This might seem obvious, but it’s worth repeating: European economic policy has been a complete failure. By every measure, things have been a disaster for years. Nobody is doing anything right.
This coming Thursday we get the latest European GDP report, and the prognosis is really grim.
Here’s Carl Weinberg of High Frequency Economics telling it straight. If you don’t want to read the full paragraph, you can just read the first, bolded sentence.
For Euroland, the big picture is that the economy is in its seventh year of depression. On our estimate of a 0.7% contraction in the second quarter, GDP was still 3.2% lower than it was in the first quarter of 2008, when the depression began. Euroland’s economy actually contracted in the first quarter of this year when you exclude Germany’s unexpected surge to a 3.3% annualized rate of growth. Only people who were misled by Markit’s untested and unproven PMIs believed that such growth was real and sustainable. Our estimate of second quarter GDP for the Euro Zone includes a contraction of Germany’s economy at a 2% annualized rate, reversing the windfall in the unexplained and inexplicable first quarter spurt. If our forecast proves correct, average GDP growth for Germany in the first half of 2014 will work out to 0.7% at an annualized rate, clearly less than potential but very much in line with the experience over the last few years. Our estimate for France’s economy is a more horrible contraction of 1.1% for the quarter, or 4.3% at an annualized rate.
Back in 2010-2012, Europe did have a crisis, which it largely solved, and that was the sovereign debt crisis. That was fixed when the ECB offered an implicit debt backstop to every country. That caused borrowing costs to plunge, and removed the fears that a country would default and be forced to leave the common currency.
But nothing else has worked. The countries are still largely on an austerity track (even as debt loads continue to rise) and the ECB has twiddled its thumbs, letting loan growth and inflation fade.
And Q2 likely won’t mark the end of the pain.
Here’s Citi’s forecast for dismal GDP growth and inflation that misses ECB targets
We lower our 2014 & 2015 GDP forecasts by 0.1pp each year to 1.1% and 1.7%, respectively and also shave a decimal point off our 2014 inflation forecast to 0.5%. Although our bean-count models suggest that euro area real GDP growth was around 0.4% QQ in 2Q-14, our bottom-up estimates point to 0.3% QQ. To be sure, most business surveys have been painting a somewhat less constructive picture of economic activity in the latter part of the first half. Our analysis of the business cycle highlighted risks that the initial and strongest phase of business cycle improvements could be behind us. Recent developments in Ukraine and the persistence of a strong euro indicate that the balance of risks to economic activity remains skewed to the downside, notwithstanding better signs from the US and China. Turning to inflation, strong base effects will likely drive the euro area headline rate to a new multi-year low of 0.3% YY in July (flash estimate on 31 July), with limited prospects of a rebound before Q4, in our view. Our forecast of weak wage dynamics suggests core inflation will stay low, in contrast to the ECB’s expectations of an imminent rebound.
As the above hints at, on top of everything else, now there’s the Russia situation and the sanctions, which won’t help anyone’s confidence.
It’s all gloom, with no lights at the end of the tunnel.
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