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Thursday, August 14, 2008

Eurozone Contracts

Really. Eurozone GDP came in at -0.2% in the second quarter. France contracted at -0.3%, vs Germany's -0.5%. France was a bit of a surprise, whereas Germany looked a bit better than many had been speculating a month or so ago. Spain +0.1%. The fall-off rate in what had been a strong Spanish expansion until very recently is hurting other major economies in Europe. Also negative: Italy at -0.3%. Italy racked up one negative quarter at the end of 2007 (just like the US!), then went positive, and now is back on the downward slope, but slowly.

There is a somewhat funny Economist article on the subject, which begins by noting that European economies are hurting more than the US economy:
EUROPEANS might be forgiven for feeling bruised. The housing bust across the Atlantic was the trigger for the credit crunch, so justice demands that America suffer most from the fallout. But America has not so far followed the script, weathering the storms better than it expected. Its GDP suffered a tiny decline at the end of 2007, but it grew at an annualised rate of around 2% in the second quarter of 2008.

Europe is struggling to stay above water. Figures released on Thursday August 14th showed that the euro-area economy shrank at an annualised rate of 0.8% in the second quarter, the first such reverse since 2001. Nor are things likely to improve soon. A closely watched survey of purchasing managers in manufacturing and services slumped in July to its lowest level since 2001. Business confidence has turned down sharply in all of the three biggest economies in the euro area: Germany, France and Italy.
Well, it is what it is, and I don't think most Americans are feeling flush. The point is that the bubbles existed over there too, and several of them started earlier and were bigger than the US bubble. The pain of the UK and Ireland is cutting Eurozone exports to those countries as well, so the Eurozone is getting whupped for its own sins and those of its trading partners.

Since bank lending in Europe continues to contract, this European downturn has legs.

In the US, initial claims fell from last year on the week, however the longer trend is really showing up now. SA insured unemployment has risen to 2.6% from last year's 1.9%, and NSA insured unemployment has gone from 1.8% to 2.4% over the year. CPI-U 12 months ending in July all items is 5.6%, and CPI-W is 6.2%. Ex-food and energy both indexes come in at 2.5%. Mind you, bank presidents who expect consumers to pay mortgages ex-food and energy are jerks and fools, but the ex-food & energy index does show how relatively restrained inflation is. We are absolutely not in an inflationary spiral. We're struggling to stay out of a deflationary spiral.

These CPI figures will start to come down as energy comes down a bit, but slower than most economists are expecting. For one thing, the impact of winter heating costs kicks in from August through November (depending on where you live), which raises the energy-related percentage of the household budget for a huge number of households. Adding to that is the reality that temperatures in the northern US are running a few degrees below the post-80 average, so that causes a bit more suffering. Even the sun won't take pity on us.

Here is where the Treasury data I posted earlier this week comes in. No matter how you slice it, dice it, hang tinsel on it, or slap lipstick and eyeshadow on it, real incomes are falling. The YTD cumulative WIET has risen 4.0% as of July, and compare that to CPI! CPI is understated, also. Effective CPI is much higher for lower income levels. There are a lot of lower income working people who have experienced CPIs of 10-16% over the last year. Life is pure hell for a lot of older people living substantially off Social Security.

The Eurozone really does seem to be hurting more than the US (really because of their taxation system, which is exaggerating energy shocks), but that's hardly a consolation for about 70% of US residents.

And now the pain migrates to Asia.... Bigger bubbles, more risky lending, and manufacturing dependent economies that will feel a disproportionate amount of pain compared to the service-heavy western economies.

Not even Japan is immune to the coming problems with Asian property values, and Germany, which did not see much of a run-up in real estate while others were bubbling, is now seeing problems with commercial real estate. How bad are things in Asia and Europe? Well, would you BELIEVE that a Japanese bank wants to buy the rest of a US CA-based bank? Eweeeeewww:
Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research, Stock Buzz), Japan's largest bank, said it would bid $3 billion to buy the remaining 35 percent of California's UnionBanCal Corp (UB.N: Quote, Profile, Research, Stock Buzz), as it looks for growth beyond its softening home market.

The purchase represents a significant bet by Mitsubishi UFJ, which is looking to increase its presence in the United States even as the world's largest economy continues to stumble through the subprime mortgage crisis.

Saddled with slow economic growth and a declining population at home, Japanese financials, which have avoided much of the subprime meltdown, are increasingly aiming to boost their small market shares in the West.
Do we laugh? Do we cry? It may very well be a decent investment, but that should tell us all something about what's really happening in the world.

Update: And Hong Kong's growth slows sharply, surprising everyone with the depth of the drop.

Well, would you BELIEVE that a Japanese bank wants to buy the rest of a US CA-based bank?
Do we laugh? Do we cry? It may very well be a decent investment, but that should tell us all something about what's really happening in the world.

Do you remember Max Headroom?


Kudos for your prescient call on European (and Asian) growth. You really got it right.
I wish I had been wrong.

Using the same methods, the result is that the new orders on the US production expansion are going to be impacted about 15-20% by the end of Q1 09.

This is NOT good news for the US. Maybe it helps some dysfunctional banks get capital from overseas, but the real economy is going to suffer.

This didn't have to happen either, and I'm still surprised that the ECB didn't wise up and change course before it did. Now it is somewhat too late; a set of correlated forces are working as a drag on European growth.

There, I have to disagree. The ECB is not charged with preventing recessions. They will have one, it will test the Euro, wash out imabalances, and clear out inventories. That will be the end of it.

I still think we'll have a tougher time because we couldn't stomach a moderate increase in unemployment after the internet bubble burst, and we're still discovering the consequences, which if course include the credit crisis.

Please give the ECB a break for thinking that the business cycle is a natural part of capitalism. Its funny, because the knock on the Europeans was that they believed otherwise. Now its our "conservatives" that can't accept the pain and want universal bail outs. That's part of the reason we're in this mess -- we're a one party system when it comes to avoiding pain.
David - I certainly agree that central banks should not be in the business of fostering bubbles, and I think Greenspan did. Yes, a lot of our current situation stretches back to his era.

On the other hand, ECB did nothing to stop their own....
The ECB was never going to cut until after inflation retreated. It is neither their mandate nor their natural inclination to address growth. It is ironic that the very countries who most wanted that strong anti-inflation mandate (the Germans in particular) have been getting hurt most by it. Just goes to show, be careful what you wish for!
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Dear friend,

Wonderful .
Accept my sincere thanks and appreciation

John ,


Jobs – companies – real estate – engineers – petroleum company
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