Is Core Europe Headed for a Hard Landing?

By Michael Darda

Executive Summary: We are increasingly concerned that the eurozone — including the core — is headed for a sharp slowdown. This powerpoint presentation shows that:

• Leading indicators in the eurozone have rolled over. The OECD’s Euro-Area Composite Leading Index has declined for seven consecutive months;

• Euro-area monetary aggregates are weak across the board. Both M1 (narrow money) and M2 (broad money) are contracting on a three-month annualized basis in the eurozone;

• However, euro-area business confidence is nearly back to peak 2007 levels. Despite the ongoing struggles, business confidence is high in the eurozone. However, confidence levels tend to be elevated at cycle peaks and depressed at cycle troughs;

• Weak money growth and strained credit markets suggest a high risk that the euro-area nominal GDP recovery could be stopped in its tracks. Absent a powerful positive shock to the velocity of money, European nominal GDP growth is likely to slow sharply;

• Debt spreads in Spain and Italy are showing a troubling pattern of “higher highs and lower lows”. Despite backing off a bit recently, sovereign debt spreads in Spain and Italy are near record highs. Worryingly, each successive “peak” in spreads has been higher than the previous one while each “trough” has also been higher.

No question austerity will work- that is, it will force negative growth.
Question is just when.
Unless they make fiscal adjustments, but that seems unlikely.

I’m starting to feel a deflationary malaise coming on as the end of year/beginning of new year related activity subsides.

Headline CPI increases to me are mainly just relative value shifts that rob demand for other things,
and are not anywhere near pushing through to core measures which would pass them on to indexed compensation.

But the talk of inflation is just one more thing keeping global authorities thinking they don’t need another ‘fiscal stimulus’ as they continue to push spending cuts and ‘fiscal responsibility’.

Housing going nowhere. Jobs going nowhere as GDP growth only marginally exceeds productivity growth.

Financial sector finding it hard to make a buck as loan demand remains weak and competition is driving down net interest margins and spreads in general. (I’m thinking of holding a walkathon to help them out. Anyone want to kick in a few cents a mile?)