More good data out of Germany overnight with German exports rising 2.5% in November after posting their biggest fall in half a year the previous month. The forecast was for 0.7% growth so the number of a large outperformance. In addition the trade surplus widened to €15.1bn, showing that imbalances within Europe remain.
There was some evidence early in the week that the figure would be solid as BMW has stated record sales in 2011, and Volkswagen stated over the weekend that its US sales targets were rising. It would appear that the weaker Euro is helping with trade figures rising even while much of Europe enters recession.
However it wasn’t all good news with a decline of 0.6% in industrial production in November suggesting future export numbers may not be so impressive. As I have said previously these number are a double edged sword because the outperformance of Germany over other European countries is one of the major problems in Europe.
The November data for France appears solid with industrial production rising 1.1% and manufacturing rising 1.3% in November. Those numbers were offset somewhat by Bank of France’s message that the country appears to be stumbling into recession.
The French economy was flat in the last three months of 2011, the Bank of France said Tuesday, confirming an earlier estimate amid concerns the eurozone debt crisis could spark a recession.
The French central bank said there was no growth between the third and fourth quarters of 2011, an outcome which should allow the government to come very close to meeting its full-year target for a 1.5 percent expansion.
Third quarter growth had come in at 0.3 percent, the national statistics institute INSEE said last month.
On the basis of the third quarter performance, the French economy should grow 1.7 percent growth for the year, it said.
INSEE said last month it expected France to fall into a brief recession, with the economy contracting 0.2 percent in the three months to December and another 0.1 percent in the first quarter of 2012.
The latest industrial output numbers may have a more positive effect than the Bank of France is predicting, however, given that France has a largely consumption based economy I expect economic underperformance to continue. The French government has forecast GDP growth of 1% this year, yet estimates on the effects of austerity tend to understate the psychological effects of the policies.
What we have seen from recent history is that consumers turn into savers in far greater numbers than expected causing a greater slow down in economic activity. A major component on France’s economy is consumption-driven so increases in taxes on consumption, such as the ‘social VAT‘ proposal, are likely to have a larger effect on the economy than forecast by the government.
While Germany outperforms and France tries to keep up, much of the rest of Euro-Zone looks to be about to get a little worse.
Fitch Ratings says a number of euro countries, including Italy, may see their credit ratings downgraded by one or two notches by the end of this month as they struggle to cope with the debt crisis.
Fitch’s head of sovereign ratings David Riley says Tuesday the agency will give its verdict on several countries by the end of January. Fitch currently has Italy, Spain, Belgium, Ireland, Slovenia and Cyprus on so-called “ratings watch negative.”
As I mentioned last week I expect Spain to return to centre stage in the coming months as the world realises, once again, that nothing has been fixed in that country. At this stage however, the spotlight remains on Italy.
Yesterday I noted that:
The Italian government will not have to carry out an additional package of budget cutting measures to meet its goal of eliminating its deficit in 2013, Prime Minister Mario Monti said.
His government will now focus on producing a package of measures to spur economic growth and competitiveness in Italy to be presented before a meeting of European Union finance chiefs on Jan. 23, Monti said on the “Che Tempo Che Fa” talk show on state-owned RAI television.
Given what we have seen from other countries including Ireland, that is back getting prodded by the Troika , I suspect it is far too soon to make such claims about the need for additional cuts to meet deficit targets. From what I have witnessed over the last 2 years these estimates always fail to take into account the negative feedback loop that is created by imposing higher taxes on deflating economies. I do, however, have to applaud Mario Monti for his focus on competitiveness and economic growth even if I do think the entire plan is the wrong way around.
Italy does have the advantage that over 75% of its public debt is long term with an average maturity of approximately 7 years and only about 12% of that is variable interest rate. This means that even though Italian yields are high now ( 10yr @ 7.11) the flow-on effect to the overall deficit is relatively limited.
The real problem in Italy is that its economy has been stagnate for nearly the entire decade. According to the IMF between in 2000-2010 among all countries of the world Italy only grew faster than Haiti and Zimbabwe. In 2010, Italian GDP was only 2.5% higher than in 2000. This problem is actually made worse by the fact that this is such a long term trend. Italy’s per-capita GDP growth was 5.4% in the 1950s, 5.1% in the 1960s, 3.1% in the 1970s, 2.2% in the 1980s and 1.4% in the 1990s. Since the new millennium the country has hardly moved forward and if we extrapolate out that trend Italy will spend the next decade in contraction.
On top of stalling growth, Italy has a demographics issue. With a debt to GDP ratio at 120% along with a population with a median age of approximately 45 Italy really does look like the Japan of Europe. The only problem is Japan is competitive, runs a trade surplus and is sovereign in its own currency. Italy has none of these things.
Given all of these problems it will be interesting to see what Mario Monti can come up with to get the country back onto a path to growth while staying in the Euro and meeting the countries existing obligations. It would appear to be a monumental task.
The country’s issues have got worse recently because the focus has moved to the banking system as it fails to find new capital.
UniCredit, Italy’s largest bank, is undergoing a trial by fire in the stock market, underscoring the challenges that European banks face in trying to right themselves.
Shares of UniCredit have been in free fall as investors have balked at a new stock offering meant to bolster the bank’s capital. Since last week, UniCredit’s market value has plunged by more than 40 percent.
In other news Portugal’s economy is likely to contract more than estimated in 2012, Quel surprise!, the ECB’s deposit facility is still hitting records even while the discount window still appears to be in operation, and finally, the IMF and the hedge funds appear to be playing chicken over the Greek PSI.