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Economy in Brief

EMU GDP Comes In On The Light Side
by Robert Brusca  February 15, 2011

The early reports of GDP headlines are presented in the table above. EMU GDP is a touch weaker than had been expected. While UK growth was the first to disappoint, the UK today posted a 0.7% rise in its LEI for December clearly the UK economy is not dead yet. UK inflation continues to be on the strong side with the RPI up by over 5% Yr/Yr and that is the same as the dilemma being faced by the Euro-Area.

On that theme Axel Weber recently talked about why he did not pursue the head job at the ECB. We are aware that he had been pushing for a hard line on inflation despite the ongoing weakness in Europe. He did not find many sympathetic ears. Instead of taking the job and taking on the fight, he decided it was time to step back. That decision will raise the question of whether the next ECB president will have to run a tighter ship because the ECB will not have a strong inflation fighting German at the helm. Is its credibility tarnished by this event?

Clearly the UK economy is a kind of model of the sort of thing that EMU is facing. UK inflation is, of course, much higher. But the EMU is facing already rising inflation in Germany and no sense of any braking. I sense that Weber could read the handwriting on the wall and did not want to be the first ECB president who was outvoted by his fellow board members or to be the head of the ECB when inflation climbed in Germany and the EMU region struggled for its identity. So Axel checked out.

The GDP figures underscores the extreme budget pressure being faced by Greece; GDP declines just keep on coming. We will need to follow the trends in Spain, Portugal, and Ireland as well to see how the most affected countries are facing up to their respective challenges as Germany battles a heating up economy without the benefit of monetary restraint. This is sort of like St George against the dragon without a spear.

The EMU region is even more bifurcated than it has been. The year-over-year growth data tell the tale. German growth is 4% the next best in this group is at 2.1% (The Netherlands). Granted, many other countries have yet to report and will do better but these results are a revealing. And there is more strength in these yet-to-report-regions since the EMU-wide growth figure is put at 2%,. Even so Germany’s weight, coupled with its 4% growth rate, go a long way to explaining that added strength in EMU. After the Netherlands we come to France at 1.4% and Italy at 1.3%, then Greece at -6.6%. Of these France and Greece are decelerating yr/yr compared to their respective Q3 GDP results. But the EMU rate itself has been waffling between 1.9% and 2% for three quarters. Looking at the countries that have ‘accelerated in Q4, that result is on some pretty thin margins for the most part.

The US Q4 growth rate (for Q4 at 3.2%) is the best of the bunch. Its Yr/Yr Q4 growth rate decelerated but at 2.8% its second best to Germany and the US economy seems to picking up steam; the slowdown does not appear to be structural.

All these regions face battles of different sorts, to be fought on different fronts. The US is growing better but is mortgaging its future with deficits that are too large and with no will to reduce or properly finance its public spending addiction. The UK’s growth is being slammed because it has chosen to address its public spending excesses yet it still is facing an inflation problem, at least short term. If the UK economy remains as weak as this inflation will simply be swallowed up and eliminated by economic weakness. That is different from conditions in the EMU. EMU’s problem is the bifurcated nature of the Zone with groups of countries facing completely different growth and inflation tradeoffs and conditions but with only one monetary policy to address that bifurcation. Euro-fiscal policies are still at loose ends. By that I mean that they are not constrained in any coherent manner. These tradeoffs will define the economies at the center of world economic activity for the next two years at least. Meanwhile, the importance of the developing world is growing and it in many ways is acting to make the job of the developed nations even more difficult.

Welcome to 2011; it’s so much more than 2010 plus one.

Euro-Area and Main G-10 Country GDP Results
  Quarter Over Quarter-SAAR Year/Year
GDP Q4-10 Q3-10 Q2-10 Q4-10 Q3-10 Q2-10 Q1-10
EMU 1.2% 1.4% 4.1% 2.0% 1.9% 2.0% 0.8%
France 1.4% 1.0% 2.4% 1.5% 1.7% 1.6% 1.2%
Germany 1.5% 2.8% 9.2% 4.0% 3.9% 3.9% 2.1%
Greece -5.6% -6.6% -7.0% -6.6% -5.7% -5.1% -0.7%
Italy 0.2% 1.1% 1.9% 1.3% 1.2% 1.3% 0.5%
The Netherlands 2.3% 0.3% 4.0% 2.1% 1.9% 2.7% 0.3%
UK -2.0% 2.9% 4.6% 1.6% 2.6% 1.6% -0.3%
US 3.2% 2.6% 1.7% 2.8% 3.2% 3.0% 2.4%
Japan -1.1% 3.3% 2.1% 2.6% 4.7% 3.3% 5.4%
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