Macro Weekly Difficult times Group Economics Macro Research Han de Jong Chief Economics 19 October 2014 These are clearly difficult times for participants in financial markets. And they are also problematic for policymakers. The crisis has triggered an unprecedented policy response, and it is no surprise that policymakers are learning all sorts of lessons along the way. It seems to me that they have recently misfired and shot themselves in the foot a few times. I believe policymakers will draw lessons and the economic recovery will gain some momentum into 2015. A lesson for Mr Samaras consecutive quarters of mildly negative growth, but what I The Greek Prime Minister has suggested that he would like to mean is that a prolonged period of significant decline of activity end Greece's IMF programme, and rely fully on funding in seems extremely unlikely. Serious recessions don't appear out financial markets instead. The IMF's response was that Greece of nowhere. They are caused by something. Apart from loss of should not end its adjustment programme. The market's confidence, the most obvious suspects for causing a recession response was a deafening rejection of this idea. Ten year are overly tight monetary policy, very restrictive fiscal policy, a yields on Greek government bonds had been moving in a band sharp rise in inflation, a sharp rise in oil prices, a collapse of of 5.5%-6.5%, but shot up to 9% last Thursday. That seems a asset prices or some other sort of shock. Lack of reform in clear message to me that the market is telling the Greek France and Italy is not going to cause a recession in the government not to end the IMF programme. To what extent eurozone - they are nothing new. As I have argued before, I they will listen is another matter. They could try to get the see the eurozone gradually enjoying a number of tailwinds: the Greek banks to buy government bonds and borrow from the lower euro, fallen borrowing costs, lower oil prices and the ECB. The domestic political situation in Greece is complicated, gradual healing of the credit channel as shown by the ECB's of course. The anti-bailout Syriza party is ahead in the polls bank lending survey. By making the '40% remark', Lagarde and is trying to force early elections. So Mr Samaras may have seems to have exposed the economy to the most important seen a political advantage in ending the programme. risk. Doubting your own success. Why? Has Mr Draghi overplayed his hand? The mood in global financial markets had been subdued Commentators concluded that the ECB is on its way to following weak economic data in the eurozone when the IMF sovereign QE (quantitative easing) from Mr Draghi's speech at held its annual meeting in Washington last week. Probably in the Jackson Hole conference some weeks ago. He has so far an effort to increase the sense of urgency for reform policies, failed to live up to these expectations. I think it is difficult for the IMF officials stressed the downside risks, in particular for the ECB to engage in such a strategy as there are legal and eurozone. IMF boss Christine Lagarde went so far as to say political hurdles. Therefore, I think Draghi may that the eurozone is facing a 40% chance of sinking into a new overplayed his hand a little. have recession. That did not exactly lift the mood, to put it mildly. Another issue with central bankers is that they have recently While I would not want to suggest that it is the IMF's job to be demonstrated quite a number of differences of opinion within unrealistically optimistic in order to 'talk up' the economy, their own ranks. Normally that does not matter, but when neither can I see any point in talking the economy down confidence is vulnerable, disunity among central bankers is not unnecessarily. And it seems to me, that is exactly what she helpful has done. The global recovery is fragile and, arguably, the biggest risk to the recovery is a loss of confidence. The right price for risk Policymakers have pulled out all the stops in recent years to Policymakers have recently also warned of excessive asset get the economy back on its feet and some success can prices with several of them pointing out that investors may be certainly be claimed. Why would they now doubt that so too complacent and may be underestimating risk. Sovereign explicitly and put their own success at risk? spreads in the eurozone would appear a case in point, and over the last couple of days spreads on peripheral bonds have The question is, of course, whether Lagarde is right with her widened out considerably. In this area, too, one has to wonder 40% recession risk. I cannot see it. Given how low (potential) what policymakers are trying to achieve. They have done what growth is in the eurozone, it is always possible to have two they can to prevent a break-up of the euro. So it is not 2 Macro Weekly - Difficult times - 19 October 2014 surprising that investors consider that risk very low. 1.3%, respectively. The ZEW index, measuring analysts' Policymakers have also demonstrated that they would not like confidence fell again in October, both for the eurozone as well to see another sovereign debt write down in the eurozone, as for Germany. That is not good, but it might in this case be a following the debacle of the Greek debt write down in 2011. It lagging indicator and simply a response to recent disappointing would seem that they have convinced market participants of data and stock market volatility. Recent dat from various that also. So I would say that the very tight spreads on airports is more encouraging. True, freight data published by peripheral bonds over German bonds are a sign of success on Fraport, the body that runs Frankfurt airport, is weak. But the part of the policymakers. They have convinced investors freight volume in Schiphol is up 4% yoy in September, while that the risk of another debt write-down is small and the risk of Spain is up 14% yoy. The trend for all airports continues to be a break-up of the euro is even smaller. If these events have a up. very low probability, is it really surprising that spreads are tight? By arguing that that investors are complacent, are News in the US was better. Early on in the week, disappointing policymakers actually saying that they themselves may retail sales for September and a poor reading on the so-called ultimately not be successful? Isn't that an odd message? Empire State index - a business confidence gauge in the district of the New York Fed - had added to market gloom. But We are not sure how exactly quantitative easing (QE) of initial jobless claims fell to the lowest level in over 14 years, a monetary policy works. Most analysts distinguish between sign of continued improvement on the labour market. The different channels. QE is meant to push borrowing costs down Philly Fed index of business confidence in the Philadelphia and lead to portfolio shifts with investors. So, boosting asset Fed district did not confirm the New York's equivalent and prices, aiming for an improvement in confidence and positive declined only marginally in October, staying at a high level. US wealth effects is all part of the plan. It seems very odd to me industrial production grew strongly in September (1.0% mom), for policymakers to then openly question if this has gone too pushing the yoy rate to 4.3%. far. If this is the case, then reverse the policy. Finally, Chinese data was not too bad either. Export and import A major inconsistency growth improved noticeably in September and money and I see another major inconsistency in overall policy. On the one credit data is suggesting that the targeted stimulus measures hand, in their role as prudential supervisors, policymakers are are taking effect. trying to get households and the financial sector to reduce risks. Buffers must be strengthened and risky activities ended. Overall, we maintain an optimistic view on the global, including This process puts a lid on economic growth. Meanwhile, eurozone, outlook. The economic recovery is set to continue monetary policy is aggressively trying to work in the other and gain momentum into 2015. (Eurozone) policymakers are direction. This is all well and good, but it means that people are facing some challenges and, in my personal opinion, they encouraged to reduce risks while they are also encouraged to haven't always made the right choices, particularly in their increase risk. It is like driving a car while stepping on the communication. But I think they will, eventually, address further brakes and the accelerator at the same time. You fail your challenges successfully. driving test if you do that. The result, I think, is a potential for excessive risk aversion in the real economy and excessive risk appetite in the financial economy. That looks to me to be a recipe for instability. Last week's data Economic data was a little volatile last week. Eurozone industrial production fell 1.8% mom in August and fell 1.9% yoy in August. This was not a good result, but was largely driven by Germany. We knew a week earlier that German output had fallen by more than 4% in August. This was partly blamed on a different pattern of holidays. The European data gives some credence to that view as Germany really was the odd one out. According to Eurostat, output fell 0.1% mom in France, but rose in Italy, Spain and the Netherlands by 0.3%, 0.1% and 3 Macro Weekly - Difficult times - 19 October 2014 KEY MACRO EVENTS Day Date Time Country Monday 20/10/2014 09:30:00 NL Tuesday Tuesday Tuesday Tuesday Tuesday 21/10/2014 21/10/2014 21/10/2014 21/10/2014 21/10/2014 04:00:00 04:00:00 04:00:00 04:00:00 16:00:00 Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday 22/10/2014 22/10/2014 22/10/2014 22/10/2014 22/10/2014 22/10/2014 Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Friday Friday Friday Friday Key Economic Indicators and Events Period Latest outcome Consensus ABN AMRO Consumer confidence - index Oct -7.0 -7.7 -8.0 CN CN CN CN US Fixed investments - % yoy Retail sales - % yoy Industrial production - % yoy GDP - % yoy Existing home sales - % m om Sep Sep Sep 3Q Sep 16.5 11.9 6.9 7.5 -1.8 16.3 11.7 7.5 7.2 0.7 01:50:00 14:30:00 14:30:00 14:30:00 14:30:00 16:00:00 JP US US US US CA Merchandise trade exports - % yoy Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy Policy rate - % Sep Sep Sep Sep Sep Oct 22 -1.3 0.0 1.7 -0.2 1.7 1.00 6.5 0.2 1.8 0.0 1.6 23/10/2014 23/10/2014 23/10/2014 23/10/2014 23/10/2014 23/10/2014 23/10/2014 23/10/2014 23/10/2014 23/10/2014 03:45:00 10:00:00 10:00:00 10:00:00 10:00:00 10:30:00 14:30:00 15:00:00 15:45:00 16:00:00 CN EC EC EC NO GB US US US EC PMI manufacturing - index (HSBC) - flas h PMI services - index Composite PMI output PMI manufacturing - index Policy rate - % Retail sales - % mom Initial jobless claims - thousands FHFA house price index - % mom Markit - Flash PMI Consumer confidence - index Oct P Oct P Oct P Oct P Oct 23 Sep Oct 18 Aug Oct P Oct A 50.2 52.4 52.0 50.3 1.5 0.4 264 0.1 57.5 -11.4 50.1 51.9 51.6 49.9 1.5 -0.1 0.4 57.3 -12.2 24/10/2014 24/10/2014 24/10/2014 24/10/2014 01:00:00 10:30:00 15:00:00 16:00:00 KR GB BE US GDP - % qoq GDP - % qoq Business confidence - index New homes sold - % mom 3Q P 3Q A Oct Sep 0.5 1 -7.2 18.0 0.8 1 -7.8 -6.5 7.3 0.2 1.8 0.0 1.6 1.0 52.7 52.5 50.8 1.5 57.5 -12.0 Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events) If you would like to receive this calendar by email on Friday, please send a message to [email protected] Main economic/financial forecasts GDP grow th (%) 2012 2013 2014e 2015e +3M +12M 2014e 2015e 2.3 2.2 2.2 3.8 United States 0.23 0.23 0.3 1.3 0.3 1.7 -0.6 -0.4 0.9 1.7 Eurozone 0.08 0.08 0.0 0.0 0.0 0.0 Japan 1.5 1.5 1.5 1.4 Japan 0.21 0.21 0.2 0.2 0.2 0.2 United Kingdom 0.7 1.7 3.0 2.8 United Kingdom 0.56 0.56 0.7 1.5 0.7 1.7 China 7.7 7.7 7.5 7.0 World Inflation (%) 3.2 2012 3.2 2013 3.3 2014e 3.9 2015e 08/10/2014 15/10/2014 +3M +12M 2014e 2015e United States 2.1 1.5 2.0 2.2 US Treasury 2.32 2.13 2.6 3.1 2.6 3.3 Eurozone 2.5 1.3 0.5 1.0 German Bund 0.90 0.77 1.0 1.4 1.0 1.6 Japan 0.0 0.3 2.5 1.7 Euro sw ap rate 1.12 1.00 1.2 1.6 1.2 1.8 United Kingdom 2.8 2.6 1.6 1.7 Japanese gov. bonds 0.51 0.49 0.5 1.1 0.5 1.1 China 2.7 2.6 2.0 2.9 UK gilts 2.26 1.95 2.6 3.1 2.6 3.2 World Key policy rate 4.1 15/10/2014 4.0 +3M 4.0 2014e 4.0 2015e 08/10/2014 15/10/2014 +3M +12M 2014e 2015e Federal Reserve 0.25 0.25 0.25 1.50 EUR/USD 1.27 1.28 1.25 1.15 1.25 1.15 European Central Bank 0.05 0.05 0.05 0.05 USD/JPY 108.1 105.9 115 123 115 125 Bank of Japan 0.10 0.10 0.10 0.10 GBP/USD 1.61 1.59 1.60 1.53 1.60 1.53 Bank of England 0.50 0.50 0.50 1.50 EUR/GBP 0.79 0.80 0.78 0.75 0.78 0.75 People's Bank of China 6.00 6.00 6.00 6.00 USD/CNY 6.14 6.12 6.17 6.25 6.17 6.25 United States Eurozone Source: Thomson Reuters Datastream, ABN AMRO Group Economics. 3M interbank rate 10Y interest rate Currencies 08/10/2014 15/10/2014 4 Macro Weekly - Difficult times - 19 October 2014 Find out more about Group Economics at: http://insights.abnamro.nl/en/category/economy/ This document has been prepared by ABN AMRO. 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