REAL INDICATORS
“So those who are last will be first, and those who are first will be last” (Mt 20, 1-16). In the'Eurozone Is the teaching of the parable of the workers in the vineyard perhaps being realized? We doubt it, it's not the kingdom of heaven anyway.
It happens that for several months now the leading European economy, the Germany, goes very badly, so much so that it resembles a snorting steam locomotive going uphill more than the ICE (InterCityExpress), and finds itself last in growth; and that the French, which is the second largest by tonnage, finds itself second to last. On the contrary, theItaly which was last in terms of dynamism, finds itself among the first, together with the Spain (which was also in the queue during the two major crises of this third millennium: in 2008-2009 and in 2020).
It's not a paradise because they are the first two to have "adjusted" to the snail's pace of the last one, and not vice versa: +1% per year, against +1,8% and +1,5% respectively in the pre-pandemic four-year period, when Spain was American, with a +2,6% (+2,5 .XNUMX% the USA). It is not a paradise also because, given these past and present rhythms, only Italy among the great Europeans has almost it resumed trend levels pre-Covid, as the USA fully did (whose GDP however is 11 percentage points higher than Italy's: cumulative gap over nine years). It is not a paradise, finally, because the Germanic tortoise is ballasting the rest of Europe, and France helps her in this (this was not the Berlin-Paris axis we hoped for).
Therefore, if Italy was once said to be the 'sick man of Europe', today this humiliating label is attached to Germany, which has always been the heart and engine of the European economy. But Italy's (ex)-disease was not enough to infect the entire area (GDP is 14% of the Eurozone). While Germany, with a weight double that of Italy, is now a burden on the whole of Europe.
It is not the first time, in fact, that the German system finds himself in this uncomfortable and humiliating position for those who assimilate the sense of superiority with breast milk. It had already happened between the two millennia, and this led to the series of liberal reforms of the Schröder government which opened the doors of electoral victory to Merkel and a new phase of success for the German locomotive. The current picture has changed a lot in at least two load-bearing pylons of that power, regional as you want, but power.
The first pylon is there globalization. The phase of long Teutonic growth was driven by exports, whose weight (on the GDP) in fact rose from 27% in 1999 to 46,3% in 2012. An export, however, also based on qualities of others, in the sense that Germany imports semi-finished products and then re-exports them as finished products, leveraging the Made in Germany brand synonymous with high-end products, whose reliability and performance are based on what is imported. And the bazaar economy. Now that geopolitics is reshaping geoeconomics, this model works less well.
Proof of this is thetrend of German exports towards the hubs of the other two macro-regions (the first being Europe, of which Germany itself is the hub) of global trade, i.e. China and the USA: in both cases there is a decline in exports, more significant towards the first than towards the latter, also due to the fact that US domestic demand is growing more.
The second pylon is theautomotive which, between components, production and sales and assistance network, employs 2,1 million people in Germany, which exports 51% of its turnover of 438 billion and which has a very high research content. Only that the German automotive production she never recovered from diesel-gate and in 2023 it was one third lower than the levels of 2015 (when the scandal broke). On the other hand, the transition to electric will reduce and by a large number of workers in the sector (direct ones by 60%, and indirect ones by a good amount). And it should be added that the main German car manufacturer is investing more outside than inside Homeland.
It was grafted onto this renewed structural fragility of the German model theAffair of the 60 billion hole (around 1,5% of GDP) in the federal public budget caused by the ruling of the Constitutional Court, which rejected the use of the surplus funds allocated to combat the pandemic and its effects to incentivize the digital and green transition . So Berlin found itself having to hastily cut subsidies and expenses, with the result of slowing down this transition and causing orders already purchased by companies to be cancelled. That sentence has such consequences by virtue (so to speak) of theGerman economic orthodoxy which abhors public deficits and debt, a true obsession of nullKommanichts (zero point zero), which we had tragic experience in the sovereign debt crisis of 2011-12.
So, there is a Teutonic disease that afflicts the European cycle and makes the recovery of the Old Continent after the double pandemic and energy shock more difficult, the second of which is much stronger than that suffered by the USA (which are net exporters of energy).
If Germany is doing badly, the France does not appear in excellent health, partly for similar reasons: the weight of the car, although smaller, remains significant. At the opposite Italy and Spain are doing better, and if the second is not surprising (it has a track record of significantly higher growth, as mentioned above) the first wonder. But we will return to this "miracle" in other Lancets, given that in the past the Bel Paese paid double the cost of every global crisis, while it overcame the pandemic and energy crisis much more brilliantly than the top of the class. One reason, however, must be said immediately: a strong driving force for the two Mediterranean economies is, in fact, in the Mediterranean, understood as a climate and tourist attraction which, together with monuments and other natural beauties, is attracting droves of tourists (finally also Chinese) in the wave of recovery of post-pandemic international travel, which has not yet ended and perhaps, by virtue of the increased preference for travel, may never completely end.
Finally, Europe is theater of a new war, which continually threatens to spill over into a wider conflict, and is very close to the other war, the Israeli-Palestinian one, which has unfortunately reached yet another episode, not much bloodier than many that preceded it, and like these with Middle Eastern bites which expose the Old Continent to paying high prices (see the increased danger of using the Suez route). The economy can only be affected.
And in the rest of the world? Three considerations from a bird's eye view. First, the manufacturing continues to emerge from the demand hangover during the quarters in which Covid-19 was raging, hangovers made worse by the increase in energy prices and the cost of money (manufacturing production is more energy-intensive and the demand for many manufactured goods is more sensitive to the increase in the cost of money). Second consideration, even if it is fashionable to point the finger at the weakness ofChinese economy, this continues to be there locomotive of the world economy, since its contribution to the planet's growth is the highest in the forecasts for both 2024 and 2025; added to that of India (now third in the PPA GDP ranking), it makes ASIA the most dynamic continent.
Third consideration, in the USA there are those who are starting to worry more about the recession than of inflation: it is a minority, and it looks at the "Sahm rule”, which sees a recession as more likely if the 3-term moving average of the unemployment rate increases by more than half a point above the minimum of the last twelve months. This empirical regularity has merited regular updating of this indicator by the FRED database. We are not there yet, but we are approaching the critical threshold. All the other indices, however, give good stable weather in the American economy, apart from the oscillations due to meteoric effects; The the main driver remains employment, which increases at high rates. In general, the soft landing is confirmed, with less hot growth (GDP expected at 2,3% in the current quarter) and cooling inflation (albeit in a non-linear way).
INFLATION
On the inflation front they alternate hopeful expectations and bitter disappointments. Hopes that the reduction in consumer price dynamics will continue rapidly, paving the way for rapid drops in interest rates, and disappointments whenever data goes against expectations.
In fact, it's not that strange to be disappointed when you have them expectations based on pious desires rather than on a careful reading of reality. Time ago The hands they warn sailors not to claim victory too hastily. Because the reduction in inflation would have continued, but less rapidly. For three reasons: the first is that the effect of the return of the raw material prices energy and food production towards pre-war values, an effect that could only be a one-off. It is true that this effect does not end with the direct impact on the consumer price index because it lowers production costs and therefore pushes companies to reduce price lists, but this still happens gradually.
The second reason is that the main component of home-grown inflation, the cost of the job, would have continued to increase due to favorable supply and demand conditions (more vacancies than unemployed) and the push to recover lost purchasing power.
The third reason is that restrictive monetary policy does not act on demand uniformly, but rather focuses (it is not therapeutic obstinacy) on that part of it aimed at goods that are purchased by resorting to credit, therefore durable manufactured goods, investment goods and construction, having less impact on the purchases of services. And the compression of the purchases of manufactured goods at a certain point ends, physiologically, because the need to replace or innovate overcomes the barrier of the financial cost.
On the other hand, it happens that the second phase of the post-pandemic recovery (the one from 2022 onwards) has focused precisely on social activity services (travel, shows, HoReCa). So the effectiveness of the crackdown was less, given the circumstances. Furthermore, housing shortages, investments in infrastructure and incentives for the energy transition have an expansive effect on construction, easing the monetary brake there too.
Therefore, the downward profile of the inflation curve it is flatter in its final phase. This does not mean that inflation is no longer falling, just that it will take longer to reach the desired objective consistent with monetary stability. If we were around a pool table, we would be urged to "calm and chalk".
RATES AND CURRENCIES
The obsessive attention of the markets, and not, to interest rates of the Central Bank is justified? Suppose you are a captain of industry American who needs money. If you want to get them from your home bank, your attention is certainly warranted. An example: from the beginning of 2019 to today i Fed policy rates increased by 3 percentage points, and the first installments followed them faithfully, rising to 8,5% today. But in America – and also, to a much lesser extent, in Europe – the home bank is not the only option. Our 'captain' could stock up on capital stock market (in its different joints), or could emit junk bonds, or ask for money through the venture capital. If it were not American but European, the mutatis mutandis it wouldn't work very well forEuro-area and more bank-centric of the United States. For theItaly even less, given the minimum average size of the companies. In any case, he should then, if he is an exporter, keep an eye on the cultural, : if the dollar devalues, its foreign currency revenues will increase its profits, and it will then have less need to finance itself externally; and viceversa.
All this to say that what matters, for the impact on the economy, are not just interest rates, but a broader quantity that economists call 'financial conditions'. The two concepts should, in theory, influence the economy passi passu: if rates increase the stock market is not happy, and both the cost of debt capital and the cost of risk capital increases, and the opposite if rates fall.
But, moving from grammar to practice, things are not always like this. Let's look at the graph, which puts together the Fed's policy rate (Federal Funds) and Wall Street (S & P500). At the beginning (until towards the end of 2021), everything was going by the book: rates were low and the stock market was happy. Then, again as per the book, the markets began to smell a coming fortune monetary restriction, and Wall Street continued to weaken, until towards the end of 2022. But from then on the manual no longer worked. The Fed continued to raise rates until August, and then kept them at high and restrictive levels until today. And in the same period it S & P500 it did nothing but go up breaking historical records.
There are two explanations: on the one hand, there has been a broad drag on the shares of large technology companies, with big current profits and even bigger ones profits hoped, driven by the euphoria on IA (Artificial intelligence). On the other hand, there are expectations: if in that graph we were to replace the actual Fed Funds with those implicit in operators' expectations, we would see a expected decline in the key rate which justifies the rise in the stock market (and which also fleshes out future profits with a lower discount rate).
This "promised" descent, like the land to the people of God in the biblical writings, is not only in the expectations of the operators: both the Fed and the ECB they gave unambiguous indications that summer will see the long-awaited start of the decline of rates. A decline that is also necessary to counteract the Teutonic severity of the budget rules in the Eurozone. We must use caution, say the higher echelons of the Commission. But then, if the economy is weak and public budgets are hampered by the rules, that at least monetary policy lends a hand...
We return to America. Everything just examined means that, despite the fact that the Fed Funds are today at the highest level of the last twenty-odd years, the 'financial condition' indices are the most permissive since the Fed began its recent tightening. These indices include the dollar exchange rate, which however matters little in a relatively closed economy like the American one (exports are only just over 10% of GDP), and also include the spread between 'solid' and 'junk' securities which have fallen - even the spreads with the securities of emerging countries they are at their lowest level for three years –. Then, of course, there's the everlasting optimism of the markets, which sees asymmetric reactions: the more modest intimations from the Fed ("with words and with hands and with signs", says the Poet) in the direction of lower rates, are received with enthusiasm from Wall Street and its sisters. While intimations in the opposite direction are met with elegant detachment.
In short, there is desire for risk in the markets. A desire that can be seen, turning towards extreme sports, even in the ascent of Bitcoin, which tries to shake off the (justified) reputation of being “a decentralized Ponzi scheme“, as Jamie Dimon, the CEO of JP Morgan Chase, defined it. Moreover, a scheme that has received a sort of regulatory blessing, given that the US authorities authorized on January 10th the issuance of ETF funds that contain fake electronic money (fake as money). And this has encouraged the flow of savings towards it, also allowing people to try their luck by pledging a fraction of its unit value. The popularity of Bitcoinmania is confirmed by the Google search engine, which in the week from 7 to 14 March assigned a rating of 53 to "digital coinage", against 38 to Taylor Swift and 9 to Beyoncé: more pop than that!
Moving on to more domestic areas, it is necessary to underline the decline in the local spread. We are back to levels of the Draghi Government, although, of course, yields were much lower then (the ECB's key rate was crushed to zero). It is normal that, in times of falling rates (or, at least, expectations of falling rates), the BTp benefits, but here there is something more: there is the confidence in the markets in the management of Italian public finances and in the signs of vitality of our economy. The fact that it is the spread decreased both compared to Bunds and Bonos Spaniards confirms the existence of this trust.
Sui foreign exchange markets there's not much new. The dollar it remains in the 1,05-1,10 range (against the euro) in which it has been sailing since the end of 2022. But there are also other currencies besides the euro. In the same period the greenback, if we look at the actual changes (against 63 other currencies) has depreciated slightly: by approximately 3% nominal and 5% real (in this case, the relative consumer price indices for each of the counterpart countries are taken into account). Strangely enough, the same thing can also be said for the chinese coin: from the end of 2022 to today, the exchange rate of the Yuan against the dollar has changed little (depreciated by 1,5%), and a similar depreciation is also noted for the actual exchange rate of the Yuan (0,8%); but the real exchange rate it depreciated by around 5%, thanks to lower Chinese inflation. It might seem strange that China and the United States, with more than decent economic growth, see a real depreciation of their currencies. But this seems to be due more to the inflation differentials than to the trend of the nominal exchange rate. Without forgetting that in recent years i Competitiveness factors other than price have become much more important of the factors – nominal exchange rate and inflation – that determine price competitiveness.
We said: there are other currencies besides the euro. And in the currency zoo there is an exchange rate that seems like a chimera: the one between Australian dollar and Swiss franc. Yet, this esoteric relationship between the two currencies is sometimes regarded as a mighty one advanced indicator of the fate of the world economy. The two countries, apart from their natural beauty, don't have much in common. But exactly this one diversity it is the reason behind the significance of the signals that come from the exchange rate gaps. There Switzerland is often referred to as the country-refuge par excellence: currencies seeking shelter flock to the coffers of the Swiss Confederation, and even various misadventures with the American tax authorities have not affected this role. Switzerland, in addition to its landscape resources, is not greatly endowed with other gifts from the earth: it lives thanks toindustriousness of its inhabitants.Australia it's a bit the opposite: it has immense natural riches, from mineral to agricultural. Export mostly raw material. And, having, at least until a few years ago, a structural deficit with foreign countries (unlike Switzerland, which has a structural surplus), it must keep interest rates relatively high.
And it is precisely these differences that make the change a 'canary in the mine'. Ecosystem's staff is Australian dollar it is linked to the cycle, which is known to be unstable and violent, dei commodity prices. Thus, when things go well, that dollar rises, risk aversion diminishes, capital is willingly invested in a profitable currency, the flight towards the Confederation's coffers diminishes, and in any case the low rates of the Swiss franc they don't attract. The opposite happens when things go wrong.
So, what does this 'canary' say in the current times? Apart from the collapse (see graph) during the Great Recession and pandemic, today this exchange rate is relatively stable. Which is fine. We've had enough of instability in the world economy...
