Hamish McRae: Listen to Draghi and Merkel - the rest is so much rubbish
Economic Life: The European Central Bank is the only body holding together the eurozone; it is in effect the financial government of Europe
Friday 09 December 2011
The information flow from and about Europe is all too relentless, too wall-to-wall, too intense, too confused. This makes it very hard to sort out what is new and significant in both the data and the statements of the officials and politicians.
As far as the flow of numbers is concerned it is easy enough. It is obviously better to look at forward-looking data, such as the various purchasing managers' indices and surveys of consumer sentiment, rather than stats that are already out-of-date when they are published. And when numbers feel wrong – they don't square with what businesses and shops are reporting – then they usually are wrong and are subsequently corrected.
I don't think much had changed in that regard, except for two things. One is that we really should look at global data, data that encompasses the emerging countries, rather than what is happening in the old developed world. For example I saw the other day that China and India between them are likely to account for some 60 per cent of the increase in global output next year.
And the other thing is that the plight of the eurozone has meant that we should look at numbers that we used not to bother about. I don't mean just the bond spreads or the calculations about the chances of a country defaulting, fascinating though those are. There are huge flows of money between the eurozone banks that have been under-publicised: money walking out of the fringe countries' banks and into Germany. It takes a move such as was announced yesterday by Mario Draghi, the new president of the European Central Bank, to supply unlimited cash for three years to European banks to make one realise quite how gummed up the eurozone banking system has become.
As far as flow of words is concerned, so much rubbish has been spouted by politicians and officials in recent months that it is very hard to take anything seriously. I still keep in my phone a text assuring me that Ireland was not going to go for a bailout. Ten days later it duly did. I am afraid that economic forecasts have also to be taken with a large pinch of salt, though here the reason is not wishful thinking but a combination of bad luck and poor judgement.
But as a rule-of-thumb anything said by Mario Draghi and to a lesser extent Angela Merkel does matter. The ECB is the only body holding together the eurozone at the moment. It is in effect the financial government of Europe. All it can do is set interest rates and print money but that is all it needs to do to keep the eurozone functioning in the short-term. So yesterday it cut rates, as expected, while Dr Draghi's pledge on cash for the banks is not a statement of his view but a practical and very important change in policy. So it matters.
Angela Merkel matters but in a different way. Germany may not be strong enough to save the euro but without Germany's creditworthiness backing it the euro is dead. But she is a politician accustomed to moulding and nudging German public opinion; managing a continental currency is beyond her experience. So while there will be some sort of deal at the European summit today that on the surface looks credible, the scale of the task ahead is beyond anything that has been attempted before. Indeed the creation of the euro was beyond the experience of the politicians and technocrats that stitched it together. That was why they constructed something that was bound to increase divergence within Europe rather than decrease it. So when she says that Germany will or will not do something, that matters. But when she merely assures the world that Europe will overcome its problems, that is meaningless.
And the words of other European politicians? Totally and utterly unimportant. That is not because they are bad people or even bad politicians. It is because what is happening in the eurozone is both beyond their experience and their competence. As Mervyn King said last week, Europe's problem is one of solvency, not of liquidity. Actually it is both, and while the ECB can fix the liquidity problem it cannot fix the solvency one. Politicians can only do that by running budget surpluses for years on end, and they may not be given the time to do so. In any case the idea that taxpayers will pay into the state far more than they get out in services is one that politicians will find very hard to explain to their electorates. Actually I think things will be patched up for a bit longer but I have no idea how much longer is longer. The way the Italian 10-year bond yields are nudging back up towards 7 per cent does not bode well.
Enough about what words to trust; what about the data we should trust?
Well, the purchasing manager surveys are really the best place to start and I'm afraid they do suggest that the eurozone economy is heading back into recession. The left-hand graph shows the results from surveys of international business opinion, with the 50 level being the crossover point where companies expect either expansion or contraction. As you can see a majority of firms in the eurozone now expect contraction, whereas in the US and, somewhat surprisingly, the UK, a small majority still expect growth to continue. The divergence of views between the eurozone on the one hand and the US and UK on the other is much sharper now than at any time since the recession.
But if producers in the developed world are finding it tough to claw their way back to pre-recession levels of output, consumers seem to have caught up, as the second graph shows. This is the G7 as a whole, rather than its component parts. As you can see, the climb out of recession began well (though my word things went down a long way, didn't they?) but this year industrial output has faltered a bit. But retail sales in the G7, the white line, has gone on rising right through this year. In the three months to end-October retail sales were up 1 per cent, or annualised more than 4 per cent. Simon Ward at Henderson Global Investors, who drew attention to this phenomenon, notes that if the retail sales continue, industrial output should start to recover again in the first part of next year.
The question is whether we can trust consumers to keep spending in the light of this deluge of adverse economic comment. I cannot give a good answer to that, except to observe that US consumers are reasonably buoyant and here, while consumption has been flat for most of this year, it certainly has not fallen off a cliff. Given the dismal stuff that has been heaped on the British consumers in recent weeks, they should take a bow.
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