Last night the EU cut its growth forecasts again. The European Commission said it now expects gross domestic product in the eurozone to grow 0.8% this year, down from 1.2% it forecast this spring. Goldman Sachs models are now seeing renewed contraction:
RETINA retreats further into Q3 contraction
Bottom line: We are less than a fortnight away from Eurostat’s publication of its flash estimate of Q3 GDP growth in the Euro area. In today’s Daily, we look through the lens of our contemporaneous tracker of real-time inflation and activity. Since our previous update in mid-October, RETINA’s median estimate of Q3 GDP growth has moved deeper into negative territory, driven largely by a disappointing print for area-wide industrial production in August. The downside risks to our +0.1%qoq judgemental forecast for Q3 GDP now look skewed to such an extent that our point estimate no longer falls within a 50% confidence interval around RETINA’s median reading.
RETINA sees negative GDP growth in Q3
As Chart 1 shows, from mid-September to mid-October, RETINA’s median estimate for third-quarter GDP growth (the red line in Chart 1) fell from around +0.3%qoq to just short of -0.2%qoq. Following a disappointing contraction in area-wide August IP on 14 October, RETINA’s median estimate fell a further 10bp — yet deeper into negative territory. Having stabilised at around -0.3%qoq in the past fortnight, RETINA’s median estimate is now some 40bp weaker than our current judgemental forecast for Q3 GDP growth (+0.1%qoq, the black dotted line in Chart 1). This is yet more pessimistic than the latest available poll among other private-sector economists (collated on 8 September), which envisaged Q3 growth of around +0.35%qoq.
RETINA’s latest leg lower is down (solely) to Euro area IP
As Chart 2 shows, the latest move lower in RETINA’s median growth tracker (from around -0.2%qoq to -0.3%qoq) was driven almost exclusively by the 1.8%mom contraction in Euro area IP in August. Conditional on this out-turn, subsequent releases of national business surveys (ranging from the Italian ISTAT, the Belgian business survey and the French and German PMIs), as well as a +0.5%qoq sequential expansion in Spanish Q3 GDP, left our RETINA growth tracker largely unmoved.
The mechanical nature of the RETINA framework implies that it may underestimate the potentially significant ‘calendar effect’ in the German IP data (changes in the timing of holidays is likely to have shifted production out of August into July, as reflected in the month-to-month volatility of outturns). Some caution is required in interpreting the downward shift implied by these data, at least until we see the September print later this week. That said, the broadly confirmatory signal offered by business surveys (e.g. with the German IFO index continue to decline) suggest that idiosyncracies in the data should not be overstated.
RETINA suggests that degree of downside risk to our forecast has returned
As Chart 3 shows, RETINA’s growth tracker implied an escalation of downside risks to our former (+0.4%qoq) judgemental forecast through most of September. The latest indications are that the intensity of that downside skew has returned through the course of October — even as it pertains to our much weaker current forecast for +0.1%qoq growth in Q3. The Bayesian underpinning beneath RETINA’s growth tracker allows us to quantify this skew. Chart 3 shows that the model-implied probability that Q3 growth beats our judgemental forecast has fallen to 25% — down from around 35% at the time we made our forecast change. Furthermore, as Chart 1 also underscores, the downside risks to our judgemental forecast for Q3 now look skewed to such an extent that our point estimate no longer falls within a 50% confidence interval around RETINA’s median reading.
Meanwhile, to QE or not to QE, that is the question. Inflation is now expected to be below 2% through 2016 but, from Reuters:
National central bankers in the euro area plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources said.
The bankers are particularly angered that Draghi effectively set a target for increasing the ECB’s balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public, the sources said.
“We specifically agreed at the meeting… not to put any numbers on the table,” one central banker. “Draghi’s reference to the balance sheet of 2012 irritated a lot of colleagues. So he has had to backtrack a bit … to compensate.”
“This created exactly the expectations we wanted to avoid,” an ECB insider said. “Now everything we do is measured against the aim of increasing the balance sheet by a trillion (euros)… He created a rod for our own backs.”
“Even members of the ECB’s executive board – the six-member inner circle that runs the bank – were not informed in advance about two key recent policy announcements, two sources said.
“Mario is more secretive… and less collegial. The national governors sometimes feel kept in the dark, out of the loop,” said one veteran ECB insider.
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One imagines it will come, haltingly. But if the Austarians get the upper hand then you can expect nasty blow back for risk assets. Either way, global growth is facing an increasingly difficult 2015 acceleration.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
