Verbal acrobatics and a cliffhanger from Brussels

As expected the ECB kept its powder dry at today’s meeting. However, what started off as a rather dull meeting developed into a very exciting press conference. At some point in time, Draghi’s comments looked almost as acrobatic as many performances at Tuesday’s semi-final of the Eurovision song festival. However, in the end, Draghi had prepared everyone for new ECB action at the June meeting. The start of today’s ECB press conference was rather dull. The introductory statement was almost a verbatim copy of the one from the April meeting. According to the ECB, the gradual and weak recovery will continue, while at the same time inflation will remain low for a prolonged period of time. Interestingly, the ECB has put somewhat more emphasis on possible downward risks to the recovery. For the first time, the ECB mentioned private loan developments already in the part on the economic analysis and not only in the monetary analysis part. In addition, Draghi’s comments during the press conference on geopolitical risks also showed that the ECB has become somewhat more cautious. As regards the exchange rate, Draghi’s comments made listeners almost dizzy. Initially, Draghi defended the ECB against all external advice and criticism. He also said that the exchange rate was not a policy target. Later on, however, the exchange rate was called a “serious concern” for the ECB, which could not only have a negative impact on inflation but also on the recovery. Again the recovery. Looking ahead, Draghi gave the final goodbye to his predecessor’s famous “we-never-precommit”. The ECB’s forward guidance, which started last summer, had already been a first emancipation from the no-precommitment. Today’s statement that the Governing Council was dissatisfied with the current inflation path, was not accepting it as a fact of nature and was therefore comfortable with acting next month. Boom. This very last comment was supported by Draghi’s comment that “further information and analysis concerning the outlook for inflation and the availability of bank loans to the private sector will be available in June”. Moreover, Draghi stressed the next staff projections as an essential new piece of information in June. Of course, every next meeting will have new and more information than the previous one. However, with today’s press conference it will be hard for the ECB to take some “manana-manana” attitude. To the contrary, with his comments on the exchange rate and hints at possible June action, Draghi has pushed the ECB into a corner from which it will be very hard to escape. Nevertheless, in our view, it is not a given that the ECB will really act in June. In fact, on the back of better-than-expected Q1 GDP data, growth might even be revised upwards for this year. And what if the inflation forecast for 2015 and 2016 remains unchanged? And what if credit growth has improved slightly? It is exactly these uncertainties which kept the ECB from already acting today and might prevent it from acting in June. All in all, taking a step back and just looking at the facts, not a lot has changed with today’s ECB meeting. In our view, the real new thing is that the ECB has become more concerned about the strength of the recovery and has clearly put more emphasis on the exchange rate. . For the rest, any next steps remain conditional on the June staff projections. Admittedly, with today’s comments, Draghi has clearly presented a cliff hanger which makes it hard for the ECB not to come up with a brandnew episode of monetary action at the June meeting.

Ongevraagd advies

Druk werkt averechts. Dat heb ik bij de opvoeding van mijn kinderen uit eigen ervaring moeten leren. Op belangrijke momenten werkt het beter om vertrouwen te hebben in het gezond verstand van het kind, hopelijk versterkt door een goede opvoeding. Ook in Europa zien we dat patroon terugkeren. Alleen hebben sommige Europese politici geen vertrouwen in het gezond verstand van de Europese Centrale Bank. Telkens weer komen ze aandraven met 'goede adviezen en wenken'. En hopla, daar gingen ze weer. Franse politici vervielen weer in de oude nationale reflex. Als het niet goed gaat met de eigen economie en puinruimen moeilijk en pijnlijk is, roept Frankrijk graag de hulp van buitenaf in. De makkelijke weg is het laten oplopen van de overheids- tekorten en druk uitoefenen op de ECB om de munt te verzwakken. De Fransen zijn niet alleen. Het succes van de ECB als onomstreden crisismanager geeft velen een sinterklaas- gevoel. Nationale en Europese politici vinden blijkbaar dat de ECB de macht heeft om te geven en nemen. Politici becommentariëren op Twitter beslissingen van de ECB. In de campagne voor de Europese verkiezingen lijkt iedereen zijn wensen naar de ECB te sturen. Verzwak de euro, help de kmo's, koop overheidsobligaties en doe met een magische ingreep onmiddellijk de werkloosheid verdwijnen. Is dat kinderlijk geloof in de almacht van de ECB of een afleidingsmanoeuvre voor het gebrek aan eigen kracht, macht en visie? Wat politici, vooral in de media, graag vergeten, is dat artikel 130 van de Europese verdragen de ECB verbiedt om advies van regeringen, politici en andere instellingen te vragen of aan te nemen. Kwestie van de ECB te beschermen tegen sterk fluctuerende politieke wenslijstjes. Maar, eerlijk is eerlijk. De ECB heeft zelf bijgedragen aan het vol van verwachting kloppende hart van politici, het IMF en de OESO. Het aanwakkeren van speculaties over op handen zijnde nieuwe acties van de ECB deed de spanning stijgen. Daarbij moet de centrale bank oppassen niet méér te suggereren dan ze kan waarmaken. Alle mogelijke opties zijn op papier en in theorie sterker dan in de praktijk. Denk aan het opkopen van staatsobligaties. Frankrijk laat het begrotingstekort oplopen en de ECB koopt als beloning Franse staatsobligaties? Onvoorstelbaar. En als de ECB kmo-leningen van de banken of in de markt koopt? In theorie zouden dan de kredietvoorwaarden voor kmo's gunstiger moeten worden. Maar de markt voor die leningen is behoorlijk opgedroogd. Bovendien lijkt het onwaarschijnlijk dat de ECB - terwijl zij ze bezig is de risico's van de banken in kaart te brengen - die risico's zelf zou over- nemen. De ECB is zich goed bewust van haar zeer speciale verantwoordelijkheid. Nu politieke druk uitoefenen werkt eerder averechts en helpt niemand. Anders dan mijn kinderen is de ECB oud genoeg om helemaal zelf te beslissen. Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

German Ifo beats expectations in April

Happy-go-luckies or down-to-earth pragmatists? In any case, German businesses surprised once again with an almost hard-headed optimism in April. Germany’s most prominent leading indicator, the Ifo index, just increased to 111.2, from 110.7 in March. Even more surprising, both the current assessment and the expectation component improved. The current assessment component increased to 115.3, from 115.2 in March, and stands now at its highest level since April 2012. At the same time, the expectations component rebounded from the March decrease and stands at 107.3, from 106.4. After a weaker ZEW index and yesterday’s PMI increase, today’s Ifo index illustrates that financial market participants seem to be more worried by possible cold headwinds from the East than economic participants. It looks as if currently German businesses stick to the facts and do not get concerned by eventualities. And the facts up to now speak a clear language. Order books, both domestic and foreign, are still growing, inventories are low and activity in both manufacturing and services is picking up. Moreover, the exceptionally mild winter weather has boosted construction in the first months of the year. For the first quarter, construction should have been an important growth driver for the entire economy. Even if the sector would not grow at all in March, it could add around 0.5%-point to German GDP growth. However, despite today’s surprisingly strong Ifo and the expected growth acceleration of the German economy in the first quarter, it would be foolish to turn a blind eye to possible downside risks for the economy. With the Ukraine crisis, Chinese uncertainties and emerging markets slowing down, more and more gusts of wind, particularly from the East, could easily disturb the current spring fever on the Eurozone’s island of happiness

German ZEW drops again in April

Starting to get petrified? The German ZEW index just dropped for the fourth months in a row. The ZEW index, which measures investors’ confidence, decreased significantly in April and now stands at 43.2, from 46.6 in March. At the same time, however, the current assessment component surged to the highest level since June 2011 and stands at 59.5, from 51.3. The geopolitical conflict close to Germany’s backyard, concerns about the Chinese economy and the recent equity market correction have clearly dented investors’ optimism. After the excellent start to the year, the German economy is now starting to feel some headwinds. In this regards, the latest drop in exports could have been a warning forerunner of a worse-than-expected export performance this year. Looking at the potential downside risks stemming from outside the Eurozone, a too strong euro is one of the least problems for the German economy. In fact, the discussion about a strong exchange rate has to be broadened beyond the euro-dollar rate. While the euro-dollar exchange rate is currently more than 7% higher than one year ago, the trade-weighted exchange rate of the euro has only strengthened by around 3.5%. Neither for the economy nor for the ECB this strengthening qualifies as – to use former ECB president Trichet’s word - being “brutal”. Today’s ZEW index sends two messages, which perfectly characterise the current state of the German economy. The economy had an excellent start to the new year, gaining new momentum. However, with the Ukraine crisis, Chinese uncertainties and emerging markets slowing down more and more gusts of wind, particularly from the East, could easily disturb real spring fever on the island of happiness.

Vriendelijke spoken, ze betaan

De angst voor een nieuw monster in de eurozone waart weer rond. De lage inflatie van de afgelopen maanden en de krimpende kredietgroei heeft het spook van de deflatie teruggebracht. Deflatie, is dat niet het gedrocht dat volgens de leerboeken de hele economie in een neerwaartse spiraal stort? Gelukkig bestaat het leven uit meer dan leerboeken economie. Daarom weten we dat niet alle spoken slecht zijn. De leerboeken brengen een duidelijke boodschap: deflatie is slecht. Een gevaar voor de economische groei, want dalende prijzen leiden mogelijk tot uitstellen en afwachten door consumenten en bedrijven. Daarnaast maakt deflatie het moeilijker schulden af te lossen, omdat de uitstaande schulden steeds meer waard worden. Kortom, deflatie is een monster dat we moeten vrezen, luidt de klassieke theorie. Niet zo snel! Zelfs als de prijzen een klein beetje dalen, hoeft dat lang geen reden te zijn voor deflatievrees en economische neergang. De ik ben-toch-niet-gek-campagne van een bekende Duitse winkelketen toonde overtuigend aan dat dalende prijzen consumenten niet tegenhouden om geld uit te geven. Het lijkt onwaarschijnlijk dat een consument bij een deflatie van 0,5 procent of 1 procent de aankoop van een nieuwe koelkast een jaar uitstelt. Bovendien zijn er enkele goede redenen waarom de inflatie in de eurozone zo laag is: algemene en eurospecifieke. De ruk naar beneden is al langer bezig. Door de zogenaamde hedonistische berekeningsmethode houdt de inflatie rekening met kwaliteitsverbeteringen van producten. De komst van een nieuwe iPhone, ook al kost die net zo veel als de oude een jaar geleden, heeft een negatieve impact op de inflatie. Globalisering en arbeidsmobiliteit hebben ook een neerwaartse druk op lonen en prijzen gezet. Op dit moment komen er nog de lagere energie- en voedselprijzen bij, en de structurele veranderingen in Zuid-Europese landen. Kortom, de lage inflatie in de eurozone is eerder een zegen dan een gevaar. Japan geldt voor velen als de beste illustratie van de kwalijke effecten van deflatie. Daarbij wordt vergeten dat niet de dalende prijzen van consumptiegoederen het probleem waren, maar een leeggelopen zeepbel op de huizenmarkt en op de beurzen. Terwijl de prijzen van goederen sinds 1998 jaarlijks met slechts 0,4 procent daalden, zakten de huizenprijzen en beurskoersen met ongeveer 90 procent en krompen de balansen van de banken fors. Japan toont dat een langdurige bankencrisis het ware spook is dat de eurozone moet vrezen. Het is tijd om een monsterlijk hoofdstuk aan de economische leerboeken toe te voegen. Een hoofdstuk dat behalve aan kwaadaardige spoken ook aandacht besteedt aan vriendelijke geesten zoals in de film 'Monsters Inc', of meer vintage: 'Casper' of 'I dream of Jeannie'. Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

Feb industrial production - German economy is powering ahead

Full speed ahead. German industrial production continued the positive trend of the last months, increasing by 0.4% MoM in February. In January, industrial production grew by 0.7% MoM. On the year, industrial production is now up by 5%. The February increase was driven by the manufacturing sector (+0.5% MoM) and the production of intermediate goods (+1.3% MoM), while production in the energy and construction sector declined somewhat. Despite today’s drop of 0.1% MoM, the German construction sector is booming. Over the last four months, the construction sector has grown by a monthly average of 1.6% and order growth of more than 10% yoy suggests that the boom should continue. For the first quarter, construction should have been an important growth driver for the entire economy. Even if the sector would not grow at all in March, it could add around 0.5%-point to German GDP growth. More generally speaking, latest hard data has closed the gap between buoyant confidence indicators and weak economic activity. Since the start of the year, hard economic data has accelerated. Looking ahead, the German economy should gain further momentum. The formula for success is still the same: the labour market remains tight, order books are filled and inventories are at a 2 ½ -year low. The big unknown in this success formula remains domestic investment. Having been a drag rather than a push-factor for growth over the last years, domestic investment has started to gradually pick up last year. Gross operating surpluses at all-time highs, strong liquidity positions and some capital repatriation argue in favour of strong investment growth. On the other hand, however, capacity utilisation rates are only at, but not above, historical averages and recent surveys show that German companies hardly see equipment as a constraint for production. In our view, domestic investment should continue to pick up, but only at a subdued level. Investment growth this year should rather be a cyclical rebound than a structural shift. All in all, today’s numbers confirm once again that a strong growth performance, at least in the first quarter, is in the making. The German economy is powering ahead.

ECB meeting - The art of doing nothing

As expected, the ECB kept its ammunition dry. Rates were left unchanged but ECB president Mario Draghi sharpened up the ECB’s language to again stress its determination to act (if needed). The ECB’s macro-economic assessment was almost a verbatim copy of last month’s. Economic activity is bang in line with the ECB’s base case scenario. The gradual recovery should continue, although the ECB still sees downside risks to the economic outlook. Interestingly, the exchange rate was still not mentioned as one of these downside risks. As regards inflation, ECB president Draghi remarked that he had been surprised by the March drop in headline inflation. However, contrary to the inflation data ahead of the November rate cut, the March inflation surprise would not have any significant impact on the ECB’s inflation outlook. In the ECB’s view, the timing of Eastern should push up inflation in April and the base case scenario of a gradually accelerating inflation rate until the end of 2016 remains unchanged. Risks to this scenario are still balanced but, remarkably, the exchange rate was explicitly mentioned as a risk factor. During the Q&A session, it became also clear that the ECB is not so much concerned about deflation but rather of a prolonged period of a very low inflation. In the absence of any real action, the ECB provided markets with the expected verbal action. One entire paragraph in the ECB’s introductory statement was dedicated to stress the ECB’s determination to act. “We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time…The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.” There are clearly two key take-aways from this sharpened language: i) the ECB is on even higher alert than before; and ii) unconventional measures, including the for markets so important QE, are backed by all ECB members. Listening to Draghi during the press conference and looking at the available options, however, still leaves us with the impression that QE will not happen any time soon. Draghi’s reference to the Fed and the totally different institutional set-up in the US and the Eurozone indicated that any Fed-style QE, which bypasses banks, is highly unlikely. Interestingly, given his comments it looks as if the option of a negative deposit rate currently has fallen into the category of unconventional measures. For the time being, the ECB sees low inflation as the result of positive supply shocks and temporary factors. In fact, the current period can still be filed under Draghi’s earlier label “with low inflation, you can buy more stuff”. However, today’s press conference signalled that the ECB has increased its state of high alert. Given the expected reversed Easter bunny effect on prices next month, it looks unlikely that the ECB will act at its May meeting. The June meeting, with the next round of ECB staff projections, should be the ultimate litmus test for the ECB’s sharpened determination. If then the 2016 inflation outlook shows lower numbers than the current 1.5%, new ECB action looks probable. This does not necessarily have to be QE. Draghi’s comment that the ECB had not yet reached the end of its conventional measures indicates that a refi rate without a negative deposit rate cannot be excluded. All in all, the bottom line of today’s ECB meeting is that the famous “we stand ready to act” has been stretched to its maximum. No further verbal stepping up possible. The ECB seems to be well aware of the downside risks and implementation difficulties surrounding unconventional measures. Still, the ECB mentioned them to maintain its own credibility. The risk of this strategy can be found back in Goethe’s The Sorcerer’s Apprentice. “beware of the spirits that you call ”. From here on, a further verbal stepping up seems impossible. In a way it’s a gamble, either the recovery continues and inflation picks up again, or the ECB will have to act in June, even if it’s only a small refi rate cut. Carsten Brzeski