Spain's Economic Slowdown December 2007

Retail sales across the entire 13-nation euro region fell in November according to eurostat data released yesterday, dropping by 0.7 per cent from October to a level which is just 0.2 per cent higher than the Novemeber 2006 one. Of course this average hides considerable variance, with the weakest performances coming from Germany, Italy and Belgium.

But of particulr of note is the performance of retail sales in Spain (the zones 4th largest economy) since strong growth in Spain has previously offset weaknesses in Germany and Italy at previous critical junctures. But this time it will be different, since Spanish retail sales have fallen in both October and November, and while the year on year readings are still in positive territory, they will not remain there for long since the earlier strong readings will eventually drop out of the data.




And since the spring the story in both services and manufacturing has been one of one long and sustained declined, as the data from the monthly Bloomberg/NTC Purchasing Manager Indexes reveal.



Meanwhile the consumer confidence index prepared by the Instituto de Credito Oficial continues to plummet the depths, registering at 76.1 in November a historic low for the third consecutive month.



This drop in confidence is also reflected in the data for new mortgages issued (latest data still only September unfortunately), where the slowdown is clear if you compare the numbers for 2007 with those for 2006 (and especially since the spring, although my feeling is that when we get numbers for October and November we will see the slowdown accelerating, as buildings contracted in 2006 reach competion. Of course we should remember that those buildings and flats sold on the basis of architects plans in June and July - ie prior to the August sub-prime "bust" - will still be giving work until next summer, even if the would be purchasers may be increasingly looking for an "escape clause" as property prices steadily decline).



If we turn to the emplyment sub component of the Spanish index we will see that the outlook has changed dramatically in the last three months.



and the underlying situation again becomes clear if we look at the unemployment numbers, where a comparison between 2006 and 2007 is again revealing. We can see that in the early months of this year the employment situation was up over 2006. Then the situation turned (around July), and since then it is "down hill all the way" unfortunately.

Tough Times at the ECB

by Claus Vistesen

cross posted from Alpha Sources



I have, at times, levied quite an extensive critique towards the ECB at this space since I have felt and indeed feel that the current campaign which so far has taken the ECB up and upwards with respect to interest rates has been too scarcely tuned in to the economic fundamentals present in many Eurozone countries. Of course, at this point in time the ECB has been caught up by current events as the general market turmoil has forced the bank to hold rates as well as actually providing liquidity to an otherwise almost Vermouth dry interbank lending market. However, when we look forward to this Thursday's interest rate meeting we must also consider the real and essentially nasty bind which the ECB faces.
In this way and following my last remarks in the context of an ECB meeting downside risks to growth and the general workings of financial markets are plenty which is ultimately also why the ECB has been forced to scrap what was otherwise judged (although not by the author of this blog) to be a sure final refi level of 4.5% at the end of 2007 in the Eurozone. Yet, the ECB is fast running into what essentially must constitute something of a brick wall with the recent rather violent surge in Eurozone wide inflation. The readings for September was for a hefty 2.6% increase in the HICP well above the 2% target and with the recent flash estimate from Eurostat suggesting a 3% inflation increase the ECB is indeed stuck in quite a bind. As reported by Bloomberg ...
European inflation accelerated in November to the fastest in more than six years, adding pressure on the European Central Bank to raise interest rates even as economic expansion cools. The inflation rate in the 13-nation euro area rose to 3 percent this month from 2.6 percent in October, the European Union's statistics office in Luxembourg said today. An index of executive and consumer sentiment fell to a 20-month low of 104.8 from 106 in October, according to a separate report. A 75 percent surge in oil prices since mid-January and rising food prices are driving inflation further above the ECB's 2 percent ceiling. At the same time, easing economic growth may restrain ECB policy makers from increasing interest rates to slow the pace of price increases.
Of course, economic convention is not entirely without tools to address such situations. At least we need to remember that there are many kinds of inflation and at this point in time we need to ask ourselves whether the rather stark increase is driven by demand-pull or cost-push factors? Clearly, this should not make us deviate from the main point but it does serve as a nice qualifier I think as we are bound to move into a territory where decisions either way from the median will be watched and scrutinised closely. One example I do feel the need to point out is the following from Stefan Karlsson who, I should immediately say, regard as a fine economic commentator.
Yet despite this surge in both monetary and price inflation, the ECB betrays its legal obligation to hold M3 growth at 4.5% and consumer price inflation below 2% by failing to raise interest rates and by offering "emergency loans" to failed investors.
Now, I want to reiterate that I don't think complacency is ever warranted when it comes inflation but we also need to remember that the world is a bit more complicated than just raising rates until some essentially arbitrary targets are within line. In fact; I would argue with some force that traditional instrument rules for monetary policy in the current environment should be treated with some care. As such, we need to consider the point that raising rates actually might be counterproductive to reigning in monetary growth since in a world where capital flows are driven increasingly more (at least on the margin) by moves in nominal interest differentials which essentially are very wide at the present time raising rates will only exacerbate the pressure. Quite simply, there is a lot of liquidity out there and anybody signalling to reign in monetary supply growth by raising rates will only end up pulling even more money in on the short end of the yield curve. At least, I think we need to consider these kind of dynamics and once we are letting ourselves ask some of the right questions we will see, I think, that a whole gamut of issues are present which makes that ever so famous conventional wisdom rather ill-equipped to handle the situation. Furthermore, and in the immediate context of the Eurozone and the current financial market turmoil I don't think that we should, for one minute, let ourselves loose sight of what is going on in in the interbank market. Edward and Eurointelligence recently had some fresh reports on the standing on this topic. Now, a lot of things can be said about this but the most important thing is that the conditions in the interbank market essentially is a proxy for much tighter credit and liquidity conditions than is otherwise alluded from the HICP and corresponding refi rate stance of 4%.
So, what will it be on Thursday then?
Well, and despite that pretty nasty HICP reading from October I see a holding operation as does the majority of other economic commentators. However, and this is also where I ultimately agree with Karlsson inflation is becoming a serious concern at these levels and as such it will be very interesting to see how Trichet narrates the situation. One surprise here could be for Trichet to signal an imminent raise from the start of 2008 but I see this as rather improbable at the moment with the economic momentum destined to head south. Rather, I expect citation of the ongoing financial market turmoil as a reason to stay put which will be a continuation of the current wait and see approach adopted by the ECB. As for the general market implications the coming week will be an interesting one indeed. Not only is the ECB meeting but also the Bank of England, the Bank of Canada, the Royal Bank of New Zealand, and the Royal Bank of Australia are meeting to decide on interest rates. Of these meetings the one at BOE is the most interesting one since it remains unclear whether the BOE will actually lower rates or merely stay on hold. As for the ever recurring debate on the EUR/USD it started off this morning at shy just of 1.47 flat and although of course the ECB meeting and the chosen discourse will have an important impact it is widely held that Friday's nonfarm payrolls will have a major impact on the Fed decision come next week. So saddle up for what undoubtedly will be an interesting week. For the record the consensus has it that all central bank meetings above will see holding operations with the dark horse being the one at the BOE.

Old Maid Continues as Europe's Great Men go to China

by Claus Vistesen

cross posted from Alpha Sources


Not too long ago as I was finding my self in my creative corner as I quoted the Stereophonics song Pass the Buck as a metaphor for what was going on at the moment in global financial markets. At the time I was also scouring my mind and, as it were, the internet for a the name of shedding card game where it set piece is to relinquish yourself from all the cards and then to avoid remaining with the 'old maid.' You see, it appears that the old maid is a fitting metaphor for what at the moment seems to be a global game being played about not ending up being stuck with the Dollar. Yet, as practitioners of the dismal science no doubt will be at pains to point out we need both pairs of those scissors. As such and while everybody can agree, at least based on economic logic alone, that the Dollar must fall which indeed is has been it is a little bit more tricky when it comes to the flip side. In this way, we need to understand that when you sell USD (or USD denominated assets) you buy something else which in this case could be foreign denominated assets or domestic assets where the latter would signify that you own currency appreciates. Of course this is all things equal and all and especially the general growth in the monetary supply must be taking into account but still I think it is fair to say the fall in demand for USD denominated assets has to be matched by a corresponding increase in demand for assets denominated in other currencies from other regions of the world. This would then bring us back to those scissors of Marshall's since where is indeed the supply and where is the yield?
Ultimately, I have a strong belief that economic fundamentals will solve such global games of old maid and I even have a pretty good reason as to what kind of fundamentals to look out for. However so far, the game is played and apart from the USD starring it could also seem as if a derivative of the old maid would be who in fact must step up to take the role for the USD as the structure of Bretton Woods II is ground down. Here of course, it will soon (i.e. after my exams) be time to re-visit old arguments but for now I will merely note that I always saw the current structure as very strong and fragile at the same time. It was/is very strong quite simply because de-coupling/re-balancing in the traditional sense where Europe and Japan ascends to take over the throne of the US would be virtually impossible. The fragile nature then comes in as an immediate consequence of this since if Europe and Japan cannot step up to the task who can and indeed will? As I say, fundamentals will tend to drive this and no-doubt the process of global re-coupling whereby the likes of India, Brazil, and Turkey takes over the clout of the US will materialize itself but a lot of glasses might end being shattered in the process. Ok, enough about that for now. Also, it clearly seems that my view of the fundamentals has not quite sunk in just yet epitomized by the very sharp decline of the USD against the Euro and the Yen. Of course this is only natural as an interim but the current process of shift in capital flows is beginning to bite. As such and turning back to my headline above the game continues as Europe sends an envoy to China in order to persuade Chinese authorities to do something about the Yuan/remninbi ...
Europe's finance chiefs arrived in Beijing today with the warning that China must let its currency strengthen against the euro or risk sparking a trade war. European Central Bank President Jean-Claude Trichet, Luxembourg Prime Minister Jean-Claude Juncker and European Union Monetary Affairs Commissioner Joaquin Almunia will argue that an undervalued yuan is ``triggering protectionist tendencies,'' according to a briefing document obtained by Bloomberg News.
The yuan rose to its strongest since a peg to the dollar was scrapped in July 2005 as Juncker told reporters in Beijing that the exchange rate will be the main topic of the two-day talks. European policy makers are pressing for the yuan to gain more versus the euro to curb a trade deficit with the world's fastest-growing major economy that's swelling by $20 million an hour.
Of course, the strong Euro relative to the Yuan is not exactly news straight in off the wire but in the light of the USD's recent slide it has clearly began to pinch. Especially the following kind of 're-balancing' is something which the Eurozone won't be able to muster for long ...
While the yuan has risen 5.7 percent against the dollar this year, it has dropped by about the same margin versus the euro. That leaves the Chinese currency undervalued in the eyes of European policy makers who blame it for inflating their trade deficit with China by $20 million an hour and helping to push the euro to an all-time high against the dollar.
On the other hand you can ask yourself what good all this will make. Quite obviously, and in light of Paulson's formidable strides, it may take many a trip from Frankfurt and Brussels to make China budge if at all. Meanwhile, the process continues as Brad Setser demonstrates in his recent post. Go see for the graphical version but the picture is pretty clear in words alone ...
I didn't’t use the term “sudden stop” in my post on the September TIC data release lightly. The attached graph -- which comes straight from the TIC data -- shows an extremely sharp fall in net purchases of US long-term financial assets over the last three months.
As a counterpart to this Setser cites a recent analysis from Danske Bank's Teis Knuthsen which shows that inflows with respect to the FDI and portfolio accounts into the Eurozone continue to increase on a rolling month basis. Also in annual terms the net inflow of portfolio investments reached an all time high. This is clearly the text book case for re-balancing/de-coupling in the traditional sense but do remember as an aside that the Eurozone is still running an overall external surplus on the trade balance which suggest an overall process of re-funnelling. In this respect, please do not miss the following seemingly trivial but very important data point as reported by Eurostat.
EU27 trade with most of its major partners grew, with the exception of exports to the USA (-2% in January-August 2007 compared with January-August 2006), and imports from Norway (-9%) and Russia (-5%). The largest increases were for exports to Russia (+29%), India (+22%), Brazil (+17%) and China (+15%), and for imports from China (+22%), Brazil and India (both +17%) and Turkey (+14%).
Now, this would be tantamount to re-coupling. More generally and while nobody can deny the facts as they are presented the very nature of the current shift is likely to present notable and difficult issues in the interim not least for the Eurozone and certain key members as well as of course those most strained economies in Eastern Europe. Ok, I will sign off for now. Of notable things that I missed out on in terms of commentary include Federal Reserve Vice Chairman Donald Kohn's statement today which has largely been interpreted that the Fed is going to cut once more this year. As always, I remain rather contrarian and believe it to be a holding operation but given the sharp rally in equities today I seem to be pretty alone on this position. Moreover, the tradeoff in the Eurozone facing the ECB is becoming crystal clear if it ever was anything else as inflation seems certain to pick up.
As a more general note I am entering exam periods now which means that I may be a bit more erratic than usual but I will try to keep up. Tomorrow (Thursday) is applied econometrics; wish me luck.