Can the ECB save the Euro area economy?

by Shaun Richards

The last day or so has brought economic activity in the Euro area into focus. Last night brought a reminder that November was going to be difficult in France via all the reports of the traffic logjam in Paris as Parisians tried to find somewhere else to spend the new lockdown. We also had the ECB policy meeting of which more later as first we get to see what happened in the third quarter for the 2 biggest economies. France was first to release its numbers.

In Q3 2020, GDP in volume terms bounced back: +18.2% after –13.7% in Q2 2020. Nevertheless, GDP remained well below the level it had before the health crisis: measured in volume, compared to its level in Q3 2019 (year-on-year), GDP of Q3 2020 was 4.3% lower.

Yet again the expectations of analysts were wrong ( much too low) in spite of the fact that the theme was effective leaked by ECB President Lagarde in the press conference yesterday. After all she would have known the numbers.

Lagarde: As you know, the number for the third quarter will be coming out I believe tomorrow, and might surprise on the upside.

The bit that was a surprise to me was this at a time of large government intervention.

while general government expenditure slightly exceeded it (+0.4% year-on-year).

Moving on we saw Germany next to release its numbers.

WIESBADEN – The gross domestic product (GDP) rose by 8.2% in the third quarter of 2020 on the second quarter of 2020 after adjustment for price, seasonal and calendar variations……GDP in the third quarter of 2020 was down a price-ajusted 4.1% on the third quarter of 2019 (price- and calendar-adjusted: -4.3%).

So at this point we have a similar pattern with a fall of around 4% which means we are Looking at numbers around 1% worse that the USA. I note that Italy has fallen into the same pattern.

In the third quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 16.1 per cent with respect to the previous quarter, whereas it decreased by 4.7 per cent over the same quarter of 2019.

Both typically and sadly our Girlfriend in a coma has down slightly worse, but there is a need to take care as the numbers will be less accurate than usual due to collection difficulties. Also if there is ever a tear where seasonal adjustment will be inaccurate this is it and that is before we get to the impact of issues like this.

The third quarter of 2020 has had four working days more than the previous quarter and one working day
more than the same quarter of previous year.

More Trouble?

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We got a hint of things turning for the worse from the German retail sales release.

WIESBADEN – According to provisional data, turnover in retail trade in September 2020 was in real terms 2.2% and in nominal terms 2.6% (both adjusted for calendar and seasonal influences) lower than in August 2020.

As you can see one of the factors driving the German economy forwards looks to have weakened at the end of the quarter. The annual comparison still looks strong but we need to take around 3% away from it to allow for the extra day.

In September 2020, the turnover in retail rose by 6.5% (real) and 7.7% (nominal) compared to the same month of the previous year, where the September 2020 had one day of sale more. In comparison to February 2020, the month before the outbreak of Covid 19 in Germany, the turnover in September 2020 was 2.8% higher.

What next for the ECB?

As I pointed out earlier the ECB will have been aware that the third quarter in isolation had outperformed. But it was also aware that the passage to the end of the year and maybe beyond was not. That has been confirmed by its survey of professional forecasters this morning.

However, due to the emergence of new COVID-19 cases in the recent weeks, many forecasters now assumed a weaker fourth quarter 2020 and that the economy would remain affected by restrictions (albeit not complete lockdowns) well into 2021.

That in essence is the shift we are seeing and let me add that it puts 2021 on a weak opening and also what if the lockdown cycle repeats again?

The ECB response was as we expected to kick the can to its next meeting.

The full Governing Council was in total agreement to analyse the current economic situation and to recognise and acknowledge the fact that risks are clearly, clearly tilted to the downside. We all acknowledge the role and the importance as a driving force of the pandemic and the increase of contagion, as well as the impact that containment measures will have on the economy. So it is with that recognition and that acknowledgement that we agreed, all of us, that it was necessary to take action, and therefore to recalibrate our instruments at our next Governing Council meeting. ( President Lagarde )

Perhaps the most revealing bit here was the shift of language as “tools” have morphed into “instruments”. That may turn out to be like the way “The Troika” became “The Institutions” as things went from bad to worse in Greece.

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Then we got more from Christine Lagarde.

So the teams, the committees, staff members are already at work in order to do this recalibration exercise, and this recalibration exercise will touch on all our instruments. It is not going to be one or the other. It is not going to be looking at one single instrument. It will be looking at all our instruments, how they interact together, what will be the optimal outcome, and what will be the mix that will best address the situation.

I do love the way this is presented as a scientific enterprise! But suddenly quite a few extra things are in play via the mention of “all our instruments”. For example another interest-rate now looks to be in play. Maybe the ECB might buy more private-sector instruments such as equities too. Up to now it has only bought bonds,but should the equity market falls continue maybe it will spread its wings. I suggested back on March the 2nd that it could be the next central bank to but equities and it seems such thoughts have arrived at the Financial Times.

“New Instruments” If BOJ is the blueprint, ECB already buy government, corporates bonds and commercial paper. One thing missing… stock ETFs? ( Stephen Spratt)

Comment

We see that the ECB is strongly hinting that it is preparing what has become called a Bazooka although I suppose in the circumstances Panzerfaust may be better. But if we look at what is its main policy tool right now it is already pretty much flat out.

But, according to calculations by Citigroup, ECB purchases will more than cover the extra cash that governments need in 2021 — even if the central bank does not scale up its €1.35tn emergency bond-buying programme by another €500bn in December as is widely expected. Christine Lagarde, the ECB’s president, hinted at a policy-setting meeting on Thursday that further stimulus is on the way. (Financial Times)

Actually to my mind the precise figures do not matter because if there is a miss match and bond yields start to rise I expect the ECB to raise its rate of purchases. The numbers above omit the 20 billion Euros a month of the pre-exisiting QE scheme but as I just said the principle here is that they will implicitly ( they do not buy in the primary market) finance the deficits.

The ongoing problem remains that there is never any exit strategy as highlighted from Japan earlier this week.

BOJ’S GOV. KURODA: THE ETF PURCHASES WILL CONTINUE TO BE A NECESSARY POLICY TOOL. ( @FinancialJuice )