The ECB would do well to leave the Euro exchange-rate alone.

Over the past 24 hours we have seen something of a currency wars vibe return. This has other links as we mull whether for example negative interest-rates can boost currencies via the impact of the Carry Trade? In which case economics 101 is like poor old HAL 9000 in the film 2001. As so often is the case the Euro is at the heart of much of it and the Financial Times has taken a break from being the house paper of the Bank of England to take up the role for the ECB.

The euro’s rise is worrying top policymakers at the European Central Bank, who warn that if the currency keeps appreciating it will weigh on exports, drag down prices and intensify pressure for more monetary stimulus. Several members of the ECB’s governing council told the Financial Times that the euro’s rise against the US dollar and many other currencies risks holding back the eurozone’s economic recovery. The council meets next week to discuss monetary policy.

There are a range of issues here. The first is that we are seeing an example of what have become called ECB “sauces” rather then sources leak suggestions to the press to see the impact. Next we are left mulling if the ECB actually has any “top policymakers” as the FT indulges in some flattery. Especially as we then head to a perversion of monetary policy as shown below where lower prices are presented as a bad thing.

drag down prices

So they wish to make workers and consumers worse off ( denying them lower prices) whilst that the economy will be boosted bu some version of a wish fairy. Actually the sentence covers a fair bit of economic theory and modern reality so let us examine it.

The Draghi Rule

Back in 2014 ECB President Draghi gave us his view of the impact of the Euro on inflation.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

There is a problem with the use of the word “permanent” as exchange-rate moves are usually anything but, However since the nadir in February when the Euro fell to 95.6 it has risen to 101.9 or 6.3 points. Thus we have a disinflationary impact of a bit under 0.3%. That is really fine-tuning things and feels that the ECB has been spooked by this.

In August 2020, a month in which COVID-19 containment measures continued to be lifted, Euro area annual
inflation is expected to be -0.2%, down from 0.4% in July……..

Perhaps nobody has told them they are supposed to be looking a couple of year ahead! This is reinforced by the detail as the inflation fall has been mostly driven by the same energy prices which Mario Draghi argued should be ignored as they are outside the ECB’s control.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest
annual rate in August (1.7%, compared with 2.0% in July), followed by services (0.7%, compared with 0.9% in
July), non-energy industrial goods (-0.1%, compared with 1.6% in July) and energy (-7.8%, compared with -8.4% in

The Carry Trade

This is the next problem for the “top policymakers” who appear to have missed it. Perhaps economics 101 is the only analysis allowed in the Frankfurt Ivory Tower, which misses the reality that interest-rate cuts can strengthen a currency. Newer readers may like to look up my articles on why the Swiss Franc surged as well as the Japanese Yen. But in simple terms investors borrow a currency because it terms of interest-rate (carry) it is cheaper. With an official deposit rate of -0.5% and many negative bond yields Euro borrowing is cheap. So some will borrow in it and cutting interest-rates just makes it cheaper and thereby even more attractive.

As an aside you may have spotted that a potential fix is for others to cut their interest-rates which has happened in many places. But with margins thin these days I suspect investors are playing with smaller numbers. You may note that this is both dangerous and a consequence of the QE era so you can expect some official denials to be floating around.

The Euro as a reserve currency

This is a case of be careful what you wish for! I doubt the current ECB President Christine Lagarde know what she was really saying when she put her name to this back in June.

On the one hand, the euro’s share in outstanding international loans increased significantly.

Carry Trade anyone? In fact you did not need to look a lot deeper to see a confession.

Low interest rates in the euro area continued to support the use of the euro as a funding currency – even after adjusting for the cost of swapping euro proceeds into other currencies, such as the US dollar.

The ECB has wanted the Euro to be more of a reserve currency so it is hard for it then to complain about the consequences of that which will be more demand and a higher price. Perhaps they did not think it through and they are now singing along with John Lennon.

Nobody told me there’d be days like these
Nobody told me there’d be days like these
Nobody told me there’d be days like these
Strange days indeed — strange days indeed

Economic Output

Mario Draghi was more reticent about the impact of a higher Euro on economic output which is revealing about the ECB inflation obsession. But back in 2014 when there were concerns about the Euro CaixaBank noted some 2008 research.

Since January 2013, the euro’s nominal effective exchange rate has appreciated by approximately 5.0%. Based on a study by the ECB,an increase of this size reduces exports by 0.6 p.p. in the first year and by close to 1.0 p.p. cumulative in the long term.

With trade being weaker I would expect the impact right now to be weaker as well. Indeed the Reserve Bank of Australia has pretty much implied that recently with the way it has looked at a higher Aussie Dollar which can’t impact tourism as much as usual for example, because there is less of it right now.


One context of this is that a decade after the “currency wars” speech from the Brazilian Finance Minister we see that we are still there. This is a particular issue for the Euro area because as a net exporter with its trade and balance of payments surplus you could argue it should have a higher currency as a type of correction mechanism. After all it was such sustained imbalances that contributed to the credit crunch and if you apply purchasing power parity to the situation then according to the OECD the exchange rate to the US Dollar should be 1.42 so a fair bit higher. There are always issues with the precision of such calculations but much higher is the answer. Thus reducing the value of the Euro from here would be seeking a competitive advantage and punishing others.

Next comes the way that this illustrates the control freakery of central bankers these days who in spite of intervening on an extraordinary scale want to intervene more. It never seems to occur to them that the problems are increasingly caused by their past actions.

The irony of course is that the elephant in the room which is the US Dollar mat have seen a nadir with the US Federal Reserve averaging inflation announcement. If so we learn two things of which the first is that the ECB may work as an (inadvertent) market indicator. The second is that central banks may do well to leave this topic alone as it is a sea bed with plenty of minefields in it. After all with a trade-weighted value of 101.53 you can argue it is pretty much where it started.





The UK finds itself with a trade surplus

In many ways that is quite a chocking headline. It has been quite some time since the UK has been in a surplus situation as regarding trade. On a personal level I have got used to pointing out that not only has it been years since we sustained one it has in fact been decades. It was around 1997/98 that we did so as the effect of what turned out to be White Wednesday or the UK’s exit from the ERM ( Exchange-Rate Mechanism). I suppose that raises an initial point as it seems we need quite a economic shock to ever be in surplus. Also as people dip into my blogs over years I would point out that the 1997/98 has been revised in and out over time, less likely now for obvious reasons but you never know. In a way that provides its own critique of trade statistics.

You may be wondering why this was not on the news yesterday? I suppose like the extraordinary inflation numbers it was either not read or dismissed. One area where I do have sympathy though is that the concept of “theme days” that the Office for National Statistics does flood the system with too much data at once. Fans of Yes Prime Minister will know that this is a deliberate tactic to hide bad news, so somewhere Sir Humphrey Appleby and Jim Hacker are having a quiet chuckle.

The UK Surplus

The headline is this.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £8.6 billion to £8.6 billion in Quarter 2 (Apr to June) 2020, as imports fell by £35.2 billion and exports fell by a lesser £26.7 billion; the largest underlying total trade surplus on a three-month basis since records began in 1998.

As Shalamar are wont to put it.

There it is, there it is
What took us so long, ooh, to find each other, baby?
There it is, there it is
This time I’m not wrong

Actually the last line is more than risky as trade numbers at a time like this will see revisions.

Returning to the numbers it is immediately clear that we have not come to the surplus in the best of ways. This is because unless we have suddenly kicked out addiction to imports the fall in imports represents a consequence of the depressionary level fall in economic output we looked at yesterday. Also exports fell as well meaning out own domestic output was lower. One request I would make to the ONS is that they stop implying that ( in this instance) records began in 1998. After all if there were no records in the mid-1960s we would not have devalued in 1967 would we?! Ironically the records were wrong but the ONS statement should add recorded in this manner or something similar.

It is no great surprise to learn that the falls were everywhere.

Falling imports and exports in Quarter 2 2020 were largely seen in trade in goods, excluding non-monetary gold and other precious metals, where imports and exports fell by £21.4 billion and £14.0 billion respectively, while for trade in services they fell by £13.9 billion and £12.7 billion respectively.

A Goods Deficit

One familiar feature persisted in spite of the changes elsewhere.

The trade in goods deficit, excluding precious metals, narrowed by £7.4 billion to £20.7 billion in Quarter 2 2020 (Figure 2). Goods imports fell by £21.4 billion to £87.0 billion, while goods exports fell by £14.0 billion to £66.4 billion. Falling imports and exports were largely seen in machinery and transport equipment, and fuels, with larger falls of each in imports than exports.

So whilst it shrank we still had one and I doubt anyone fell off their chairs whilst noting the areas which were affected the most. Interestingly one major part of this saw a switch in which side of the ledger was worst affected.

The falls in exports and imports of machinery and transport equipment in Quarter 2 2020 were largely seen in road vehicles, where exports and imports fell by £7.8 billion and £4.2 billion respectively.

Switching to fuel and oil I am not sure I have seen numbers like this before.

Demand down by a record 31 per cent as a result of the COVID-19 lockdown. Demand in the three months to May 2020 was just 11.3 million tonnes, a record low in the series and 2.7 million tonnes under the previous low seen in the three months to April 2020.

Aviation fuel demand fell by 75% in the three months to May.


Here is all we get.

The trade in services surplus widened by £1.2 billion to £29.3 billion in Quarter 2 2020. Services imports fell by £13.9 billion to £35.3 billion, while services exports fell by £12.7 billion to £64.6 billion.

Good job it is not around 80% of our economy…..Oh wait.

Allowing for Inflation

After the extraordinary GDP Deflator number of yesterday it is perhaps for best that in fact this does not seem that large a player here.

In volume terms, the total trade surplus (goods and services), excluding unspecified goods (which includes non-monetary gold), widened £7.2 billion to £7.8 billion in Quarter 2 (Apr to June) 2020, as imports fell by £31.1 billion and exports fell by £23.8 billion.

Although this deserves an investigation as which prices rose?

Total trade import prices fell 0.8% in Quarter 2 2020, while export prices fell 0.4%. Fuels were the largest drivers of the fall in both import and export prices, by 35.7% and 36.7% respectively.

We should at least be told.

An Annual Surplus

The party continues here.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £37.6 billion to a surplus of £3.7 billion in the 12 months to June 2020, as imports fell by £67.6 billion and exports fell by a lesser £29.9 billion.

The detailed breakdown is below.

The increase of the underlying total trade balance in the 12 months to June 2020 was largely because of a £39.5 billion narrowing of the trade in goods deficit to £104.6 billion. Imports decreased by £61.7 billion, while exports decreased by £22.1 billion. The fall in both imports and exports of goods was largely seen with machinery and transport equipment, and fuels.

As usual we get no detail on the services position.

The trade in services surplus narrowed by £1.9 billion to £108.3 billion in the 12 months to June 2020, as exports fell by £7.8 billion and imports fell by a lesser £5.9 billion.


The warm glow provided by a UK trade surplus soon starts to fade. Whilst there may well have been a shift towards producing more domestically it will hardly have been at play on this scale. In reality it is the fall in demand affecting the demand for imports which has somewhat artificially created a trade surplus. One area where this is clearly in play is fuel and energy as production of oil and gas in the North Sea only fell by 2.6% in the three months to June as opposed to the much larger demand falls noted earlier.

What we are also reminded of is how little detail is provided on the sector which provides around four-fifths of out economy. Even the annual figures which allow for some actual surveys to be done – for newer readers the main services trade survey is quarterly leading to the reverse of Meatloaf’s two out of three aint bad – tell us nothing more than the bare numbers which hardly inspires confidence. I have long suspected the numbers for services are better than those recorded but doubt they fully offset the trade deficit. Of course trying to track this down is a complex business, but then it is also true that the gains in information technology have been exytaordinary.


Japan sees quite a GDP contraction in spite of the Bank of Japan buying 8% of the equity market

Overnight the agenda for today was set by news out of the land of the rising sun or Nihon. Oh and I do not mean the effort to reproduce the plot line of the film Alien ( Gaijin) for those poor passengers on that quarantined cruise ship. It was this reported by the Asahi Shimbun.

Gross domestic product declined by a seasonally adjusted 1.6 percent in the quarter from the previous three months, or an annualized 6.3 percent, the Cabinet Office figures showed.

The contraction of 6.3 percent was far worse than expectations of many private-sector economists, who predicted a shrinkage of 4 percent or so.

Just to clarify the quarterly fall was 1.6% or using the Japanese style 6.3% in annualised terms. What they do not tell us is that this means that the Japanese economy was 0.4% smaller at the end of 2019 than it was at the end of 2018. So quite a reverse on the previous trend in 2019 which was for the annual rate of growth to pock up.

The Cause

Let me take you back to October 7th last year.

After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )

I pointed out back then that I feared what the impact of this would be.

This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.

As you can see this was a risky move and it came with something of an official denial of the economic impact.

 about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan.

The 2014 rise in the Consumption Tax ( in rough terms the equivalent of VAT in the UK and Europe) had hit the Japanese economy hard, so the official claim of that the new impact would be a quarter was something I doubted. Now let us return to the Asahi Shimbun this morning.

Japan’s economy shrank in the October-December period for the first time in five quarters, as the sales tax hike and natural disasters pummeled personal consumption, according to preliminary figures released on Feb. 17.

The exact numbers are below.

Personal consumption, which accounts for more than half of Japan’s GDP, grew by 0.5 percent in the July-September period.

But the figure plunged to minus 2.9 percent for the three months from October, when the government raised the consumption tax rate to 10 percent from 8 percent.

We had previously looked at the boost to consumption before the tax rise as electrical appliances in particular were purchased. This will have flattered the economic data for the third quarter of last year and raised the GDP growth rate. But as you can see the party has had quite a hangover. On its own this would have led to a 2.2% decline in quarterly GDP.

The spinning has continued apace.

Yasutoshi Nishimura, minister in charge of economic revitalization, gave a positive outlook for personal consumption in a statement released on Feb. 17.

“The margin of decline in personal consumption is likely to shrink,” he said.

As John Lennon points out in the song Getting Better.

It can’t get no worse

As ever there is a familiar scapegoat which is the weather.

Destructive typhoons that hit eastern Japan and the warmer winter also fueled the slowdown in personal spending, such as purchases of winter clothes.

Although as @Priapus has pointed out there was an impact on the Rugby World Cup and the Japanese Grand Prix.

Investment and Exports

These will be on people’s minds as we try to look forwards. According to the Asahi Shimbun the situation for investment is also poor.

Investment in equipment by businesses, for example, shrank by 3.7 percent, a sharp decline from a rise of 0.5 percent in the preceding quarter, while housing investment tumbled 3.7 percent from an increase of 1.2 percent.

New housing starts have also been waning since the tax hike.

Many companies’ business performances are deteriorating, particularly in the manufacturing sector.

The business investment fall was presumably in response to the trade war and the deteriorating conditions in the Pacific economy we looked at in the latter part of 2019 and of course predates the Corona Virus. By contrast the Bank of Japan like all central banks will be more concerned about the housing market.

Switching to trade itself the position appears brighter.

In contrast, external demand pushed up GDP by 0.5 percentage point.

But in fact this was due to imports falling by 2.6% so a negative and exports fell too albeit by a mere 0.1%. That pattern was repeated for the annual comparison as exports were 2.2% lower than a year before and imports 4.3% lower. It is one of the quirks of the way GDP is calculated that a fall in imports larger than a fall in exports boosts GDP in this instance by 0.4%. Thus the annual comparison would have been -0.8% without it.


Sometimes the numbers are eloquent in themselves. If we look at the pattern for private consumption in Japan we see that it fell from 306.2 trillion Yen to 291.6 trillion in the first half of 2014 as the first tax rise hit. Well on the same seasonally adjusted basis and 2011 basis it was 294 trillion Yen in the last quarter of 2019. If we allow for the fact that 2014 saw a tax based boost then decline then consumption in 2019 had barely exceeded what it was before the first tax rise before being knocked on the head again. Or if you prefer it has been groundhog day for consumption in Japan since 2013. That is awkward on two counts. Firstly the Japanese trade surplus was one of the economic world’s imbalances pre credit crunch and expanding consumption so that it imported more was the positive way out of it. Instead we are doing the reverse. Also one of the “lost decade” issues for Japan was weak consumption growth which has just got weaker.

This leaves the Japanese establishment in quite a pickle. The government has already announced one stimulus programme and is suggesting it may begin another. The catch is that you are then throwing away the gains to the fiscal position from the Consumption Tax rise. This poses a challenge to the whole Abenomics programme which intended to improve the fiscal position by fiscal stimulus leading to economic growth. I am sure you have spotted the problem here.

Next comes the Bank of Japan which may want to respond but how? For newer readers it has already introduced negative interest-rates ( -0.1%) and bought Japanese Government Bonds like it is a powered up Pac-Man to quote the Kaiser Chiefs, But the extent of its monetary expansionism is best highlighted by this from Etf Stream earlier.

According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.

Hence the nickname of The Tokyo Whale.They think the rate of buying has slowed but I think that’s an illusion because it buys on down days and as The Donald so regularly tweets equity markets are rallying. Just this morning the German Dax index has hit another all-time high. But what do they do next? They cannot buy that many more ETFs because they have bought so many already. As you can see they are already a material player in the equity market and they run the Japanese Government Bond market as that is what Yield Curve Control means. Ironically the latter has seen higher yields at times in an example of how water could run uphill rather than down if the Bank of Japan was in charge of it. It will be wondering how the Japanese Yen has pretty much ignored today’s news.

Also as a final point. More and more countries are finding it hard to raise taxes aren’t they?





How is it that even Germany needs an economic stimulus?

Sometimes we have an opportunity like the image of Janus with two heads to look at an event from two different perspectives. This morning’s trade data for Germany is an example of that. If we look at the overall theme of the Euro era then the way that Germany engineered a competitive devaluation by joining with weaker economies in a single currency has been a major factor in this.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 16.3 billion euros in February 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.1 billion euros), services (-1.1 billion euros), primary income (+6.2 billion euros) and secondary income (-7.9 billion euros). In February 2018, the German current account showed a surplus of 19.5 billion euros.

The large surplus which as you can see derives from its trade in goods feels like a permanent feature of economic life as it has been with us for so long. Also it is the bulk of the trade surplus of the Euro area which supports the value of the Euro although if we shift wider the Germany trade surplus is one of the imbalances which led to the credit crunch itself. So let us move on as we note an example of a currency devaluation/depreciation that has been quite a success for Germany.

What about now?

The theme of the last six months or so has shone a different perspective on this as the trade wars and economic slow down of late 2018 and so far this year has led to this.

Germany exported goods to the value of 108.8 billion euros and imported goods to the value of 90.9 billion euros in February 2019……After calendar and seasonal adjustment, exports were down 1.3% and imports 1.6% compared with January 2019.

We can add to that by looking at January and February together and if we do so on a quarterly basis then trade has reduced the German economy by a bit over a billion Euros. Compared to last year the net effect is a bit under four billion Euros.

One factor in this that is not getting much of an airing is the impact of the economic crisis in Turkey. If look at in from a Turkish perspective some 9% of imports come from Germany ( h/t Robin Brooks) and the slump will be impacting even though if we switch to a German view the relative influence is a lot lower.


On Friday we were told this.

+0.7% on the previous month (price, seasonally and calendar adjusted)
-0.4% on the same month a year earlier (price and calendar adjusted)

There was an upwards revision to January and if we look back we see that the overall number peaked at 108.3 last May fell to 103.7 in November and was 105.2 in February if we use 2015 as our benchmark. So there has been a decline and we will find out more next month as March was a fair bit stronger than February last year.


These give us a potential guide to what is on its way and it does not look good.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in February 2019 a seasonally and calendar adjusted 4.2% on the previous month……..-8.4% on the same month a year earlier (price and calendar adjusted).

If we switch to the index we see that at 110.2 last February was the peak so that is a partial explanation of why the annual fall is so large as for example March was 108.6. But it is also true that this February saw a large dip to the weakest in the series so far at 101. 2 which does not bide well.

Also you will no doubt not be surprised to read that a decline in foreign orders has led to this but you may that it is orders from within the Euro area that have fallen the most. The index here was 121.6 last February as opposed to 104.6 this.


On Thursday CNBC told us this.

Forecasts for German growth were revised significantly downwards in a ‘Joint Economic Forecast’ collated by several prominent German economic research institutes and published Thursday, with economists predicting a meager 0.8% this year.

This is more than one percentage point lower than a prediction for 1.9% made in a joint economic forecast in fall 2018.

Although they should be eating a slice of humble pie after that effort last autumn.

The private sector surveys conducted by Markit were a story of two halves.

Despite sustained strong growth in services business activity in March, the Composite Output Index slipped from a four-month high of 52.8 in February to 51.4, its lowest reading since June 2013. This reflected a marked fall in goods production – the steepest since July 2012.

In terms of absolute levels care is needed as this survey showed growth when the German economy contracted in the third quarter of last year. The change in March was driven by something that was eye-catching.

Manufacturing output fell markedly and at the fastest
rate since 2012, with the consumer goods sector joining
intermediate and capital goods producers in contraction.


A truism of the Euro era is that the ECB sets monetary policy for Germany rather than for the whole area. Whilst that has elements of truth to it the current debate at the ECB suggests that it is “The Precious” which takes centre stage.

A debate on whether to “tier” the negative interest rates that banks pay on the idle cash they park at the ECB is now underway, judging by recent ECB comments and the minutes from the March meeting. ( Reuters)

There is a German element here as we note a Deutsche Bank share price of 7.44 Euros which makes any potential capital raising look very expensive especially to existing shareholders.. Also those who bought the shares after the new hints of a merger with Commerzbank have joined existing shareholders in having singed fingers. Maybe this is why this has been floated earlier.

The next frontier for stimulus at the ECB should include stock purchases, BlackRock’s Rick Rieder says

Will he provide a list? I hope somebody at least pointed out that the Japanese experience of doing this has hardly been a triumph.

It all seems not a little desperate as we see that ECB policy remains very expansionary at least in terms of its Ivory Tower models. It’s ability to assist the German economy has the problem that it already holds some 511 billion of German bonds at a time when the total numbers are shrinking, so there are not so many to buy.

This from Friday suggests that should the German government so choose there is plenty of fiscal space.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

That is confirmed by so many of Germany’s bond having a negative yield illustrated by its benchmark ten-year yield being 0% as I type this.

The catch is provided by my junkie culture economics theme. Why after all the monetary stimulus does even Germany apparently need more? In addition if we have been “saved” by it why is the “speed limit” for economic growth now a mere 1.5%?

They can tell you what to do
But they’ll make a fool of you ( Talking Heads )







Is Germany an economic miracle or a deflationary force?

There has been a raft of economic data out of the Federal Republic of Germany this morning but before we get to that there are two major themes I wish to point out. These come from its membership of the Euro which has given its exporting industry in particular an enormous competitive boost. To get an idea of the scale of these we merely need to consider where the Deutschmark would be trading now if it existed. The musical theme is “higher and higher it’s a living thing” by ELO. If we look at the most similar currency which is the Swiss Franc we see that a new Deutschmark would have soared like a bird and created all sorts of problems for the German Bundesbank in trying to cope with it and German industry. If the Swiss pattern was repeated then the Bundesbank would also be an enormous hedge fund with a central bank on the side. As for the exchange rate well it would be more like 1.50 to the US Dollar ( and perhaps higher) rather than the 1.05 that Euro membership has brought,

In addition Germany has seen low and more recently negative interest-rates with the deposit rate of the European Central Bank currently -0.4%. If there is anywhere that sees this translated into lower borrowing rates for businesses and consumers in the Euro area then Germany will be at the top of the list. Whilst I doubt that negative interest-rates themselves help much Germany has seen low interest-rates for quite some time now. In an example of the sort of “Not Fair” sung about by Lilly Allen we also see that the German government has benefited from some 304 billion Euros ( and rising) of its debt being bought by the ECB. It is seldom asked how wise or indeed necessary this is/was but for now let me simply point out that the ability to issue debt at low and negative yields has added further to Germany’s ability to run a budget surplus.

The trade problem

This is usually presented as an economic triumph for Germany and in many ways it is but with it problems have been created and we see these in this mornings data release.

Germany exported goods to the value of 108.5 billion euros and imported goods to the value of 85.8 billion euros in November 2016. These are the highest monthly figures ever calculated both for exports and for imports. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 5.6% and imports by 4.5% in November 2016 year on year.

So not only a large trade surplus in goods but one which is growing so much it is a record. If we widen our outlook to services then the position changes but by a relatively small amount.

services (-1.8 billion euros)

If we look at the Euro area we see that Germany continues to be a deflationary influence on the other nations.

In November 2016, Germany exported goods to the value of 63.2 billion euros to the Member States of the European Union (EU), while it imported goods to the value of 56.9 billion euros from those countries.

This is not explicitly due to the exchange rate of course but makes us wonder what other gain have been provided by a lower exchange-rate such as possible economies of scale for its vehicle producers. If we move to outside the Euro area than the numbers speak for themselves.

Exports of goods to countries outside the European Union (third countries) amounted to 45.2 billion euros in November 2016, while imports from those countries totalled 28.9 billion euros. Compared with November 2015, exports to third countries increased by 7.6% and imports from those countries by 3.9%.

So we see not only a large and growing surplus but one that seems to be accelerating and here of course the value of Euro membership can be explicitly seen.

When the credit crunch hit there was a lot of talk about the German trade surplus being a factor ( along with the Chinese and Japanese ones) yet we see that as we sadly see so often if anything it has grown. The initial impact is to raise German GDP via net exports but the way that it happens year after year means that demand is sucked out of other countries. If you throw in the budget surplus I mentioned earlier then you have plenty of fuel for my argument that the theme that Germany keeps losing with regards to matters such as ECB policy needs the counterweight that in areas which it considers most important Germany continues to get what it wants.


This morning has seen another consequence of this.

In November 2016, production in industry was up by 0.4% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

This follows a 0.5% monthly increase in October but to see the overall picture we need to look deeper. If we look at the manufacturing output index then it was 100.2 in November 2008 and was 110.5 in November of last year. So we see growth over what has been a very difficult period for western manufacturing. Now those two months make it look better than I think it is but in general 2016 is better than 2008 whereas if we look at my country the UK we see a different situation.

In Quarter 3 2016, production and manufacturing output remained below their Quarter 1 2008 levels by 8.0% and 5.7%, respectively.

There has been good news this morning from both Rolls Royce and Jaguar Land Rover with their 2016 figures but it is plain that the UK has quite a bit of ground to catch up.

The outlook

The future is bright if the Markit business surveys are any guide. According to them Germany had a solid last quarter in 2016 and 2017 looks okay as well.

With services expectations also improving in December, the outlook for 2017 is bright – IHS Markit is forecasting solid GDP growth of 1.9% for the year as a whole.


If you are looking for support for the theme of Germany being something of an economic miracle then one would look at the trade position combined with this which was reported by Eurostat earlier.

the lowest unemployment rates in November 2016 were recorded in the Czech Republic (3.7%) and Germany (4.1%).

As we move to youth unemployment we see a further example but also a hint that perhaps a deflationary consequence has been seen elsewhere.

In November 2016, the lowest rate was observed in Germany (6.7%), while the highest were recorded in Greece (46.1% in September 2016), Spain (44.4%) and Italy (39.4%).

If we look back at the history of the Euro we see that it has benefited Germany hugely and that monetary policy has in general been set for it. There are doubts rising from the latest phase of negative interest-rates and 1.5 trillion Euros of QE ( Quantitative Easing) which have seen consumer inflation rise to 1.7% in some German regions with the likelihood it will push higher as 2017 progresses. Or as Die Welt puts it.


Actually in a link to my next part they are discussing Mesut Ozil who of course is trying to get a large pay rise from Arsenal football club which has to be inflationary. But many think that an increase in wages in Germany would improve things as highlighted by this below.

2017 price-wage loop check: wage bargaining rounds kick off in Germany with unions asking for 6% pay rise for 800k regional public servants. ( h/t @MxSba )

Of course in both cases asking is one thing and getting is another. But it has long been argued that higher wages in Germany would set off a beneficial cycle as follows. Workers would be able to consume more ( the original Ford motor car strategy as discussed in the comments a few days ago) thereby boosting imports and shrinking the trade gap as well thereby benefiting both the German and overseas economies. As Germany is estimated to be 5.5% of world economic output this could have a solid effect in world terms.

As ever life is unlikely to be that simple as for example what if the higher wages set of an inflationary push? Or make companies uncompetitive? But in general I think it is hard to argue that a nudge higher would be what economists call a Pareto gain.

The ECB faces a stronger Euro and an unbalanced economy

One of the features of this time of year is that the ECB (European Central Bank) is quiet as its Governing Council gets in some research on holiday hot-spots and does its best to boost the economies of the southern countries. However in their absence there is little sign of a summer lull this year so let us take a look at what is happening. Firstly of course we have the deposit and current account rate set at -0.4% and the 80 billion Euros of QE (Quantitative Easing) per month which now includes corporate bond purchases.

Negative Interest-Rates

Standard and Poors has produced a report on this issue and it starts badly for the ECB. From the FT.

Almost 500 million people are living under negative central bank interest rates – an unprecedented policy move which is “a clear sign of desperation” with a host of unintended consequences for the world economy, Standard & Poor’s has warned.

Almost enough to make Mario Draghi choke on his lunchtime glass of chianti. There is more.

It warned of the danger of a “feedback loop”, where negative rates encourage irresponsible and excessive risk taking that could spillover into escalating defaults that would require yet more stimulus from central banks.

There are two further problems which will be familiar to readers of my work.

This has led to concerns for pension funds and insurance companies, “reducing the investment returns these institutions rely on to meet their long-term liabilities”. They could then be spurred to search for yield by investing in riskier assets.


Should negative rates spread across the economy, it could lead to a “cash-only economy”: “This means increased transaction costs and rising risks of theft”

Then suddenly there is some better news for the ECB as Standard and Poors decides that it should fall into line with the IMF and tell us that this is working.

Negative rates in the eurozone are “having the desired stimulative effect”, managing to spur bank lending and leading to a sustained fall in the value of the euro.

Let us look at bank lending vis the ECB August Bulletin.

Loan dynamics remained on a path of gradual recovery………While the annual growth rate of loans to non-financial corporations (NFCs) recovered further in May, the annual growth rate of loans to households has remained broadly stable since February 2016.

Not entirely convincing is it? The truth is that the ECB has stopped such lending from falling but the numbers are barely positive.

The Euro

I was interested in the “sustained fall in the value of the Euro” claim as the Euro has been rising recently. The most obvious rise has been the post Brexit leave vote move against the UK Pound £ which has seen it push forwards to 1.15. However it has also been rising against the US Dollar and has pushed above 1.13 versus it this morning after the US Federal Reserve Minutes showed uncertainty last night. I guess it has absolutely surged against the Mongolian Tugrik which has required a 4.5% increase in interest-rates today to try to shore it up!

If we look at the effective or trade-weighted numbers we see that the Euro has been rising since it fell to just below 89 in early April 2015 and it is now 95.6. Or as Sober Look pointed out.

: ‘s tradeweighted euro index now highest since start of QE; has to be frustrating for the ECB –

If you are wondering why? I suspect that some figures released this morning give us at least a partial guide.

As a result, the euro area recorded a €29.2 bn surplus in trade in goods with the rest of the world in June 2016……In January to June 2016  the euro area recorded a surplus of €134.5 bn, compared with +€111.4 bn in January-June 2015.

As you can see whenever we are not in an ouvert crisis phase then there is steady and regular demand for Euros to pay for goods. Actually there is an elephant in this particular room as two thirds of the trade surplus in goods comes from one country Germany which recorded a 89.2 billion Euro surplus in the first half of 2016.  We are back to the view that I expressed some years back that the Euro is a vehicle for Germany to get a lower exchange-rate. The price for the other 18 nations is that they get a higher exchange-rate and this has compromised the economic performance particularly of countries like Italy and Portugal and of course especially Greece.

For all the media rhetoric and talk about Germany being a loser in the various Euro negotiations and bailouts it remains an enormous winner from its original currency devaluation. What it did not know back then was that we would see a post credit crunch era where a German Deutschmark would have soared.

The banks

The problem here is duofold. The first has been caused by the ECB itself and the way that negative interest-rates impact on the banking sector. An irony because of course so many policies are aimed at supporting the banks. Benoit Coeure of the Governing Council put it like this at the end of last month.

In the euro area, the potential adverse impact on bank profitability, if it materialises, would be compounded by low growth prospects and a legacy of high non-performing loans.

In fact virtually his whole speech was about the banks revealing his real interests! In essence on this road they are being given not far off “free money” from the QE program to offset losses elsewhere.

While average deposit rates only decreased by around 0.2 percentage point between June 2014 and May 2016, loan rates decreased by around 0.8 percentage point, effectively reducing the interest margin.

If we return to the lending figures I quoted early on you might reasonably have expected them to have done better in response to this.

The next problem is responded to rather euphemistically.

In the euro area, this translates into geographic differences based on national banking structures,

He means the banking travails of Portugal and Italy for example but does not want to say so explicitly. I note that Algarve News has reported this.

Portugal’s government has spent €14 billion of public money on ensuring the banking sector is ‘robust’ – but much of this money will never be seen again……….This overall €14 billion bill, as computed by the Court of Auditors and the National Institute of Statistics, represents nearly 8% of Portuguese GDP, hence Moody’s recent warning that the Portuguese banking system is one of the most fragile in Europe.

Even the traditionally insular US Federal Reserve is on the case.

However, European bank equities, especially those of Italian banks, underperformed, reflecting investor fears that lower interest rates will continue to weigh on profitability.

Not everywhere is on a downwards spiral as the economic growth spurt in Spain has helped improve things for banks there. This morning has seen a fall in non performing loans recorded although I also note that another consequence of the To Big To Fail strategy has also been seen as national debt to GDP which was 36% in 2007 looks like it has passed 100%.


There is much to consider for the ECB as it looks at its policies. It did originally manage a fall in the Euro exchange rate but as I have explained above that has been fading. As I have pointed out before both the main QE players right now ( Euro area and Japan) are seeing stronger not weaker exchange-rates these days. Actually one bit of relief for Mario Draghi and his colleagues has been that the Yen has risen even against the Euro.

Also whilst the economy is growing the rate of growth halved in the second quarter of 2016 to 0.3% from 0.6% previously. Whilst Spain has done well and Ireland has recorded some quite extraordinary numbers Italy and France recorded no growth at all in the latest quarter. I think that the ECB if Benoit Coeure is any guide is starting to think that it is struggling.

Fiscal and structural policies should act more decisively to support aggregate demand and productivity, thereby preventing the economy from falling into a low interest rate trap.

Yes especially in the struggling nations. Oh hang on the ECB as part of the institutions or troika has been enforcing exactly the reverse there!

Should the oil price continue to edge higher some of the gains from its lower phase will start to ebb away as well.