Europe’s GDP numbers have just been released today and they are miserable. They show the Netherlands and France in recession along with the rest of the periphery. And even outside the euro zone, we got some pretty dire numbers out of the Czech Republic as well. A: What’s going on? and B: why I am still bullish despite this?
Since this is supposed to be one of those daily short commentaries, I am not going to get into a long-winded piece on the ins and outs of austerity. Suffice it to say that the problem is that fiscal multipliers are higher than one when private debt is high. In the periphery and also in France and the Netherlands, there is generally high levels of private debt. Italy is one notable exception here. So when the public sector imposes austerity, the result is debt distress in the private sector and a concomitant cut in private spending in order to continue to be able to pay down private debts.
There really are only four options when austerity is imposed by cutting spending or increasing taxes: default in the private sector, private savings reduction, external sector surpluses or private sector spending cuts. What I have been saying here at Credit Writedowns is that austerity produces debt deflation by exposing a highly indebted private sector to debt distress that ultimately reduces private spending, increases defaults, reduces bank capital and credit supply and has knock-on effects in reducing asset prices, which furthers the whole downward cycle.
So the euro zone numbers are telling us that the austerity has been too great and that the European private sector needs some relief. I think we will get it as the relaxed austerity timetables are telling us. And so that means the economic outlook is not quite as dire as some would have you believe. At the same time in Greece, not only do I believe the debt deflation has largely played out but the ratings agencies are upgrading the debt, targets are being met and exceeded and bond yields are plummeting. This is a virtuous circle that makes me bullish on Greece in particular. I am only bullish on EUropean equities to the degree that they are undervalued vis-a-vis North American ones. But the fiscal drag caps any upside. And I do not expect the ECB to come to the rescue.
So, yes, Europe is in recession but I believe Greece at least has hit bottom and is poised to join Ireland as the only periphery countries moving into the recovery phase.
All economic data links below except Canada
Statistik : Familien in Deutschland jetzt in der Minderheit – Nachrichten Politik – Deutschland – DIE WELT
There are now more seniors living alone and singles in Germany than there are families. That tells you how powerful the demographics are in that country.
Eurozone recession extends to record as Germany cools | Economy | News | Financial Post
“Gross domestic product in the 17-nation eurozone fell 0.2% after a 0.6% decline in the previous quarter, the European Union’s statistics office in Luxembourg said today. The median of 39 estimates in a Bloomberg News survey was for a 0.1% contraction. From a year earlier, the economy shrank 1%.
The slowdown has spread to the euro core. The German economy, Europe’s largest, expanded less than forecast in the first quarter. France slipped into a recession and Italy’s contraction exceeded estimates. “
My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike? – Liberty Street Economics
“Overall, our analysis suggests that the payroll tax cut during 2011-12 led to a substantial increase in consumer spending and facilitated the consumer deleveraging process. Based on consumers’ responses to our recent survey, expiration of the tax cuts is likely to lead to a substantial reduction in spending as well as contribute to a slowdown or possibly a reversal in the paydown of consumer debt. These effects are also likely to be heterogeneous, with groups that are more credit and liquidity constrained more likely to be adversely affected. Such nuances may be lost in the aggregate macroeconomic statistics, but they’re important for policymakers to consider as they debate fiscal policy.”
Farmland Price Boom Continues, but Pace Moderates – Real Time Economics – WSJ
“Farmland values in parts of the U.S. Great Plains and the Rocky Mountains continued to rise in the first quarter, but at a more moderate pace, as higher costs and falling commodity prices slowed farm income growth, the Kansas City Federal Reserve Bank said Wednesday.
Reuters
The value of non-irrigated farmland rose 19% above year-earlier levels, with the biggest rise coming in portions of Missouri, the bank said in a quarterly report. That put the bank’s farmland survey at record levels for the first quarter as a boom in farmland prices continued, fueled in recent years by low interest rates and a record run-up in commodity prices.”
Czech GDP: it gets worse | beyondbrics
“The Czech Republic is in a terrible downturn that shows no sign of coming to an end with new flash GDP data showing a first quarter annual contraction of 1.9 per cent, much worse than analysts had predicted and the Czech economy’s worst performance since the depths of the first wave of the crisis in 2009.
The bad news is largely a result of continuing difficulties in exports, dragged down by the ongoing slump in the eurozone. Domestic consumption is doing slightly better after the government pulled back from its fierce austerity programme, a controversial policy that is one of the reasons why Czechs have suffered a deeper downturn than their Polish and Slovak neighbours.”
Nederland blijft in recessie – De Standaard
The Netherlands remains in recession with the economy shrinking by 0.1% in Q1 2013.
Economists Cut China Forecasts – WSJ.com
“Many economists are cutting their forecasts for China’s economic growth this year after a fourth month of disappointing data prompted fresh looks.
At the start of 2013, investment-bank economists had high hopes a rebound at the end of last year would gather more steam. A Wall Street Journal survey of 18 economists late last year showed the median forecast for growth in 2013 at 8%, up from the 7.8% rise China’s economy posted last year.
But a new survey of 12 economists this week showed that the median forecast has since fallen to 7.8%.”
China premier says little room for policy stimulus: media | Reuters
“China has limited room to use government spending and policy stimulus to boost its economy, China Premier Li Keqiang was quoted as saying on Wednesday, dashing hopes among some investors that Beijing may take steps to foster growth.”
Finanzmarkt: Unklare Schulden-Wachstum-Kausalität – Börsen & Märkte Nachrichten – NZZ.ch
Swiss-German article that references me, Yves Smith and Gavyn Davies regarding the debate around austerity. The quote associated with me says that I am more concerned with private debt here and I think that is true. The real problem has been private debt and the public debt increases are the result of loss socialization that is now unsustainable, a major reason we have turned to bail-ins.
Greek yields fall sharply after Fitch upgrade – FT.com
“many economists and investors say Greece will again have to restructure its debts, which Fitch estimates will hit 180 per cent of gross domestic product in 2013-14.
“Public debt sustainability is still far from assured and will be dependent on economic recovery and a sustained primary fiscal surplus,” the rating agency said on Tuesday.
But the burden of any more debt reductions is expected to fall more heavily on the eurozone’s official sector than on private investors, who represent only 15 per cent of Greece’s debt burden.
“Barring a Greek exit from the euro, Fitch could envisage official creditors bearing the brunt of any future default, albeit the political considerations of any such move may not be straightforward,” the agency said.”
ekathimerini.com | Greek bond yields fall to lowest since June 2010 in wake of Fitch upgrade
” Ten-year Greek government bond yields tumbled on Wednesday, one day after Fitch Ratings upgraded the country’s sovereign credit ratings.
Fitch raised Greece’s rating to B-minus from CCC citing a rebalancing of the economy and progress in eliminating its fiscal and current account deficits that have reduced its risk of a euro zone exit.
Ten-year Greek government bond yields fell 89 basis points to 8.47 percent – their lowest since June 2010. Greece restructured its debt in March 2012.”
ekathimerini.com | Greek economy shrank by 5.3% in Q1 of 2013 as recession continues
“Greece’s economic output fell by 5.3 percent in the first quarter of 2013, compared to a year earlier, according to figures published the Hellenic Statistical Authority on Wednesday.
The Greek economy, which has been in recession since 2008, is expected to shrink by about 4.5 percent of GDP this year.”
How the Case for Austerity Has Crumbled by Paul Krugman | The New York Review of Books
“Reinhart-Rogoff may have had more immediate influence on public debate than any previous paper in the history of economics. The 90 percent claim was cited as the decisive argument for austerity by figures ranging from Paul Ryan, the former vice-presidential candidate who chairs the House budget committee, to Olli Rehn, the top economic official at the European Commission, to the editorial board of The Washington Post. So the revelation that the supposed 90 percent threshold was an artifact of programming mistakes, data omissions, and peculiar statistical techniques suddenly made a remarkable number of prominent people look foolish.
The real mystery, however, was why Reinhart-Rogoff was ever taken seriously, let alone canonized, in the first place. Right from the beginning, critics raised strong concerns about the paper’s methodology and conclusions, concerns that should have been enough to give everyone pause.”
There is no sovereign debt crisis in Europe | MacroScope
“Why has the crisis become conflated with a government debt problem in the public imagination? According to Blythe, this is a convenient way for Wall Street to again saddle the state with massive banking sector losses.
The cost of bailing, recapitalizing, and otherwise saving the global banking system has been, depending on how you count it, between 3 and 13 trillion dollars. Most of that ended up on the balance sheets of governments as they absorb the costs of the bust, which is why we mistakenly call this a sovereign debt crisis when in fact it is a transmuted and well-camouflaged banking crisis.”
Federal deficit shrinks at surprising rate – latimes.com
“The deficit projection for this year — $642 billion — is almost 25% less than the deficit the budget office had forecast as recently as February. At the new level, the annual deficit would be back to where it was before President Obama took office. It would continue to fall for the rest of Obama’s tenure, the budget office now projects. By contrast, the deficit for fiscal year 2012 came in at just over $1 trillion.”
Dutch Treat: Holland’s labor market reforms create exceptionally low unemployment
Just a few years ago, you saw a lot of articles like this praising the Dutch jobs miracle, asking what the US could do to emulate the Dutch. But high private debt and austerity have crushed that miracle as the unemployment rate skyrockets.
Werkloosheid loopt verder op – NOS Nieuws
Dutch unemployment rose to 8.2%, marking the 11th straight month of increase.
Italy recession becomes longest on record as GDP slumps | Reuters
“Italy’s economy shrank by more than expected in the first quarter, extending the country’s recession to seven straight quarters and making it the longest since quarterly records began in 1970.
Gross domestic product fell 0.5 percent following a 0.9 contraction in the fourth quarter of last year and contracted 2.3 percent on an annual basis, national statistics bureau ISTAT reported on Wednesday.”
Europe’s sinking economy
Europe’s GDP numbers have just been released today and they are miserable. They show the Netherlands and France in recession along with the rest of the periphery. And even outside the euro zone, we got some pretty dire numbers out of the Czech Republic as well. A: What’s going on? and B: why I am still bullish despite this?
Since this is supposed to be one of those daily short commentaries, I am not going to get into a long-winded piece on the ins and outs of austerity. Suffice it to say that the problem is that fiscal multipliers are higher than one when private debt is high. In the periphery and also in France and the Netherlands, there is generally high levels of private debt. Italy is one notable exception here. So when the public sector imposes austerity, the result is debt distress in the private sector and a concomitant cut in private spending in order to continue to be able to pay down private debts.
There really are only four options when austerity is imposed by cutting spending or increasing taxes: default in the private sector, private savings reduction, external sector surpluses or private sector spending cuts. What I have been saying here at Credit Writedowns is that austerity produces debt deflation by exposing a highly indebted private sector to debt distress that ultimately reduces private spending, increases defaults, reduces bank capital and credit supply and has knock-on effects in reducing asset prices, which furthers the whole downward cycle.
So the euro zone numbers are telling us that the austerity has been too great and that the European private sector needs some relief. I think we will get it as the relaxed austerity timetables are telling us. And so that means the economic outlook is not quite as dire as some would have you believe. At the same time in Greece, not only do I believe the debt deflation has largely played out but the ratings agencies are upgrading the debt, targets are being met and exceeded and bond yields are plummeting. This is a virtuous circle that makes me bullish on Greece in particular. I am only bullish on EUropean equities to the degree that they are undervalued vis-a-vis North American ones. But the fiscal drag caps any upside. And I do not expect the ECB to come to the rescue.
So, yes, Europe is in recession but I believe Greece at least has hit bottom and is poised to join Ireland as the only periphery countries moving into the recovery phase.
All economic data links below except Canada
Statistik : Familien in Deutschland jetzt in der Minderheit – Nachrichten Politik – Deutschland – DIE WELT
There are now more seniors living alone and singles in Germany than there are families. That tells you how powerful the demographics are in that country.
Eurozone recession extends to record as Germany cools | Economy | News | Financial Post
“Gross domestic product in the 17-nation eurozone fell 0.2% after a 0.6% decline in the previous quarter, the European Union’s statistics office in Luxembourg said today. The median of 39 estimates in a Bloomberg News survey was for a 0.1% contraction. From a year earlier, the economy shrank 1%.
The slowdown has spread to the euro core. The German economy, Europe’s largest, expanded less than forecast in the first quarter. France slipped into a recession and Italy’s contraction exceeded estimates. “
My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike? – Liberty Street Economics
“Overall, our analysis suggests that the payroll tax cut during 2011-12 led to a substantial increase in consumer spending and facilitated the consumer deleveraging process. Based on consumers’ responses to our recent survey, expiration of the tax cuts is likely to lead to a substantial reduction in spending as well as contribute to a slowdown or possibly a reversal in the paydown of consumer debt. These effects are also likely to be heterogeneous, with groups that are more credit and liquidity constrained more likely to be adversely affected. Such nuances may be lost in the aggregate macroeconomic statistics, but they’re important for policymakers to consider as they debate fiscal policy.”
Farmland Price Boom Continues, but Pace Moderates – Real Time Economics – WSJ
“Farmland values in parts of the U.S. Great Plains and the Rocky Mountains continued to rise in the first quarter, but at a more moderate pace, as higher costs and falling commodity prices slowed farm income growth, the Kansas City Federal Reserve Bank said Wednesday.
Reuters
The value of non-irrigated farmland rose 19% above year-earlier levels, with the biggest rise coming in portions of Missouri, the bank said in a quarterly report. That put the bank’s farmland survey at record levels for the first quarter as a boom in farmland prices continued, fueled in recent years by low interest rates and a record run-up in commodity prices.”
Czech GDP: it gets worse | beyondbrics
“The Czech Republic is in a terrible downturn that shows no sign of coming to an end with new flash GDP data showing a first quarter annual contraction of 1.9 per cent, much worse than analysts had predicted and the Czech economy’s worst performance since the depths of the first wave of the crisis in 2009.
The bad news is largely a result of continuing difficulties in exports, dragged down by the ongoing slump in the eurozone. Domestic consumption is doing slightly better after the government pulled back from its fierce austerity programme, a controversial policy that is one of the reasons why Czechs have suffered a deeper downturn than their Polish and Slovak neighbours.”
Nederland blijft in recessie – De Standaard
The Netherlands remains in recession with the economy shrinking by 0.1% in Q1 2013.
Economists Cut China Forecasts – WSJ.com
“Many economists are cutting their forecasts for China’s economic growth this year after a fourth month of disappointing data prompted fresh looks.
At the start of 2013, investment-bank economists had high hopes a rebound at the end of last year would gather more steam. A Wall Street Journal survey of 18 economists late last year showed the median forecast for growth in 2013 at 8%, up from the 7.8% rise China’s economy posted last year.
But a new survey of 12 economists this week showed that the median forecast has since fallen to 7.8%.”
China premier says little room for policy stimulus: media | Reuters
“China has limited room to use government spending and policy stimulus to boost its economy, China Premier Li Keqiang was quoted as saying on Wednesday, dashing hopes among some investors that Beijing may take steps to foster growth.”
Finanzmarkt: Unklare Schulden-Wachstum-Kausalität – Börsen & Märkte Nachrichten – NZZ.ch
Swiss-German article that references me, Yves Smith and Gavyn Davies regarding the debate around austerity. The quote associated with me says that I am more concerned with private debt here and I think that is true. The real problem has been private debt and the public debt increases are the result of loss socialization that is now unsustainable, a major reason we have turned to bail-ins.
Greek yields fall sharply after Fitch upgrade – FT.com
“many economists and investors say Greece will again have to restructure its debts, which Fitch estimates will hit 180 per cent of gross domestic product in 2013-14.
“Public debt sustainability is still far from assured and will be dependent on economic recovery and a sustained primary fiscal surplus,” the rating agency said on Tuesday.
But the burden of any more debt reductions is expected to fall more heavily on the eurozone’s official sector than on private investors, who represent only 15 per cent of Greece’s debt burden.
“Barring a Greek exit from the euro, Fitch could envisage official creditors bearing the brunt of any future default, albeit the political considerations of any such move may not be straightforward,” the agency said.”
ekathimerini.com | Greek bond yields fall to lowest since June 2010 in wake of Fitch upgrade
” Ten-year Greek government bond yields tumbled on Wednesday, one day after Fitch Ratings upgraded the country’s sovereign credit ratings.
Fitch raised Greece’s rating to B-minus from CCC citing a rebalancing of the economy and progress in eliminating its fiscal and current account deficits that have reduced its risk of a euro zone exit.
Ten-year Greek government bond yields fell 89 basis points to 8.47 percent – their lowest since June 2010. Greece restructured its debt in March 2012.”
ekathimerini.com | Greek economy shrank by 5.3% in Q1 of 2013 as recession continues
“Greece’s economic output fell by 5.3 percent in the first quarter of 2013, compared to a year earlier, according to figures published the Hellenic Statistical Authority on Wednesday.
The Greek economy, which has been in recession since 2008, is expected to shrink by about 4.5 percent of GDP this year.”
How the Case for Austerity Has Crumbled by Paul Krugman | The New York Review of Books
“Reinhart-Rogoff may have had more immediate influence on public debate than any previous paper in the history of economics. The 90 percent claim was cited as the decisive argument for austerity by figures ranging from Paul Ryan, the former vice-presidential candidate who chairs the House budget committee, to Olli Rehn, the top economic official at the European Commission, to the editorial board of The Washington Post. So the revelation that the supposed 90 percent threshold was an artifact of programming mistakes, data omissions, and peculiar statistical techniques suddenly made a remarkable number of prominent people look foolish.
The real mystery, however, was why Reinhart-Rogoff was ever taken seriously, let alone canonized, in the first place. Right from the beginning, critics raised strong concerns about the paper’s methodology and conclusions, concerns that should have been enough to give everyone pause.”
There is no sovereign debt crisis in Europe | MacroScope
“Why has the crisis become conflated with a government debt problem in the public imagination? According to Blythe, this is a convenient way for Wall Street to again saddle the state with massive banking sector losses.
The cost of bailing, recapitalizing, and otherwise saving the global banking system has been, depending on how you count it, between 3 and 13 trillion dollars. Most of that ended up on the balance sheets of governments as they absorb the costs of the bust, which is why we mistakenly call this a sovereign debt crisis when in fact it is a transmuted and well-camouflaged banking crisis.”
Federal deficit shrinks at surprising rate – latimes.com
“The deficit projection for this year — $642 billion — is almost 25% less than the deficit the budget office had forecast as recently as February. At the new level, the annual deficit would be back to where it was before President Obama took office. It would continue to fall for the rest of Obama’s tenure, the budget office now projects. By contrast, the deficit for fiscal year 2012 came in at just over $1 trillion.”
Dutch Treat: Holland’s labor market reforms create exceptionally low unemployment
Just a few years ago, you saw a lot of articles like this praising the Dutch jobs miracle, asking what the US could do to emulate the Dutch. But high private debt and austerity have crushed that miracle as the unemployment rate skyrockets.
Werkloosheid loopt verder op – NOS Nieuws
Dutch unemployment rose to 8.2%, marking the 11th straight month of increase.
Italy recession becomes longest on record as GDP slumps | Reuters
“Italy’s economy shrank by more than expected in the first quarter, extending the country’s recession to seven straight quarters and making it the longest since quarterly records began in 1970.
Gross domestic product fell 0.5 percent following a 0.9 contraction in the fourth quarter of last year and contracted 2.3 percent on an annual basis, national statistics bureau ISTAT reported on Wednesday.”