Goldman's Erik Nielsen looks at the immediate European future, is flummoxed by all the end of world calls (bank runs, Ireland rejecting budget, austerity riots everywhere), and sees a future so bright he just has to wear the kind of shades that only a multi-million dollar bonus can buy (especially after Goldman upgrades all banks and its own bonuses by about 10%). After all his colleague Hatzius, despite all the facts and data, just upgraded US GDP. It now appears that just like Moody's 5 years ago, Goldman's excel spreadsheets crash when one input a negative growth assumption. Arguably these are the same spreadsheets that Tim Geithner used to prepare his taxes.
From Goldman Sachs
Happy Sunday,
Winter arrived here in Chiswick sometime last week while I was in California; what a shock to my system when I landed in Heathrow on Friday afternoon! I spent a very busy – and interesting - week meeting clients there, so my apologies for my poor response rate to the many emails and calls I got last week. Possibly deluded by the wonderful vibrancy of California (in spite of the crisis), here is how I see Europe on this early winter day:
Winter arrived here in Chiswick sometime last week while I was in California; what a shock to my system when I landed in Heathrow on Friday afternoon! I spent a very busy – and interesting - week meeting clients there, so my apologies for my poor response rate to the many emails and calls I got last week. Possibly deluded by the wonderful vibrancy of California (in spite of the crisis), here is how I see Europe on this early winter day:
- Why the rumours of some new big crisis initiative from the EU or the ECB make little sense.
- My best guess what the response will be in the weeks to come, if markets don’t calm down by themselves.
- But don’t question the continued political commitment to the European project.
- It was another week of very good macro numbers throughout practically all of Europe.
- We published – globally – our revised 2010-11 forecasts, and our first suggestion for what 2012 might look like. We think the global (and overall European) outlook remains robust. [one usually pays good money for this kind of comedy]
- Next week all eyes will be on the Irish budget approval on Tuesday.
- On the data side, we’ll get the first hard Q4 data as almost all of Europe reports industrial production for October. In the Euro-zone we’ll start with Germany, France and Italy, all of which should show decent growth.
- In the UK, in addition to manufacturing output, we’ll get (high) producer price inflation – and the monthly MPC meeting (no change).
- Switzerland prints the valuation of their FX reserves; interesting in these times of (excessive) focus on central bank balance sheets.
- Sweden and Norway will be reporting IP and inflation.
- Central Europe will print a host of data for early Q4 – and the details of their impressive Q3 numbers.
1 Following the disappointment with the Irish package last weekend (justified in as much as uncertainties surrounding the 2011 budget and the future political landscape is shifting so fast), contagion spread early in the week to the Iberian Peninsula and beyond, in turn raising speculation about what the next official sector move might be. Most questions related to the possibility of an expansion of the EFSF and an announcement of big ECB purchases of sovereign assets. In my view, both ideas are very unlikely for a long time, if ever: Reality is that crisis responses are not pre-empty but reactive, so it just does not seem reasonable to expect the EFSF being topped up until its present capacity has been exhausted (if even then), and I very much doubt the ECB would ever announce a specific quantified purchase program for two reasons: First, why do it when they already have a de facto open-ended facility (and Trichet says that they’ll do what they have to do!) while a new quantified program would most likely trigger unhelpful headlines in the German (and other countries’) press? Second, would a quantitative announcement actually be better than the present set-up? I doubt it. Remember the issue they are out to address is not too weak growth and too low inflation (which might justify QE) but a market which – in their view – misprices assets to a degree that there might be broader systemic risks, so they intervene in the sovereign debt market like they would in the FX market – and here there is no history of pre-announcing quantities or time periods for their interventions.
2 Rather, if markets do not calm down substantially in the next few weeks then I rather suspect that we’ll get a “traditional” EFSM-EFSF-IMF program with Portugal that would finance them for the next 2-3 years. Indeed, I wonder why they didn’t come along with the Irish process apart from the fact that Portuguese policies still seem to lack some for the conditionality that would accompany such a program. Spain is different in as much as they have moved much more aggressively on the policy front ever since the drama in April-May. Just this past Friday the Spanish government passed the initiatives they announced earlier in the week, and added three more for good measure, namely (very importantly) plans to raise the retirement age to 67 from 65 (details to come through in late January); an increase in tobacco excise taxes; and a 35% cut in existing subsidies for wind power. In my book, we are now very close to a policy set-up in Spain that would qualify as proper conditionality for a program, but since Spain would practically exhaust the EFSF if it had to be fully funded for a 2-3 year period, I think the smart thing would be to provide them with a contingent facility – or a credit line – not that different from what the IMF provided to Mexico and Poland in recent years.
3 If still not enough to put an end to contagion, then I remain convinced that we’ll get further policy actions through official lending, ECB purchases, or – if markets are seen as irrational [otherwise known as perfectly rational markets responding to a demented authoritarian and quasi dictatorial regime, see Nigel Farage]– by some form of capital controls or other measures. The money is available in the Euro-zone (running a small current account surplus), so it is “only” a question of re-distribution of savings – and the overall commitment to the overall European project (and to avoid a European version of Lehman) is not at risk. There’ll always be political noise when official lending has to be agreed, but it takes place against conditionality which is pushing through policy reforms at an unprecedented clip in the recipient countries, and it is taking place at a positive carry for the lenders. But sometime transparency might not work to one’s advantage in a political sense, of course: Compare the European rescue of the periphery to a system of fiscal federalism in which tax money is being shared (given away, not lent) against no conditionality, with imbalances dragging on for ages. I guess it all comes down to one’s concept of solidarity with one another; a topic on which reasonable people can surely disagree. On this general topic, I can highly recommend Peter Singer’s little book: “The Ethics of Globalisation”, which – to give credit where credit is due – came to my attention from the interview with Dani Rodrik on the excellent website “Five Books”: http://fivebooks.com/interviews/dani-rodrik-on-globalisation
4 But maybe markets calm by themselves as the good data continues to roll in! We are through another week of generally robust growth-related numbers throughout Europe. The Euro-zone printed a manufacturing PMI for November of 55.3 (consistent with about 2.5% annualised GDP growth) with acceleration in the output, news orders and employment components. Not surprisingly, Euro-zone growth continues to be driven by the 75% or so of the economy in the “core” (German retail sales were up a solid 2.3%mom in October in line with our overall forecast of stronger domestic demand), while the periphery keeps struggling. In Spain we saw another decline in industrial production although better than expected retail sales. The UK composite November PMI increased to a six-month high of 55.0, suggesting annualised GDP growth in the 3.0%-3.5% range, while the Swiss PMI reversed three months declined and returned back up above 60. Norwegian PMI also moved higher to 56.0. In Sweden, where we already are in the 60-stratophere, the PMI eased a tad, while Q3 GDP came in an eye-watering 2.1% higher than Q2; i.e. 8.7% annualised growth!
5 Generally, these European numbers came pretty close to our expectations, if slightly on the stronger side, so it’s looking good for our 2010 forecast of 1.7%. On that note, on Wednesday, along with our colleagues around the world, we updated our 2010-2011 forecasts and presented our first look at 2012. For the world as a whole, we revised our 2010 and 2011 forecast up to 4.9% and 4.6%, respectively, predominantly on the back of stronger US growth than previously thought. We see good global growth continue for 2012 as well, at 4.8%. Our European (EU-27) forecast is still for 1.9% this year followed by 2.2% in each of 2011 and 2012. We have the Euro-zone grow by 1.7% this year, followed by 2.0% next year and 1.9% in 2012. Please see our global publications from Wednesday for a more detailed discussion as well as our top trades on the back of these new forecasts.
Looking to the week ahead,
6 The possibly most important event this coming week will be the vote on the Irish budget on Tuesday, which forms part of the base for last weekend’s rescue package. My guess would be that it’ll pass in spite of the rapidly developing political crisis because of a broader feeling of national cohesion – before the glows then come off for what almost certainly will be early elections, probably in January or February. If I were to be wrong in thinking the budget will pass then negotiations with the Troika would start up again, surely accelerating the expected early elections with the ECB keeping up its more aggressive asset purchases.
7 In the Euro-zone this coming week will provide the first hard data for Q4, namely German manufacturing orders and industrial production on Tuesday and Wednesday, respectively, followed by French and Italian IP on Friday (all of which having EMEA-Map relevance scores of 5). The surveys have pointed to a re-acceleration in activity in early Q4, and our leading indicator has also turned up slightly. We expect German orders to post a +2%mom gain and German IP to increase by 1.2%mom, both after weak September numbers. We expect smaller increases in France (+0.1%mom) and Italy (+0.2%mom), reflecting both their less powerful recoveries, but also their positive growth rates in September compared with the negative ones in Germany (remember these are volatile series.) If we are broadly right on these expectations, then Euro-zone October IP – out the week after next – will be a forceful +0.7%mom; a powerful start to Q4 in Euroland!
8 The UK also reports the first hard data for Q4 this coming week; in the form of October manufacturing output (and industrial production) on Tuesday; we expect both to come in at +0.3%mom. We also get producer price inflation and PPI ex-food etc on Friday, which we think will come in at a stunning 4.0%yoy and 4.6%yoy, respectively. The day before, Thursday, the MPC will consider its monetary policy stance; they’ll leave rates and other policies unchanged in spite of the continued significant overshoot of their inflation target.
9 In Switzerland the highlight will be tomorrow’s preliminary estimate of the end-November CHF value of FX reserves on the SNB’s balance sheet. This is particularly interesting in these days of (excessive) concern about central bank balance sheets because here is a central bank which didn’t hesitate to put its balance sheet to work to correct what it thought was inappropriate market price actions! Otherwise there is just one data release of interest in Switzerland: the unemployment rate for November (Tuesday); we expect an unchanged headline rate of 3.6%.
10 Sweden also reports October IP this coming week (EMEA-Map relevance: 3), which should see a more sustainable growth rate than September’s turbo-charged +2.7%mom; maybe around consensus’ +1.0%. We’ll also get inflation data on Thursday. For the CPIF inflation measure, which excludes the direct effect of changes in Swedish interest rates and is the measure most closely followed by the Riksbank, the consensus expectation is for an unchanged 1.8%yoy in November, which seems reasonable to us (Riksbank: 1.7%). Headline CPI inflation is released along with the CPIF measure, and the consensus expectation is for an increase to 1.7%yoy (Riksbank: 1.5%yoy). Also, As Lasse Nielsen has pointed out, Deputy Governor Nyberg’s speech tomorrow on new monetary policy thinking after the crisis will be worthwhile listening to (or reading shortly afterwards).
11 Norway also prints its October IP (EMEA-Map relevance: 4) and inflation this coming week. The IP is on Tuesday; we expect +0.4%mom after September’s amazing +1.6%mom. The underlying CPI-ATE inflation rate (which adjusts for tax changes and excludes energy products), and which Norges Bank pays most attention to, should come in at around 1.0%yoy in November while the headline number is likely to ease to 1.9%yoy (from 2.0%). Also, Norges Bank Regional Network Report for Q4 will be released on Friday. Given its excellent track record in Q3, this report will be the key source of information of sentiment coming into Q4.
12 Central Europe also gets their first look at hard data for Q4, namely in the form of IP, retail sales, trade and current account balances, as well as unemployment numbers for October. But the most important numbers may be the Q3 GDP breakdown in Hungary and the Czech Republic on Thursday. Flash estimates were better than expected so we will be looking for what led to this outperformance, especially if there was a visible pick-up in domestic demand.
… and that’s the way Europe looks to me. The sun is out – if not quite as powerful as it’ll be when it makes it ways over to California later in the day, but its good enough for a stroll on the high street here in Chiswick - and behind the windows of Caffee Nero, it’ll feel very good!
Best
Erik F. Nielsen
Chief European Economist
Goldman Sachs
