Macro Weekly – Falling into place

by: Han de Jong

Macro Weekly - 30 Jan 15 - Falling into place ()

Our, arguably, strongest non-consensus call for this year is positive growth surprises in the eurozone. Recent data seems to suggest that we are going to be right and it is likely that many forecasters will raise their growth forecasts for the eurozone in the months ahead. That is not to say that the eurozone economy will grow spectacularly.


A few days ago I attended a seminar where growth prospects for the eurozone was one of the topics of discussion. One of the presentations was made by an academic I have known for years. Let me be clear, I have nothing against academics, I have a lot of respect for them, but my impression is that the analysis of short-term business cycle developments is not necessarily their thing. I am not referring to my friend to slag him, but I think his views are similar to the views of many observers. So I am just using the discussion at the seminar as an example.

It is true, of course and as was argued at the seminar, Europe has performed very poorly in growth terms in recent years. Many fear that Europe is following Japan. The paper presented concluded that a significant increase in publicly financed infrastructure is the way to go. This is not exactly a new insight, the Juncker plan is all about infrastructure spending, though largely financed by private money.

It is hard, if not politically and intellectually incorrect to question the need for more infrastructure spending. In an effort to spur a bit of debate, I challenged the proposal with the following considerations. First, do the countries that have more growth, in particular the US and to a lesser extent the UK, have a much better infrastructure than the eurozone? The response was bewilderment.

Second, I asked if this isn’t exactly what Japan has tried. So the odd situation seems to be that we must try very hard not to follow the Japan scenario by pursuing the exact same policies Japan has tried. The response here was that Japan did stupid investment projects, building bridges to nowhere. We, on the other hand, are going to do really clever projects. That is a load of my mind!

Third, and more important, I suggested that the eurozone economy is actually likely to gain considerable momentum in the period ahead thanks to lower oil prices, a weaker currency, lower financing costs and the healing credit channel. The response was, once again, bewilderment and it was argued that economists have revised down growth forecasts for the eurozone consistently in recent years, why would it be different now.

As I said above, I have great respect for academics, but following analysing and forecasting short-term developments of the business cycle does not tend to be their speciality. When I look at recent data, I get very encouraged that the economy of the eurozone is showing accelerating growth and that process will get stronger as time passes for the reasons also mentioned above.

150130 - Weekly 1

This week saw a further improvement in business and general confidence. The European Commission’s gauge of ‘economic sentiment’ rose from 100.6 in December to 101.2 in January. More impressively, Germany’s authoritative Ifo index of business confidence registered its third consecutive improvement in January, reaching 106.7 after 105.5 in December. The ECB’s release of monetary trends also showed important improvements. M3 growth accelerated to 3.6% yoy in December, up from 3.1% in November and a low of 0.8% in April last year. The bank lending data is also improving with loans to the non-financial corporate sector registering a big plus on the month. This is consistent with the ECB’s bank lending survey which is showing that banks are easing lending criteria and reporting stronger demand for loans by corporates.

Spain released GDP data for Q4. Growth in that quarter exceeded expectations and amounted to 0.7% qoq and 2.0% yoy. For the full year, Spain’s economy has grown 1.4-1.5%. That is not much, but more than was expected. In its Winter 2014 forecast less than a year ago, the European Commission estimated Spain’s growth in 2014 to be 1.0%. Against a background of generally disappointing growth numbers internationally, Spain’s performance is clearly quite remarkable.

150130 - Weekly 2

On balance, I think all the pieces are falling into place to expect positive surprises regarding eurozone economic growth this year.

Syriza government

Following the elections in Greece a new coalition government was formed quickly. The radical tone struck by the new Prime Minister in the election campaign has many people worried that Alexis Tsipras is on a collision course with Europe. Perhaps he is. But a couple of points should be made. First, the Greek economy has started a recovery and, in my view, Tsipras would be very foolish to throw the economy back into chaos. Second, the Greeks have been subjected to unprecedented austerity in recent years. It can be no surprise that they are longing for something else. And with the recovery on its way and the government’s budget showing a substantial primary surplus, there should be some room for easing the austerity. Syriza made promises during the campaign which they can undoubtedly not all keep, but that is politics. Third, Greece’s debt is huge and it is hard to see how it can be sustainable at normal market conditions. It is in nobody’s interest, I think, to push the economy into a new downturn to try and squeeze some debt payments out of it. In fact, I think there is room for negotiation here, although all sides will use strong language beforehand. Fourth, but not least, Tsipras may be willing to try and implement some reform that Europe would welcome, such as broadening the tax base. That should make Europe eager to negotiate with him. Despite my optimism on how this will eventually pan out, one should expect volatility on the political scene, which may affect financial markets.

Fed still patient

The Federal Reserve believes it can still be patient normalising interest rates. The statement following the FOMC meeting recognised that economic growth in the US is picking up. The committee indicated that the first rate hike is still at least two meetings away, making June the earliest possibility for a rate hike. We believe that the tightening labour market will, indeed, push the Fed to raise rates in June and to follow that up with more hikes at a cautious pace of one rate hike every other meeting until the end of the year.

US Q4 GDP data fell a touch short of expectations. This was largely the result of a big negative contribution from international trade as imports were much stronger than exports. Corporate investment on equipment was also weak, which may be the result of energy companies cutting back on investment. Private consumption, on the other hand was very strong. On balance, however, the US recovery is progressing nicely.


No table due to technical problems