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)
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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
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