Euro Area NGDP growth rate to keep dropping

It was all cheery waves as the governing CDU party in Germany elected a new leader after Angela Merkel stepped down. Eventually, Ms. Annegret Kramp-Karrenbauer will also take over from Merkel as Chancellor of the country. Well, she may do so, but there is the small matter of crashing German and dropping Euro Area economic growth rates that may derail these plans.

We already knew that German economic success had come to a shuddering halt in 2018Q3 with a negative QoQ RGDP annualized growth rate of -0.8% and a YoY rate of just 1.2%. Maybe NGDP growth of 1.7% QoQ (3.1% YoY) will rescue Germany and just prevent a recession but the evidence from very poor exports indicates otherwise – and the trend continued with the latest October industrial production data. The experts say it is mostly due to the after-effects of the emissions crisis.

The weak German Q3 appeared slightly anomalous as France showed a decent rebound from a weak 2018Q2, The current highly disruptive protests in France over fuel tax increases are likely to mean that this French rebound is not very sustainable.

Late last week we finally got the 2018Q3 NGDP growth rate for the Euro Area as a whole and it was not pretty. The YoY trend hit 3.1% and QoQ was at 2.2%. As well as the German drop, it was particularly dragged down by Italy, the 4th biggest economy in the bloc. Always a laggard these days, the -1.5% annualized QoQ NGDP growth rate is a sign of huge trouble ahead, the RGDP rate QoQ was also a really poor at -0.5%, almost as bad as Germany.

Italy had always seemed relatively comfortable with its own currency, that allowed a relatively high inflation rate to smooth away some of the economy’s structural rigidities at the price of an ever-weakening currency. A bit of a grubby compromise for sure, but one that worked for the population as a whole.

However, the Italian elites disliked it, and so Italy had to join the Euro, and thus be forced to reform the economy or die. Well, it seems to have chosen death, as reforming a country with such diverse economic and social regions as Italy has proven largely impossible. The populists run the madhouse now, not always a good recipe for success.

Then there is Brexit mess. In addition, the US slowdown and trade spat with China. With German industry, French politics, Italian politics and UK politics all in flux there are plentiful bumps in the road for Nominal GDP growth to absorb.

And where are the managers of NGDP growth in the Euro Area central bank in all this drama? They are still probably living the dream of the racy 2017 RGDP growth numbers. Draghi has recently said that the ECB will definitely end its QE this month.  Both President Draghi and the Chief Economist of the ECB seem somewhat complacent. It seems odd to be ending QE when both nominal and real growth rates are falling back, even to below the new (low) normal.

Furthermore, this stance is especially odd when headline inflation (HICP) has only just crept above 2% but core inflation (HICP excluding energy and unprocessed food) is still stuck at around 1%. A success if you have a 2% ceiling that is in practice 1%, but not very useful for a monetary policy that is meant to provide room for economic growth.


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