MacroScope

Post-Lehman shadows creeping up on German economy again?

Germany's Minister of Finance Wolfgang Schauble speaks during a discussion during the World Bank/IMF annual meetings in Washington

The recent stretch of dire economic data from Germany is starting to bear an unfortunate resemblance to late 2008 – when Lehman Brothers collapsed and the world tipped into the worst recession since the Great Depression.

On a severity scale, a downturn now will probably be nowhere close to the first quarter of 2009 when Germany’s gross domestic product shrank 4.5 percent on the quarter.

Still, Europe’s biggest economy is careening toward a technical recession unless it’s halted by a miraculous upturn in the September data.

An analysis of Reuters polls shows several of four key German economic indicators have come below the Reuters consensus over the past three months, in some cases below even the most pessimistic prediction.

When data start to get this volatile, they sometimes herald a change in the economic cycle. And it’s not always for the better.

A long haul

U.S. Navy handout shows EA-6B Prowler attached to the Garudas of Electronic Attack Squadron 134 landing aboard the aircraft carrier USS George H.W. Bush after conducting strike missions against Islamic State targets, in the Gulf

Having largely sailed through this year’s choppy (to say the least) geopolitical waters, markets are a little discomfited by U.S. air strikes in Syria targeting Islamic State militants … though only a little.

The U.S. military said Monday’s onslaught was just the start, suggesting it could take years to “degrade and destroy” the group, as Washington puts it. It remains to be seen how effective air attacks alone, which have been conducted in Iraq for some time already, will be in that regard.

Many of the potential protagonists will be at the United Nations General Assembly in New York where President Barack Obama will try to rally more nations behind his drive to take on IS.

Britain’s export recovery looking a little more elusive

It looks like Britain might have to wait a while longer before its much-touted export recovery materialises.

Export orders growth flagged in July, according to two surveys of manufacturers over the last week.

Friday’s UK manufacturing PMI showed export order growth slipped to a four month low – with a warning that it could worsen.

Oh là là, quelle surprise for the French economy

French economic growth unexpectedly picked up to 0.3 percent in the final three months of last year, welcome news and a rare positive shock for some particularly gloomy forecasters who were looking for shrinkage or no growth at all.

But the unexpected bounce may be partly for the wrong reason: government spending.

The Markit PMIs, which are generally accepted as a good gauge of the private sector economy, suggested economic deterioration throughout the quarter, leading Markit’s chief economist Chris Williamson to predict a 0.1 percent contraction.

History suggests rocketing British growth won’t last long

Britain’s economy is steaming ahead – by one measure faster than any other large developed or emerging economy – but history suggests it will struggle to sustain the rapid growth indicated in business and confidence surveys.

Data this week showed British businesses were at the forefront of Europe’s nascent economic recovery, outpacing major euro zone peers that are still grappling for momentum.

British services companies enjoyed their fastest growth since December 2006 in August, according to purchasing managers’ surveys, while housing market activity is gaining, and consumer sentiment is at its highest in almost four years.

Turning up?

Manufacturing PMI surveys for euro zone countries and Britain will be the latest litmus test of the durability of fledgling economic recoveries.

Even the readings from Spain and Italy have shown improvement over the summer so it may well be that they are the most interesting given we’ve already had flash readings for the euro zone, Germany and France which showed business activity across the currency bloc picked up faster than expected in August.

Having exited recession in the second quarter, further euro zone growth now looks likely in the third.
Britain’s recovery looks more solid still following a 0.7 percent leap in GDP in Q2. Its PMI will be augmented by Bank of England figures on its funding for lending scheme, whereby banks are offered cheap money on the proviso they lend it on to smaller companies.

Something must be done, but what?

With little sign of economic recovery in Europe and governments incrementally loosening their austerity drives (Britain being the exception) the focus turns to the big central banks on our patch and what more they might be able to do to foster some recovery.

With the European Central Bank meeting on Thursday, President Mario Draghi is in Shanghai saying the euro zone is on track for only a “very gradual recovery”. It’s hard to tell at a glance whether that is a rhetorical downgrade of the existing forecast for a pick-up in the second half of the year with downside risks attached. Either way, the pressure on the ECB to act again is growing.

However, don’t expect anything at its monthly meeting on Thursday, although a further interest rate cut could come this year and there is still talk of cutting the deposit rate – the return banks get for parking funds at the ECB – into negative territory to try and get them to lend. The big question is would that achieve much? Despite being in a world awash with central bank money, there is clearly a reluctance among banks to push money into the real economy. The latest data showed bank loans to euro zone businesses and households contracted for the 12th month in a row in April.

Scotland catches up with the UK economy – and maybe more?


Updated to show Scotland’s composite PMI has bettered the UK equivalent for seven straight months now, after Monday’s data.

For the first time in a long while, Scotland’s economic performance has caught up with the UK average– and there is at least some evidence to suggest it’s doing slightly better than the British baseline.

In general, the Scottish economy has come second-best behind the poor UK average, at least since the full onslaught of the global financial crisis hit in September 2008 with the collapse of Lehman Brothers.

Want to know what the ECB is going to do? Watch the German PMI

A sudden turn for the worse across German companies should clinch an interest rate cut from the European Central Bank next week, or in June at the latest.

That’s because the latest PMI surveys, which have a decent correlation with economic growth, suggest the German economy  shifted back into reverse this month, against the expectations of economists.

And the one thing the ECB’s Governing Council never allows to pass is any sign that Germany, Europe’s No.1 economy, is floundering.

Beware: UK services PMI is no crystal ball for QE

Take with a pinch of salt economists who say Tuesday’s strong UK services PMI  might persuade the Bank of England to hold off from restarting its printing presses this week.

BoE policymakers been perfectly willing over the last few years to vote in favour of more asset purchases after a rise in the services PMI number.

Only the last decision for more quantitative easing — July 2012 — came after a decrease in the services PMI’s main index. While members of the Monetary Policy Committee rely on the PMIs as a monthly gauge of economic activity, it’s clear the surveys can’t be read as any proxy for policy decisions.