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Economy in Brief

EMU Indices Lie Somewhere between 'Stable' and 'Comatose' at Yearend
by Robert Brusca  January 8, 2015

The year 2014 ends with the overall EU index at 104.2 and the index for the EMU at 100.7. These are not solid readings; the one for the EMU is especially lacking. However, both metrics are roughly stable month to month.

In the table, we chronicle the data for 16 EMU members (Ireland not reporting). The far right column positions each country's overall sentiment index, expressing it as a percentage standing in its historic queue of values. Some of the new members do not have very long time series for these calculations. For the original members, the metric is quite a solid expression of their condition. Of these 16 reporters, only seven have queue standings above the 50th percentile. That means only seven have readings above their respective historic medians. Portugal's queue standing is 50.6%; Estonia's is 52%; Germany's is 56%; the Netherlands is at 59%; Spain is at 62%; Slovenia is at 63%; and Malta is at 86%. Note that the highest standings are for small countries that are relatively new members.

However, two of the four members with the largest economies, France and Italy, have metrics at the 32nd percentile. Finland stands in the 21st percentile; Austria stands in the 19th percentile; and so on. There is some stupendous weakness in the EMU. Against that only three EMU members have standings above the 60th percentile of their historic queue; that means they stand in the top 40% of all readings historically. That is a pretty weak standard for calling a metric `strong.' But this is the best that the EMU can do.

While the indices are described as `stable' at yearend, they are stable in the sense of not falling month to month. They are not stable is the sense that they are indicating economic stability. There is too much weakness and adverse momentum with the EMU overall gauge barely above 100 to consider things truly `stable' at yearend. Also, of the 16 reporters in the table, nine of those EMU members show declines in their overall sentiment gauges in December.

On the face of it, the sector results look stronger than the country level results, but we feature in the table the sector results for all of the EU not for the EMU. Still, for the sectors in the EMU, that observation is still true. Overall sector data aggregate the weak with the strong where even the moderating German results can dominate a number of weak conditions in smaller economies. For EMU level sector data, we find industrial confidence sits in its 54th percentile and its diffusion reading falls month to month to -5 in December from -4 in November. Consumer confidence stands in its 52nd percentile. Retail sales have a relatively firm standing in their 75th queue percentile. Sales improved in December, ticking up to -5 from November's -6. The services sector standing is in its 50th percentile and its raw diffusion metric moved up to 6 in December from 4 in November. The construction sector lags badly in the EMU, standing only in the 39th percentile of its historic queue.

The sector readings are, of course, weighted by the economic size of EMU members. Germany's relatively higher standing makes an important contribution to these metrics. When we look at the sector stands we get no information about the heterogeneity of conditions across the EMU. But we see the state of differences in the overall sentiment gauges in the table by country. Even so, while the sector readings are generally a lot of stronger readings than what we see at the country level sentiment gauges, they are by no means `strong' or even `firm'. The services sector reading is low as is consumer confidence. Construction is obviously weak, but it is small sector. The diffusion reading for industry, at a -5, stands only in its 54th percentile. `Normalcy' for manufacturing is a negative reading.

In other new reports available today, we see that actual EMU-wide retail sales in November saw volumes rise by 0.5%. However, there is still sales deceleration as growth rates from 12-months to six-months to three-months are fading. A separate report on German industrial orders also muddies the waters as German orders fell by 2.4% in November on falling domestic and foreign orders. And while November is clearly weak as German orders of both types are lower, in both November and on balance over 12-months, the momentum in orders is not clear. Domestic orders mostly point lower and to deceleration but German foreign orders are actually having a rather sharp revival according to its sequential rates of growth.

On balance, the picture for the EMU is not especially sharp or appealing. The chart of index levels shows that the drop off may have abated with sentiment indices well off their cycle highs, but they are nowhere near their recent cycle lows. There is no reason for alarmism over the performance of Europe. Neither is there room for complacency. But there is a great deal of attention, hope and focus on what the European Central Bank will do in 2015. I fear that there is much more anticipation about action than about what the ECB will be able to fulfill. The ECB has simply delayed too long mounting a QE offensive and now with rates so low the impact of a QE will be limited and its eventual downside will be magnified. In some sense, the larger the QE operation, the more potentially damaging it will be to the ECB itself. For these reasons, I remain much more skeptical about the euro area's future. As we can see in Germany's November orders data, there is some life in foreign orders probably stemming from the now-weak (and weakening) euro exchange rate. But in the details for the industrial sector in the EMU for December, we do not see any overall pick up is the euro area's ability to mount increased foreign orders.

On balance, the euro area is still crippled. Fiscal policy is a country-by-country affair and austerity is still in play even in those places where it is not required, such as in Germany. Monetary policy is expected to provide more stimulus in 2015, but I am skeptical that given the euro-framework, that the ECB will be up to the task.

The global environment is still weak. China has adopted a fiscal stimulus plan to try to prod its highly economy forward. Japan's QE program is going full steam. The U.S. has stopped its QE and is considering shifting to a rate hike regime. But its economic data and performance is still short of true normal in many respects. In short, the world economy is placing a great deal of its hope on stimulus from falling oil prices and on the ECB. Yet, in this environment, deflation has gotten worse. It is a still difficult global environment with heightened geopolitical tensions. The risk of a down swing still seems much greater to me than the possibility that there will be economic acceleration - even in the U.S. where economic conditions are perhaps best. The ongoing dollar rise will be undermining the U.S. economy every step of the way while lower oil has mixed effects even if net positive ones. I think the Federal Reserve is wrong to call U.S. growth risks balanced. If they are not balanced in the U.S., what are they elsewhere? Europe has a falling euro exchange rate and dropping oil prices and hopes for the ECB to boost its outlook. So far, all those factors have only kept Europe in a holding pattern with bond yields at record lows.

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