Eurozone contracts in second quarter – it’s official

August 15, 2008 | posted by Michael Baxter in Eurozone, French economy, Germany | comments (0) | Print This Post

At first glance it all seems rather alarming. The Eurozone was supposed to take up the fiery torch of economic growth, and run with it before once again setting the UK and US economies alight, this time with an export based recovery. At first this seemed to be happening, with a string of positive economic stories emerging earlier this year from the region – especially from Germany. But now, it is as if the one thing the Chinese dreaded the most as their Olympic torch travelled the world has happened, and the fire has gone out.

In the second quarter of this year the economies of Germany, France, Italy and Ireland all contracted. Spain managed to avoid contraction – but more and more are now predicting recession is imminent for the Spanish economy.

This was not supposed to happen. Sure, the Irish and Spanish economies suffered from an unsustainable housing boom and debt bubble, but most of the region was a paragon of prudent export and investment led growth. It had been a similar story in Japan, by the way. Savings are up, consumer spending modest, yet the economy of the Rising Sun has also suffered a contraction in GDP during the second quarter.

So how has it happened? Well in answering that question, we can at last reveal some good news.

Okay, Italy is a basket case. It seems likely the Italian economy will continue to lurch from one crisis to the next for the foreseeable future. Ireland and Spain are very Anglo Saxon in their economic challenges – both economies seem set to see a nasty fall in house prices which will spill over to the economy at large.

But closer examination of the big two, France and Germany, reveals a more promising story.

In the case of Germany, it appears growth was too high in the previous quarter – and we have just seen a reaction to this. Q1 saw the economy expand by a very impressive 1.3 per cent. The second quarter, on the other hand, contracted by 0.5 per cent, but remember this is quarter-on-quarter data. Combine the two quarters, then overall the growth rate was pretty respectable.

But the Eurozone suffered from an additional problem, and it was this that caused such turmoil in France. The Eurozone is struggling because the cost of living is rising fast. It seems the high cost of oil and food is really taking its toll on many Eurozone economies. At the same time, the European Central Bank (ECB) is the most hawk-like of all the world’s major central bankers. While the Fed has slashed rates, and the Bank of England has made soft noises about interest rates, the ECB and its president Jean-Claude Trichet have been swooping over the interest rates landscape like a hawk planning a feast of doves for its ravenous family.

It is true that, in addition to Ireland and Spain, house prices are too high in many Eurozone economies. Capital Economics recently predicted French house prices would fall by 10 per cent, but then again, the UK, Spain, Ireland and the US would love it if the prognosis for their own markets were that good.

Some have argued that the recent news of the Eurozone contraction is proof its central bank misread the situation, and that it should have taken a leaf out of the Fed’s book, and slashed rates.  But that is only true if you take a short-term view.

Surely the ECB, by focusing on inflation, is getting the pain over with more quickly. The recovery should be all the more rapid, as a result.

If you consider the reasons for the Eurozone slowdown, then it seems reasonable to assume that if oil and other commodity prices fall, then the economy will soon pick up. As was argued above, there are very good reasons for believing oil will fall. Food, too, is showing signs of dropping off.

But, even if commodity prices don’t fall, but instead merely stop rising, then because the ECB has been so tough with interest rates, it seems Eurozone inflation will go into reverse much sooner than in the US and UK; as a result, Eurozone interest rates will then be able to fall more rapidly.

And that is where the potential recovery can come from in the US and UK. Well, at least partially anyway. China, India, and Japan and the rest of Asia will play their part too. For Japan, the story is much the same as Europe. Just like Europe there are good reasons to believe the contraction will be short-lived. As for China, well it was told here earlier this week that there is strong evidence to suggest China is consuming more and importing more.

But there is a fly in the ointment. It often feels as if many economists have underestimated how serious the problems in the US and UK are.

The fact is, the US and UK are Germany’s second and third biggest customers. The US is Japan’s biggest customer. For France, neither the UK nor US are so important, but there must surely be a question mark on the prospects of a Eurozone recovery if these two big consumers of the world’s products hit the buffers.

It is now time to turn our attention to the two big economic developments yesterday which hit the two big Anglo Saxon economies.

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Recession threatens France and Japan

August 13, 2008 | posted by Michael Baxter in French economy, Japan | comments (0) | Print This Post

The Japanese economy contracted in the second quarter of this year, it’s official. The French economy may have contracted. If things don’t improve in the third quarter, then both economies will have experienced recession.

For the economy of the Rising Sun, GDP contracted by 0.6 per cent in the quarter, compared to the previous three-month period. Annual growth was 1 per cent.

It appears the Japanese consumer was the main the main culprit. Consumer spending contracted by 0.3 per cent. In Japan, just like everywhere else, affordability is being stretched. And in Japan, just like everywhere else, fears on jobs are so great that wages are not rising in tandem. As we have argued here many times, rising prices when wages are not moving up, could well be deflationary in the longer-term. (Consider how Mrs Thatcher fought inflation by upping VAT.)

But there is hope lurking in the Japanese figures. Another major contributor to the contraction was a one-off. Public spending reduced by 0.2 per cent. Capital economics reckons: “this may partly reflect a temporary halt to road building owing to a dispute over tolls.” The Japanese government though is planning a fiscal stimulus, so this will help in the next quarter. Taking this into account, Capital Economics was pretty sanguine about Japan. It said: “… is important to view the
fall in GDP in Q2 alongside the unsustainable strength in the previous two quarters and, above all, in the context of the surge in headline inflation. With global commodity prices now tumbling, this bad news is largely old news. The bigger picture is that the economy is still in relatively good shape compared to similar points in previous downturns. Japan has avoided the fundamental economic and financial imbalances now undermining so many Western economies, and is well-placed to benefit from the relative resilience of the rest of Asia including China.”

Yet, there is a fear. Japan’s net exports were flat in the quarter, they neither rose nor fell. This was a surprise, most economists had expected them to contract. As the US tax credit stops exerting an effect on US consumer spending, it seems there is good reason to believe Japanese exports will fall in the next quarter.

Twenty per cent of Japan’s exports go to the US, 15.4 per cent to China. So ultimately, Japan’s economic story for the rest of this year depends on whether the effect of the rise in Chinese consumer spending can make up for the fall in US spending.

As for France, recent data suggests France has been flirting with recession. June saw a 0.4 per cent fall in industrial production, taking the annual figure to a contraction of 1.6 per cent. Industrial production is an important part of the French economy – accounting for around 20 per cent of GDP, so that is a nasty blow for the French economy.

Meanwhile, the French consumer seems to be battening down the hatches. French consumer confidence is at a record low, French inflation is on the up, and French house prices seem vulnerable.

Capital Economics has predicted a 10 per cent fall in French house prices, and reckons the growth in French consumer spending will fall markedly.

But there is good news. For one thing, the government is boosting the economy with a 9bn euro tax boost, and while it is thought consumer spending growth will slow, it is still expected to remain positive.

France accounts for just under 8 per cent of Britain’s exports – so as long as French consumers increase spending while the pound stays weak against the euro, there is hope for at least some kind of export growth from the US to that country.

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Eurozone crawls to near standstill too, but at least the French put in the extra hours

July 25, 2008 | posted by Michael Baxter in Eurozone, French economy, Germany | comments (0) | Print This Post

And now to cap it all, Europe is in a mess again. But, at least headless Nick Sarkozy is getting something right.

Earlier this week Spain’s finance minister Pedro Solbes cut growth forecasts from 2.3 to 1.6 per cent for 2008. But with Spanish house prices falling even faster than its banks can buy up British banks, with Spain’s economy far more reliant on construction than most other economies, it seems likely this is just one of many cuts in forecasts to follow.

Meanwhile, the Eurozone PMI indices for manufacturing and services are now both getting into danger territory, with both below the critical 50 no-change mark for two months in a row. The manufacturing index dropped from 49.2 points in June to 47.5 in July and the services index 49.1 to 48.3.

The French composite PMI index now stands at a level which implies GDP will fall by 0.4 per cent. The German index is faring better, and is suggesting 0.2 per cent growth for Germany.

Meanwhile, the German ifo index reflects the business climate has been falling fast lately too. Both the ifo expectations and current conditions indices are at their lowest levels since the autumn of 2005, although it is worth pointing out the index has had something of a golden patch during this period, and is still above the historical trend.

But, in France, parliament has finally passed a law to scrap their 35-hour working week. This was of course one of the key reforms Mr Sarkozy has been gunning for.

It is a curious thing, but French productivity per hour is extraordinarily high. One possible explanation for this is that many French workers are understating how many hours they work. They know they can’t get their work done in 35 hours, so they are just putting in the extra time and not declaring it.

In the UK, the winner of the TV show the Apprentice won despite being caught out lying on his CV, and embellishing the truth. In France it appears they lie through understating the truth.

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Japan and Germany strike back with stunning performance

May 16, 2008 | posted by Michael Baxter in Eurozone, French economy, Germany, Japan | comments (0) | Print This Post

When the US sneezes the rest of the world catches a cold, or so they used to say.     More recently, the talk is that we have seen de-coupling, that the US is no longer so important.  It’s an important point, because if the de-couplers are right, global recession will be avoided, and there is scope for the US and little old UK to export their way out of trouble.  If they are wrong, however, then the global economy is about to get a double helping of influenza.

The last 24 hours have seen news break from Germany, Japan and France, and it’s dramatic indeed – and just for once the unfolding drama has a high feel-good factor.

In the first quarter of this year, Japan grew by a very impressive 0.8 per cent – not bad for an economy which is supposed to be in recession.   Earlier this year both Goldman Sachs and Morgan Stanley said Japan was either in, or about to hit, recession.  As for the government, well, unlike a certain government you and I are familiar with, rather than talk things up, Japan’s official estimates said the economy was at a standstill.    They were wrong, and isn’t nice to see the error on the down side?

But Japan’s performance was just for starters, the real meat was supplied by Germany.  For in the one of the few developed countries in the world where making things is still considered to be the way forward, quarterly growth was a stunning 1.5 per cent.  Let’s reiterate that – 1.5 per cent in just three months.  You would have to rewind the clock back 12 years to find the last time it expanded so fast.

Even in France, which itself was supposed to be growing at a pace which was barely above zero, growth came in at 0.6 per cent – impressive by normal standards, although rather tame in comparison to its bigger neighbour.

The Eurozone as a whole managed 0.7 per cent, and there is even talk that Italy – Europe’s basket case, expanded in the quarter – although the official data is not out yet.

As was reported here yesterday, Spain’s growth slowed quite rapidly, and with the country’s housing market on the ropes – if not on the canvas, Spain is set for a tough period. 

But let’s not  spoil the good news with dark thoughts about Spain.    The fact is that the economic performance seen in Germany and France vindicates the European Central Bank’s tough stance on inflation – but at the same times illustrates perfectly the problem with the euro – because Spain desperately needs rate cuts.

A break down for the Eurozone figures is not yet available, but according to the FT both investment and consumer spending in Germany rose significantly. 

France and Germany are Britain’s second and third biggest export markets, respectively.  Between them they account for 23 per cent of our exports, so a sharp re-bound in these two countries will help offset falls in the US, which makes up 13.1 per cent of our exports  Unfortunately, our fourth biggest export market is Ireland, which also is struggling under falling house prices.  (As an aside, it’s quite amazing, isn’t it, that in this globalised world, a country like Britain, with its free trade policy, finds its fourth biggest export market is Ireland, with a population of just 4.3 million.)

In Japan, domestic demand added 0.3 percentage points to the quarterly growth – that may not sound much, but for the economy of the Rising Sun that is pretty good.  Consumer spending jumped by an impressive 0.8 per cent.

Japan’s growth was also helped by surging exports – which isn’t quite so good for the rest of us.  Right now, we need Japan to import more – after all, last year her current account surplus was around $200bn, or around 6 per cent of GDP.

So, is there a grey cloud to this silver lining?     What Germany and Japan both have in common is that they are both big exporters.  A question mark still remains over whether these two economies can continue to expand as the US consumer pulls back. 

Last year, US imports were worth $1.8 trillion, that is to say, US consumers bought $1.8 trillion worth of foreign goods.  It will take time for a US slowdown to show up in German and Japanese trade figures.

The latest economic news, then, is very promising, but we need the consumers from these two countries to spend more.    We need these people to adopt something of an Anglo-Saxon approach to spending now, and worrying about it later.  Whether, however, that is in their interests, is another matter altogether.

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Kerviel shows lessons of promoting ‘mere’ bank clerks

February 13, 2008 | posted by Michael Baxter in French economy | comments (0) | Print This Post

According to a report on Bloomberg this morning, the Jerome Kerviel affair at Société Générale SA has just about done it for social equality in French banks.

Apparently, Mr Kerviel was not a graduate of one of the top French universities – rather he came from University of Lyon.

Worse, he started to work at the bank as a mere clerk.

Once bitten, twice shy – now it is thought that the French banks will return to their ways of only recruiting for the trading floor from the top university business schools.

Monsieur Kerviel recently said, “I am taking my share of responsibility, but I will not be the scapegoat for Société Générale.”

And so now we know the mistake that was made – too many middle-ranking bank employees with ideas above their station.

With social mobility like that, it is a wonder France is achieving any economic growth at all.

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France to get more civilized with its own new Auntie BEEB

January 9, 2008 | posted by Michael Baxter in French economy | comments (0) | Print This Post

It does seem a little curious that in France, the land where subsidies and state protection rule supreme, and where the populace often seem to think they live in the most civilized country on earth, there is no equivalent of the BBC.

But yesterday, its premier, Nicolas Sarkozy, announced plans to merge France 24 - a 24-hour news channel, with TV5Monde and Radio France Internationale, while its two main commercial channels will see an end to advertising.

The French government would then tax mobile phone operators and provide money to these companies, who in return will be required to offer more quailty programming.

Mr Sarkozy has described the move as a “policy of civilisation.”

The FT said the French government is particularly keen to look at how the BBC has provided cultural and linguistic influence for the UK.

The BBC is perhaps the single-biggest example of why state ownership does not necessarily mean “no good.” The BEEB remains a paragon of quality broadcasting - although some of the output is pretty ropy.

Yet the French move does seem to come with curious timing. In this burgeoning era of Internet TV, the BBC will have an ever-harder job justifying its licence fee, and has recently been coming under more and more criticism because of the unfair advantages other web site publishers say it has on the Internet.

Then again, the UK without the Today programme would be a sorry place. But we know what you are thinking; the UK would be a sad place without Investment and Business News too - and there’s no licence fee to pay for us, just the benevolent support of Defaqto.

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