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Monday, May 16, 2011 2:06 AM


Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected


Before taking a look at industrial production, let's take a look at how uneven the jobs recovery has been.

The New York Times reports A Jobs Recovery Is Happening Faster for Some Countries Than Others

THE financial crisis and the severe recession that followed destroyed jobs in every industrialized country. While many countries have started to recover, in only one major one, Germany, has unemployment declined to a level lower than it was in September 2008.

When the downturn began, Germany had about 25 percent of the population in the euro zone and a similar share of the unemployed workers. Its population share is about the same now, but it has only 17 percent of the unemployed.

If the euro zone were a fiscal union rather than just a monetary one, there would have been automatic subsidies through unemployment benefits and other programs for the weaker areas. If there were easy labor mobility in the zone, more workers would have moved to Germany. If there were separate currencies, the German mark would have appreciated against the other European currencies.

As it is, none of that happened. Many Germans resent the need to bail out other countries, and many people in those countries resent being forced to cut wages and payrolls in the name of restoring competitiveness.
Unemployment Rate Comparison



Spain, Ireland, Greece, Portugal Continue Decline



European Production Slips

The charts above show what has transpired. However, the pertinent question, as always is "What's Next?"

For some clues about Europe, please consider German Bonds Rise as European Production Slips, Limiting Rate Speculation
May 12, 2011 10:27 AM CT

German bunds rose, pushing the 10- year yield toward a two-month low, as a report showed European industrial production unexpectedly fell in March, strengthening the case for interest rates to be kept on hold.

Production in the euro area slipped 0.2 percent in March from February, when it grew 0.6 percent, the European Union’s statistics office in Luxembourg said today. The median prediction of 25 economists surveyed by Bloomberg was for a 0.3 percent gain.

Greek unions kept ferries docked at ports, grounded flights and shut hospitals and schools yesterday in protests against Prime Minister George Papandreou’s plans to sell state assets and usher in more spending cuts. The country’s unemployment rate rose to 15.9 percent in February, from 15.1 percent the previous month, Athens-based Hellenic Statistical Authority said.

Greece is likely to restructure its debt in the first half of next year, Barclays Capital strategists including Piero Ghezzi, head of global economics, emerging markets and currency research in London, wrote in an investor report yesterday. A restructuring is “unavoidable,” Credit Suisse Group AG analysts, including Andrew Garthwaite, wrote a research note today.
French Industrial Production Unexpectedly Declines .9 Percent

Please note French industrial production unexpectedly fell in March
French National Bureau of Statistics (Insee) on Tuesday (May 10) released data show that the French industrial production unexpectedly fell in March.

Data show that the French rate of industrial output in March fell 0.9%, is expected to rise 0.4%
Spain Production Down 1%, Ireland Down 1%, Greece Down .6%

According to the Wall Street Journal article Industrial Output Signals Slower Euro-Zone Growth, industrial production dropped 1% in Spain, Dropped 1% in Ireland, and dropped .6% in Greece. Moreover, things do no look so good for the UK either.
Figures released Thursday by the U.K.'s Office for National Statistics showed industrial production there was weaker than expected in March due to continued maintenance on oil and gas infrastructure. However, the narrower measure for manufacturing also raised questions about the strength of economic growth.

The government hopes manufacturing will play a significant role in the U.K.'s economic recovery. The sector, which has been boosted by the pound's depreciation since late 2007, has performed well and was the one bright spot in the economy's surprise contraction in the fourth quarter of 2010.

But there are signs of a loss of momentum. The latest Purchasing Managers' Index survey showed manufacturing growth slowed to a seven-month low in April, while a Confederation of British Industry's survey showed a drop in the number of firms expecting output to rise in the next three months.

Economists said Thursday's data added to signs that growth rates in the manufacturing sector, which accounts for about 11% of the U.K.'s gross domestic product, are returning to more typical levels—but that might highlight weakness elsewhere.
Pound Declines as Traders Scale Back Interest-Rate Bets on Growth Concern

Please consider Pound Declines as Traders Scale Back Interest-Rate Bets on Growth Concern
The pound weakened against most of its major peers this week as signs the U.K. economic recovery is faltering heightened speculation that the Bank of England won’t raise interest rates anytime soon.

Risks to economic growth remain “skewed to the downside,” the central bank said in its quarterly inflation report. Price growth may quicken to 5 percent this year, it said. Statistics this week also showed U.K. industrial and manufacturing production increased by less than economist forecasts. Traders scaled back bets on when policy makers will boost borrowing costs.

“We’re starting to see some of the effects of the government spending cuts feed through to the real economy and that’s causing rate hike expectations to be pushed back,” said Chris Walker, a currency strategist at UBS AG in London. “The pound has very much moved in tandem with rate expectations. It’s looking a bit vulnerable now.”

Growth is slowing as Prime Minister David Cameron’s coalition government is seeking to reduce a fiscal deficit of almost 10 percent of gross domestic product by raising taxes and cutting public spending, the deepest cuts since World War II. The Bank of England left its key rate unchanged at 0.5 percent on May 5, three days after Governor Mervyn King said the economic effect of raising borrowing costs would be “severe.”
Currency Fundamentals

Let's recap Trichet Backs off Rate Hikes; US Dollar Up Sharply; Currency Fundamentals
Thursday, May 05, 2011 3:39 PM

ECB President Jean-Claude Trichet has backed off his usual way of signaling a rate hike, which is to use the phrase "strong vigilance". Instead, Trichet said today "the ECB will monitor inflation risks very closely".

The market interpreted this change as a pause in rate hikes by the ECB. Unlike most, I had been expecting this action by Trichet for many reasons. I gave some of those reasons in my speech last week at Saxo bank. (See Meeting with Saxo Bank Chief Economist; My Speech in Copenhagen; Images of Stockholm and Copenhagen) for a discussion and lots of digital images.

Why I expected Trichet to Curtail Rate Hikes

  • Strengthening Euro is hurting European exports
  • ECB's One Size Fits Germany Policy is not viable.
  • Rate hikes would exacerbate problems Spain, Greece, Portugal, Italy, Ireland, Greece, and Spain (the PIIGS)
  • The recovery in Europe is not on solid footing
  • Hiking rates to combat oil prices makes no sense if the spike in oil prices is not caused by a rise in demand

Fundamental Factors Affecting Currencies


  1. Expected and actual interest rate actions
  2. Direction of interest rate differentials
  3. Actual interest rate differentials
  4. Demand for dollars in debt deflation credit crunch
  5. Deficits
  6. Actions on Deficits
  7. Trade imbalances

The top reason the Euro has been soaring was an expectation the ECB would hike three times or more and the Fed none. Trichet threw cold water on that expectation today, and the Euro promptly sank 3 cents vs. the US dollar.
Cold Water on Rate Hikes

As noted above, currencies move not only on interest rate differentials, but expected interest rate differentials. The Bank of England and the ECB have now both thrown cold water on expected hikes.

Huge Cracks in Global Recovery Picture

Unless those production reports are outliers, we are beginning to see a picture of a much slowing Europe.

Moreover, back in the states, Non-Manufacturing ISM Plunges Below Prediction of All 73 Economists, New Orders Collapse

Down under, please consider Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property Transactions

Meanwhile China is overheating.

Add that all together and there are enormous cracks in the global recovery picture.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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