Random Shots

As I am preparing for a tournament this weekend in Sweden I only have time for some random shots, but then again; taking random shots seem to be exactly what the markets are all about at the moment. The first such random shot came from today's release of the GDP figures from Europe which showed, with much fanfare, how the Eurzone (and Europe) is now effectively out of recession.

(quote Bloomberg)

The euro-area economy emerged from its worst recession since World War II in the third quarter as exports from Germany and France helped compensate for households’ reluctance to increase spending Gross domestic product in the economy of the 16 nations using the euro rose 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to grow 0.5 percent, according to the median of 34 estimates in a Bloomberg survey.

Europe’s economy is gathering strength after governments stepped up stimulus measures and the European Central Bank injected billions of euros into markets to encourage lending. While confidence in the economic outlook is at a 13-month high, rising unemployment, the expiration of stimulus plans and a surging euro are threatening to undermine a recovery. “The euro-zone economy has officially turned the corner and that is cause for relief, but not celebration,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. “The economy remains in a fragile state and is recovering mainly because of government stimulus and temporary inventory effects.”

Now, before we get ahead of ourselves, the comments by Mr. van Vliet should, as I would assume the comments from any other proper economist, alert us to the fact the current impressive figure, while not a figment of imagination, is indeed driven by decidedly imaginative factors in so far as goes the idea of a sustained recovery. In this way, one off government spending which, by nature, cannot be sustained indefinitely as well as a less severe bout of inventory reduction by part of companies (which may of course be a forward looking indicator) do not in themselves make a recovery.

Add to this that behind the headline figure for EU16 and EU27 of 0.4% and 0.2% GDP growth qoq respectively lies a decidedly murkier picture. Consequently, Greece and the UK continued to spend the third quarter in recession (-0.3 and -0.4 qoq respectively) and then we have poor Spain of course where the horror show of a recession continues without showing any signs (-0.3 qoq), whatsoever, of abating. It is noteworhty in this respect to consider the stark contrast between the European economies in the context of the latest aggregate confidence reading conducted by Bloomberg;

Bloomberg users in Spain remained the most pessimistic in Europe as that nation stayed mired in recession, with unemployment soaring toward 20 percent and the economy struggling to recover from a construction-industry collapse. The Spain confidence index was 17.7 this month from 10 in October.

So, the divergences are growing inside Europe and already they must be hard at work in Frankfurt to try to knit to together a strategy to suit all the individual economies of the Eurozone. The point is of course that they can't and it will indeed be interesting to see how they manage this particular challenge in the future. Before we get to that though and, one would assume, any talk of lifting nominal interest rates from their current low levels we need to get over the hurdle of when and how to pull back "extraordinary measures" of monetary policy.

And here, this is not only about the ECB.

Consequently, and with the small exception of the BOE where Mervyn King recently left it an open question of whether the BOE would buy additional gilts, the three major central banks have all upped their discourse on the winding down of asset purchases in the context of the Fed and BOJ and "enhanced credit support" in relation to the ECB.

In Frankfurt and elsewhere, the outlook on these exit strategies remain opaque except to say that with the continuing emphasis by part of central banks most market commentators expect these measures to be withdrawn some time in Q1-Q2 2010 with the notable exception that the ECB seems to have indicated that the liquidity offering (12 month) coming in December will be the last.

Without going too much into detail [1] it appears to me that central bankers may end up in trouble on account of those exit strategies and how to instigate them into a 2010 "post stimulus" slowdown. This is not so much because I cannot see the impetus to exit in itself, but rather because if now is not the time to exit, how can you argue in the first half of 2010 that it is? 

Surely, on this account I would give them an A+ in so far as goes the attempt to prepare markets, but I am more uncertain as to which they will also be able to actually deliver the exit strategy to the tune of the same grade. We will see I guess; for now, I hope that they are not taking, what will turn out to be, random shots at volatile asset prices and premature signs of non-materialising recoveries.  


[1] This will have to wait for another time.