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Tuesday, February 25, 2014

The European Commission's new economic forecasts: Fragile recovery continues, but problems remain

The latest Commission economic forecasts are out and the theme of a broad but still fragile recovery (combined with some gentle self-congratulations on the success of the current approach) has been continued. For the most part the forecasts are not hugely different from the Autumn 2013 ones, which we covered here.

We won’t do a country by country run down again, since little has changed. But we pick up on a few general themes below.

Inflation forecast cut
A metric which everyone is watching at the moment is inflation. As we have discussed before, March has been pegged as a key meeting for the ECB and is expected to be a defining choice over whether the bank takes more action to tackle inflation. The EC has cut its forecast for inflation from 1.5% to 1.1% for this year while last year’s has been revised to 1.3% from 1.5%. Despite the language being quite strong on inflation remaining low and subdued, these forecasts aren’t far from the ECB’s own and are unlikely to push them one way or another when it comes to taking further action. The graph also highlights that the view of core inflation (without energy or food prices) been on a slow decline for some time but is expected to melt upwards over the coming years. Again this fits with current ECB thinking rather than bucking against it.

Spain and Italy – diverging forecasts, but plenty of common problems
One of the more surprising points is that Spain has got the most substantial upgrade of all the big eurozone countries – with its 2014 growth forecast raised from +0.5% to +1%. At the same time Italy is the only big eurozone country whose growth forecast for this year has been revised downwards – from +0.7% to +0.6%. Similarly, on the unemployment side (while Spain remains in a much worse position) the forecast has improved somewhat for Spain and worsened for Italy. In any case, both continue to struggle with their large debt loads (more below), although new Italian Prime Minister Matteo Renzi might take the less than optimistic forecast as an important reminder of the reforms he needs to pursue, not unlike the ones Spain has undertaken…

Debt remains a problem in the eurozone
By 2015, seven eurozone countries are forecast to have public debt levels above 100% of GDP – Belgium, Ireland, Cyprus, Greece, Spain, Italy and Portugal. As the report warns, this debt overhang could become a drag on medium term growth, particularly when combined with other factors such as the knock on effects of years of depressed investment, high unemployment and falling productivity.

Borrowing costs for SMEs have come down but remain divergent in eurozone
As the graph highlights, there has been some improvement over the past few months. That said, borrowing costs for firms in France and Germany remain substantially below those in the periphery countries. Given the importance for SMEs, particularly in Italy and Spain, it is difficult to see a strong pick-up in economic activity or employment until SMEs can fund themselves effectively at reasonable rates.

Transition from export driven growth to a more balanced recovery
The EC suggests that the recovery is and will become more broadly balanced. As we have warned, particularly with regards to Portugal, becoming overly reliant on exports can be dangerous as it’s not clear that there will be sufficient demand to pull the economy out of its slump. That said, the Commission doesn’t entirely provide convincing ground for the significant turnaround in domestic demand and investment which is expected. With firms and households still weighed down by significant amounts of debt in much of the periphery and borrowing costs remaining high, it’s not yet clear that this can take place as quickly as is hoped. As the graph below shows, the turnaround needed is substantial.

Labour market continues to lag behind
Even if you buy into other parts of the recovery, it’s clear it hasn’t yet come close to improving the serious unemployment problem in much of Europe. Divergence is also expected to remain with many of the peripheral countries having incredibly high unemployment for the foreseeable future (well beyond the timeline of these forecasts).

And finally, seriously, what’s wrong with Finland? This data marks another bad day for the Finnish government, with the Finnish economy forecast to grow by only 0.2% this year, the slowest level behind Cyprus (-4.8%) and Slovenia (-0.1%), both embroiled in the eurozone crisis.


Anonymous said...

"The European Commission's new economic forecasts: Fragile recovery continues, but problems remain"

The biggest problem that remains is the EU.

The EU are empire building (wrt Ukraine) and now have yet another ball to juggle. It seems that they have made such a mess of what they already have that adding to it is just plain stupid.

The populace of the PIIGS etc can starve and go to hell whilst the EU finds more money to spend on another unfit and unready basket case called the Ukraine. The Ukraine is going to cost each EU sovereign state as and when bailout funds are required.

This whole thing makes no sense to me.

It really is time for our useless and spineless politicians to stand up for us and stop this whole EU fiasco before we find ourselves broke, at war and complete servants of a despotic and undemocratic regime (i.e. the EU).

UK out NOW.


Rik said...

In a nutshell mainly wishful thinking by an organisation that hardly looks not very knowledgable on the subjectmatter.
When you see hocketysticks or rapidly improving trends based on nothing you know it is probably rubbish.

NK said...

The level of collective delusion among the nomenclature is absolutely laughable. "More balanced growth"? Based on what? The government spending of stolen pension funds? Who in the EU in their normal mind (and from private sector) wants to spend on anything substantial when all EU governments are known to be insolvent (if all future obligations are (dis)counted)?

The sooner the EU falls apart the better. And I hope their latest empire-building adventure costs them dearly.

Freedom Lover said...

According to Open Europe, eurozone economies are beginning to recover from the dire condition they have been in over the last few years. That's not so at all. According to Zerohedge an Austrian bank, Hypo Alpe Aldria (or HAA), is in trouble - along with the British Cooperative bank. See http://www.zerohedge.com/news/2014-02-24/haa-haa-will-another-creditanstalt-be-revealed-once-hypo-alpe-aldria-black-box-opene

Meanwhile Cyprus, Greece, & Bulgaria have negative growth, & several other eurozone counties are teetering on the edge of deflation. At the same time, the Shanghai Composite stockmarket collapsed 12% over the last 2 days, & Chinese non-financial companies at the end of last year held total outstanding bank borrowing and bond debt worth about $12 trillion - equal to over 120% of Chinese GDP - according to Standard & Poor's estimates.

To cap it all, the new ECB recipe for bank failures is widespread depositors' bail-ins - not an economic confidence builder at all. Instead a guarantor of a massive economic slowdown once this is widely used.

Instead the best solution is to let eurozone member countries return to their old currencies immediately, floating their new or revived currencies at least until their EU-battered economies have genuinely recovered. It's as clear as anything that none of the weaker eurozone economies will ever really recover while they remain in both the eurozone & the EU. Could it be possible that some of them invoke the Lisbon Treaty's Article 50, & start negotiating their own very necessary EU-departure before Britain finally faces up to its destiny & also invokes Article 50?

Rik said...

1. First the positives. The prognosis seem to be more in line with the ECBs. having 1%+ gaps like before hardly make any of the two look credible. Nobody (except themselves) takes these prognosis very serious at well
The bottom is clearly not falling out.
That is about it for the positives.

2. It is simply in the nature of things if you go for internal devaluation that overall inflation will be lower than usual.
Not that that is a positive, but is simply as said in the nature of things (and very simple maths).

3. Spain at some point will have to deal with its earlier dodgy figures. You cannot keep skeletons in the closet for ever.
If you hide part of the drop when you should rise again you simply must hide part thereof as well.
And this is not even the biggest one, which is the bad loans with no provisions made on the BS of their banks.

4. Italy seem to have completely stagnated its reforms. The new guy seems a bag of hot air of Obama proportions. Hard to see that that one gives any solutions.
Simply looks a much bigger joke than the one before him. Interesting to see however how long markets will be buying this nonsense.

5. Borrowing costs in the South. You need to add premia for 2 risks when put your money with any Hispano-Italian bank. One for the bank itself as well. Unlike Northern banks.
Simply a side effect for having a dodgy banksector and not cleaning it up.

6. Main thing these estimates are basically baseless. Simply hard to see where the growth should come from.
Their models look simply crap. And they donot seem to revise them.
Not even to mention aging looks simply not been taken into account while it is hitting in big time now in a lot of these countries. You have to correct for a reduced labourforce relative to total population.Like the Finnish article of OE shows in one of its graphs.

Not even to mention decresing quality of workforce. At least that is how the labourmarket sees it. Governments simply keep looking at 'inflated' Bs and highscholl gradutes.

Rik said...


7. Looks like we are in or close to a peak of a shorter business cycle. However with a (much) lower normal.
And the picture somewhat obscured by continuing stimulus (fiscal and monetary) which works as a steroid basically (not a nice thought for people who like their growth).
As well as some catching up effect which was usually very short term in this crisis.
Fits very well in with what we see in Europe.

Which would eg mean much lower peaks. Very hard to see why that should be otherwise at least. And even harder to see why the peaks should be as high as before as the EC seem to assume. Simply doesnot make sense.

8. Holland seems to get the burst of their RE bubble behind them.
At least that looks to me the most logical explanation for its dip. Seen the amounts lost in RE value the extra stimulus some people would have liked to see seem very marginal.
Seems to me the drop in RE prices was the main driver in less consumer spending and with the uncertainties about pensions the second biggest.
Compared to these 2, a few percent stimulus simply seems pretty irrelevant.
Which is overall good news of course.

Big howevers:
-The bubble in countries like France and Belgium is pretty much still there (and Finland and Germany are blowing up one at the moment.
Especially the French and Belgian ones look scary. These look of a similar size to the Dutch one before and are still there.
It is not that the Dutch one didnot lead to much lower RE prices. They are considerably lower at the moment.
In a nutshell France and Belgium are still having a RE bubble on top of a lousy economy. Huge downside risk and of much larger than Black Swam size.

Same with the pensions. The Dutch had as problem lower calculation interest on FUNDED pensions.
Which is a problem of course.
But overall still much better than to have UNFUNDED pensions like so many of the others.
The Dutch have at least funded pensions to start with and now partly (a lot of problems still there) solved the calculation interest issue. A lot of the others have unfunded pensions.
Basically the Dutch have a car and having a problem paying for the fuel. The others have only been promised a car.
Germany has just put itself a close to 1 Tn deferred liability (pension at 63) on its shoulders by the Merkel Government rubbishing the reforms that brought them well through the crisis for instance.

Simply overall doesnot look good. Bads clearly outweigh the goods. We might go somewhat higher short term, as said this looks like a normal business cycle but no structural issues solved.

Anonymous said...

The EUSSR was built on a lie, operates by deceit and is getting worse in that respect every day.

Why on Earth would anyone believe any of its "forecasts" or other reports?

Are we really that stupid?

Rik said...

Point I forgot to mention.

Very likely we get a considerble dip in stockprices somewhere this year. Maybe even a sort of crash. Likely May (sell in May thingy) or Autumm (people getting depressions because of shorter days and lousy weather probably),
they usually happen there.

When that happens all bets re growth will be off. Will very likley be a very dangerous moment for the EZ as well, a lot of nasty things could play up again. But it might work as said for the time until then. Looks imho a mix of huge structural problems and a normal businesscycle with all sort of stimulus (aka overspending) thrown in the mix.