April inflation rate was 1.2% in the Euro Area. This rapid drop needs an answer from the ECB as this level is well below its target (inflation rate stable but slightly below 2%)
The main reason for this lower inflation rate is the energy price contribution that went to 0 in April. If as the IMF said last month global growth momentum does not accelerate, this contribution will remain low as no pressures are expected on oil price (except may be in June as price was much lower last year but it was temporary, see chart at the bottom of this post).
On the first chart, services and good sectors contributions are low and will remain low as far as economic prospects in the Euro Area de not improve strongly.
With low pressure from the global outlook and from the weak economic situation in the Euro Area, inflation rate will remain low, well below the ECB commitment.
Economic recovery in the United States came from internal private demand. Deleveraging was key for households but they continue to consume. Companies have increased their investments. Each was able to adjust its behavior and dynamic in a changing framework. US government has helped these adjustments by allowing a large budget deficit, much larger than in the Euro Area.
Taking these two elements, consumption and investment, internal private demand has grown by 2.6% from the trough of Q2 2009 to Q1 2013 the last quarter available. To illustrate this issue the chart below shows the private internal demand trajectory. It has been rebased at 100 during the first half of 2008 before the Lehman Brother bankruptcy.
On the chart and for a purpose of comparison I’ve also shown private internal demand in the Euro area. Continue reading
Month after month the Spanish labor market is becoming more and more unbalanced. The number of unemployed is 6 million but the most frightening figure is that the proportion of unemployed with a duration above 2 years is 35.1% (first quarter of 2013). It is by far the largest proportion on the chart below. As new flows (less than 6 months) are high but stable the proportion of unemployed with long duration will increase in the coming months by transfer from other categories.
To have a comparison with France which has also a high level of unemployment, the duration of unemployed for more than one year was 58.5% in Spain during the first quarter of 2013. It was 39.9 % in France in March 2013. Continue reading
This morning in the United Kingdom the good surprise was the higher than expected growth figure. During the first quarter, GDP was up by 1.2% at annual rate and by 0.6% compared to the first quarter of 2012. Carry over growth for 2013 at the end of the first quarter is between 0.4 and 0.5%.
(To be more precise: GDP figures are published with one decimal. It was 103.2 in Q1 2012 and 103.6 in the first quarter of 2013. This makes 0.4% quarterly change and 1.6 at annual rate. But the official numbers are 0.3 and 1.2%. Published level numbers lack of precision to match official numbers)
The IFO index was lower in April. Its level was 104.4 versus 106.7 in March and a local peak at 107.4 in February. April index is below the first quarter average was 106.1 but above the IFO historical average (100.9). There is no downside break but the momentum is weaker with uncertainties for the near future.
On the first chart the IFO new trend is consistent with the ZEW and PMI lines. Both have recently changed direction; in March for the PMI and in April for the ZEW.
We can imagine that the improvement seen at the end of last year was consistent with what was seen in Asia. As it is mentioned on this blog there was a better outlook in China since last fall and a contagion to other Asian countries. The first April survey in China has shown a weaker picture and that’s probably one reason of the new trend seen in Germany.
On the second chart expectations for sectorial sector indices are shown. The recent improvement came from construction and manufacturing. For both sectors the trend has reversed. As I did not understand the construction upside profile I’m not surprise by its new trend. On manufacturing the issue is probably related to Asia as I mentioned it above.
Concerning the current situation index (third chart) figures are usually lower but the width of change is limited compared to expectations.
IFO index reflects a lower level of activity. We have to be attentive to the manufacturing sector as it is an important engine for German growth and as it gives informations on the global economy.
The risk of recession is still low but the ECB could reduce this risk at its next meeting by lowering interest rates and having a message saying that monetary policy will remain accommodative for a long time period in order to change investors and companies’ expectations.
Surveys that have been published on Tuesday suggest that there is no more improvement in the data in the USA and in China and that economic activity is still shrinking rapidly in the Euro Area. None of these 3 large countries or regions seems to be able to take in charge the global economic prospect.
The United States used to play this role in the past helping the world economy to converge to a stronger trajectory. It’s no longer the case as the United-States are not able to grow rapidly and strongly for a long period of time. In China rebalancing the growth process in favor of consumption is long and costly. This has changed the Chinese role and impact on the world economy. We see in Tuesday’s publications that data in this two countries are still choppy and do not show in clear direction.
In the Euro Area the recession is still there, that’s the message from the data. The issue is that there is no external relay and as internal demand stays weak there is no possibility for growth. Data in April show that there is no real source of improvement. Specifically in Germany surveys’ results suggest that the end of 2012 acceleration is over and that impetus from outside is now weaker as new export orders are currently decreasing. In France, the PMI/Markit survey is marginally improving but the INSEE business cycle index is at its lowest since August 2009. The economic prospect is still very fragile in the Euro Area.
This situation will not create an incentive to change already accommodative monetary policies. This kind of data will not urge the Federal Reserve to stop its financial assets purchases. In the Euro Area we can expect that Jôrg Asmussen from the ECB will follow the line he gave last week-end. According to this line of conduct the ECB could reduce its interest rates in case of negative shock. The very weak situation in Germany and for the whole Euro Area is of this nature. We expect that the ECB will say that its interest rates will remain low for a very long time period. Nobody can imagine that they will rapidly change their mind on monetary strategy but by saying that they can change and monitor expectations to improve Euro competitiveness.
A report from the European Commission suggests that France (see here ) has lost a large part of its capacity to react and to adapt its behavior to an adverse environment. In other words, when the situation changes rapidly the French economy is not able to give an efficient and immediate answer.
This means that even if the global environment is getting better, the French economy will not be able to take advantage of it by adapting its behavior. This reflects a lack of competitiveness and a productivity that is growing at a pace that is too slow.
Competitiveness issue can be seen on the first chart. External balance is negative since 2005 with a deepening from 2008 on. The problem is not that it is between 2 or 3 % of GDP, it comes from the fact that it is in this range every year since 2008. In other words, exports are not competitive enough to balance imports. We have to keep in mind that the main reason for exports is to buy what cannot produce by domestic companies. If it’s not manageable then it means that exports lacks of competitiveness (the difference between cost and non cost competitiveness comes after).
Productivity is on a downside trend as it can be seen on the second chart. I’ve taken 5 year growth in order to limit short term volatility. In Q4 2012, the last point available, trend productivity growth is 0%. It’s important as productivity growth will create a surplus that will make extra revenues for employees and for shareholders. If productivity growth is zero there is nothing else to share. Productivity will grow through productive investment. On chart 3 we see that investment is not strong, still lower in level than before the crisis. The lack of investment cannot reverse downside productivity trend.