What are the economic prospects for the Euro area?

As we progress into 2020 there has been a flurry of information on the Euro area economy. However there has been quite a bit of dissatisfaction with the usual indicators so statistics offices have been looking  at alternatives and here is the German effort.

The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 0.6% in December 2019 compared with the previous month.

As a conceptual plan this can be added to the way that their colleagues in Italy are now analysing output on Twitter and therefore may now think world war three has begun. Returning to the numbers the German truck data reminds us that the Euro areas largest economy is struggling. That was reinforced this morning by some more conventional economic data.

Germany exported goods to the value of 112.9 billion euros and imported goods to the value of 94.6 billion euros in November 2019. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports decreased by 2.9% and imports by 1.6% in November 2019 on the same month a year earlier. Compared with October 2019, exports were down 2.3% and imports 0.5% after calendar and seasonal adjustment.

We get a reminder that what was one if the causes of economic imbalance before the credit crunch has if anything grown as we note the size of Germany’s trade surplus.  It is something that each month provides support for the level of the Euro. Switching to economic trends we see that compared to a year before the larger export volume has fallen by more than import volume. This was even higher on a monthly basis as we note that the gap between the two widened. But both numbers indicate a contractionary influence on the German economy and hence GDP ( Gross Domestic Product).

Production

Today’s data opened with a flicker of positive news.

In November 2019, production in industry was up by 1.1% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In October 2019, the corrected figure shows a decrease of 1.0% (primary -1.7%) from September 2019.

However this still meant this.

-2.6% on the same month a year earlier (price and calendar adjusted)

There is a particular significance in the upwards revision to October as some felt that the original numbers virtually guaranteed a contraction in GDP in the last quarter of 2019. In terms of a breakdown the better November figures relied on investment.

In November 2019, production in industry excluding energy and construction was up by 1.0%. Within industry, the production of capital goods increased by 2.4% and the production of consumer goods by 0.5%. The production of intermediate goods showed a decrease by 0.5%.

Only time will tell if the investment was wise. The orders data released yesterday was not especially hopeful.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2019 a seasonally and calendar adjusted 1.3% on the previous month.

Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.

-6.5% on the same month a year earlier (price and calendar adjusted)

Perhaps the investment was for the domestic economy as we look into the detail.

Domestic orders increased by 1.6% and foreign orders fell 3.1% in November 2019 on the previous month. New orders from the euro area were down 3.3%, new orders from other countries decreased 2.8% compared to October 2019.

But if we widen our outlook from Germany to the wider Euro area we see that it was the source of the strongest monthly slowing.

In a broad sweep orders for production rose from 2013 to December 2017 with the series peaking at 117.1 ( 2015=100) but we have been falling since and have now gone back to 2015 at 100.3.

The Labour Market

By contrast there is more to cheer from this area.

The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in November 2019, stable compared with
October 2019 and down from 7.9% in November 2018. This remains the lowest rate recorded in the euro area
since July 2008.

In terms of the broad trend the Euro area is now pretty much back to where it was before the credit crunch and is a long way from the peak of above 12% seen around 2013. But there are catches and nuances to this of which a major one is this.

In November 2019, the unemployment rate in the United States was 3.5%, down from 3.6% in October 2019 and
from 3.7% in November 2018.

That is quite a gap and whilst there may be issues around how the numbers are calculated that still leaves quite a gap. Also unemployment is a lagging indicator but it may be showing signs of turning.

Compared with October 2019, the number of persons unemployed increased by
34 000 in the EU28 and decreased by 10 000 in the euro area. Compared with November 2018, unemployment fell
by 768 000 in the EU28 and by 624 000 in the euro area.

The rate of decline has plainly slowed and if we look at Germany again we wait to see what the next move is.

Adjusted for seasonal and irregular effects, the number of unemployed remained unchanged from the previous month, standing at 1.36 million people as well. The adjusted unemployment rate was 3.1% in November, without any changes since May 2019.

Looking Ahead

There was some hope for 2020 reflected in the Markit PMI business surveys.

Business optimism about the year ahead has also improved
to its best since last May, suggesting the mood
among business has steadily improved in recent
months.

However the actual data was suggested a low base to start from.

Another month of subdued business activity in
December rounded off the eurozone’s worst quarter
since 2013. The PMI data suggest the euro area
will struggle to have grown by more than 0.1% in
the closing three months of 2019.

There is a nuance in that France continues to do better than Germany meaning that in their turf war France is in a relative ascendancy. In its monthly review the Italian statistics office has found some cheer for the year ahead.

The sectoral divide between falling industrial production and resilient turnover in services persists. However, business survey indicators convey first signals of optimism in manufacturing. Economic growth is projected to slightly increase its pace to moderate growth rates of 0.3% over the forecast horizon.

Comment

The problem for the ECB is that its monetary taps are pretty much fully open and money supply growth is fairly strong but as Markit puts it.

At face value, the weak performance is
disappointing given additional stimulus from the
ECB, with the drag from the ongoing plight of the
manufacturing sector a major concern.

It is having an impact but is not enough so far.

However, policymakers will be encouraged by the resilient
performance of the more domestically-focused
service sector, where growth accelerated in
December to its highest since August.

This brings us back to the opening theme of this year which has been central bankers both past and present singing along with the band Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To blockbuster

Hence their move towards fiscal policy which is quite a cheek in the circumstances.

The conceptual issue is that all the intervention and central planning has left the Euro area struggling for any sustained economic growth and certainly slower growth than before. This is symbolised by Italy which remains a girlfriend in a coma.

The Composite Output Index* posted at 49.3 in December,
down from 49.6 in November, to signal a second consecutive fall in Italian private sector output. Moreover, the decline quickened to a marginal pace.

 

15 thoughts on “What are the economic prospects for the Euro area?

  1. Hi Shaun

    A schoolboy error from the EU. The EU doesn’t need a strong economy it just needs to inflate houseprices/debt. They can hire Carnage and initiate a ZIRP/FLS/HTB program. Pump up consumer credit, remove houseprices from inflation measures and the jobs done.

    It doesn’t matter if society is falling apart around you. As long as houseprices increase, everyone is happy 😉

    • Hi Anteos

      Well Mario Draghi did get in on the game in his latter years although disappointingly from his point of view not in Italy. So Christine Lagarde can carry it on as there has been some reaction in France.

      “In Q3 2019, prices of second-hand dwellings in France (excluding Mayotte) were still increasing: +1.0% as compared to Q2 2019 (provisional seasonally adjusted results), at a bigger rate than in the previous quarter (+0.7 %).

      Over a year, the rise of prices barely sped up : +3.2%, after +3.1%.”

      Not a great surge but volumes have really picked up and these are the best numbers this century.

      “In Q3 2019, the annual number of transactions remained at a high level: in September, it reached 1,059,000 on a yearly basis, which is higher than the one recorded one quarter earlier (1,015,000 at the end of June) and than the one recorded one year earlier (959,000).”

    • forbin,

      Shan said “Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.”

      Marks & Spencer fell foul of the same mistake producing too many mince pies in less demand

      https://www.theguardian.com/business/2020/jan/09/marks-spencer-sales-dented-by-too-many-mince-pies-and-skinny-jeans

      Shares down over 9% and one wonders why!

      In the meantime Borris Johnson may haver to go back to the drawing board if he thinks a free trade agreement with Europe a piece of cake!

      Quote of the day yesterday in his meeting with Ursula Von Der Leyen

      Borris ” we went to the same school together”

      UDVR “we went to the same school but were not together” !

      Ha ha ha ha hilarious !

      • The EU will do nothing for as long as it can.
        Anyone who believes that the EU will ever be satisfied with any amount of delay is deliberately ignoring history.
        It is over 3 1/2 years since we voted to leave, and we have total regulatory alignment, so we are already that far down the line.
        A trade deal, on that basis, should need no more than eleven days, let alone eleven months, unless, of course, the EU refused to recognise that the will of the electorate would be carried out, in which case, the basis for a deal should be:
        No tariffs or quotas on UK goods and services, or we blow the SM wide open (because we can, you know) and bankrupt RoI..
        That’ll wipe the smug, condescending grins from a few visages.

  2. Hello Shaun,

    re : “Hence their move towards fiscal policy which is quite a cheek in the circumstances.”

    I guess they’re trying to re-arrange the deck chairs again on the Titanic again, whilst claiming they are fixing the hole…….

    Forbin

    • Hi Forbin

      Actually there is a link between tight fiscal policy and negative interest-rates. The Germans have been running a fiscal surplus and have been trying to apply that methodology elsewhere. The Swedes run a surplus as do the Swiss.

      However once we leave Europe the Japanese prove a clear exception to that rule.

  3. Hi Shaun,
    as concerns the number of toll paying trucks on the Autobahn.
    Germany, in the centre of the continent, is a transit hub. There is a large percentage of non-German trucks on the Autobahn (German for slow-to-non-moving-road-with-extensive-roadworks-every-other-5km) and so I’d posit falling numbers (especially 0,6%) doesn’t, necessarily, reflect directly on the German trucks.
    Maybe some haulers have (because of the unbelievable amount of roadworks (specifically bridges and especially since Genoa)) started to move frieght via rail?

    • Hi X-PAT

      I can only reply with the explanation from the German transport ministry.

      “The BAG has been evaluating the toll data since January 2008 as part of the “toll statistics”. Both the scope of the toll road network and the total weight of vehicles and vehicle combinations on which the toll is based have changed over time. With the truck toll mileage index, such structural changes are largely excluded, so that the economic development is more visible.”

      also this.

      “Further results of the toll statistics of the Federal Office for Freight Transport are available via the existing publication program of the Federal Office for Freight Transport with differentiations of the mileage subject to toll, for example according to the country of registration or pollutant classes.”

      As to whether it works only time will tell…..

  4. Hi Shaun

    You imply that you can talk about the economic prospects of the EZ as you would any other economic entity bu I don’t think you can because the Euro is an incomplete monetary union so cannot be looked at as a sensible construct that follows normal rules.

    The collection of weak and strong currencies gives a devaluation for the strong and a revaluation for the weak. This is a standing issue which will tend to drive divergence, and indeed has driven divergence. Divergence could be corrected by a fiscal union which would mean compensatory transfers from the strong to the weak. But there is no fiscal union.

    If countries could use different monetary policy as an adjustment mechanism this might ameliorate trends. But countries have no control over monetary policy. And of course there is no devaluation.

    They might be able to use fiscal policy to manage aggregate demand. But they can’t because of the Stability and Growth pact.

    The EZ seems to be a case of the law of unintended consequences run riot.

    This seems to leave internal devaluation aka austerity and wage reductions to serve as an adjustment strategy all of which may lower aggregate demand and exacerbate the very situation they are supposed to cure and further drive divergence between the strong and weak members.

    I think there’s a fairly simple answer to your question : “what are the economic prospects for the Euro area”: highly variable but on the whole – dire. When all your tools are taken away the term “prospects” in the sense of realisable possibilities may not have much meaning as you are simply subject to rules over which you have no authority.

    • Hi Bob J

      You are of course correct that the Euro area is a collection of disparate economies. However if we take it as a sort of collective the problem remains that it seems addicted to stimulus which provide ever weaker results. Perhaps they could employ Mark Carney to talk the Euro lower.

  5. Pingback: What are the economic prospects for the Euro area? – Investment Watch | ZUTI LIST

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