0.02% quarter on quarter. They must have an extremely accurate office of statistics.
As I see the Italian situation:
1. The EU and the ECB simply cannot get their heads around the fact that a Eurozone country could try to ignore their rules;
2. Italy’s politicians have promised tax cuts and spending increases which will be “fine” given the exemplary growth record in terms of GDP over the last few years
3. The EU cannot back down (or everyone south of Germany will want a waiver of the rules), so is using the ECB to try to stop Italy spending by allowing its interest costs to rise
4. The Italian government may also find it hard to back down, as this will mean that all their promises to the electorate are worthless, which may matter in a coalition government
Add in immigration, unemployment, increasing lack of competitiveness with Germany and I see nothing but trouble ahead.
Hi James
The tactics which were used with Greece have been dusted off and are in use again. But it is harder with Italy because it is a much larger economy and everyone knows the Greek example and what happened next. As you say everyone has Tom Petty on their ipods and mp3 players.
“Well, I won’t back down
No, I won’t back down
You can stand me up at the gates of hell
But I won’t back down
No, I’ll stand my ground
Won’t be turned around
And I’ll keep this world from draggin’ me down
Gonna stand my ground
And I won’t back down”
“Have you spotted how “independent” bodies so regularly do the will of the establishment and sometimes manage to do more than the establishment itself could get away with?”
Indeed.
Those deep down the rabbit hole might also posit that billionaire financed NGOs interfering with sovereign politics and corporate censorship from FaceBook, YouTube, Twitter and co. are also a fine way for democratic goverments to informally impose their will on the poplace.
Hi X-Pat DE
There is plenty to think of in that area. After all so little tax is paid by what are thriving businesses. Also their plan to move in on the political world was demonstrated by the way Facebook took on Nick Clegg. His value was highlighted by the way the Chancellor in his Budget speech said he was expecting a call from Nick and implied he would take it. Wheels within wheels.
As ever, Sir Humphrey Appleby was on the case long before anyone else. The secret of creating truly independent bodies was staffing them with dependent bodies, sound people who won’t rock the boat baby.
As to Italy I did mention a while back that the long shots would kick da bucket.
Hi bill40
Yes indeed, this is one of my favourites.
“Jim Hacker: We got to give him something, I promised.
Sir Humphrey: Well, what is he interested in? Does he watch television?
Jim Hacker: He hasn’t even got a set.
Sir Humphrey: Fine, make him a Governor of the BBC.”
The solution to the problems of the EU is always more EU, hence as these divergences cause more and more pain, inevitably financial integration via the common currency will lead to eventual political integration(loss of national governments and sovereignty) and it will be given as the ultimate solution,as it always was intended.
The Trojan Horse of a free trading zone was used to sell it, and then eventually the real plan is now being unveiled, and yet there are still people(and politicans) who cannot see it.
Agree, it will be presented as a ‘fait-accompli’ the problem will be as in any pooling arrangement there will be winners (Southern and Eastern Europe) and losers (Northern Europe). God knows how this will end but it does not bode well if you look at continental European history.
Look at the UK we are still arguing after 300 plus years as to who subsidises who and that is with political integration as the first step not the last