Global Economic
Trend Analysis

Recent Posts

Friday, November 21, 2014 12:06 AM

Output Gap Idiocy; Shaky Accounting EU and US Style

Shaky Accounting EU Style

Inquiring minds note that Italy Accuses Brussels of ‘Shaky’ Accounting. That's certainly not a shocking accusation.

"Shaky" is exactly what one should expect when you get a bunch of nannycrats who believe Nirvana is on the horizon if wealth and taxes could be redistributed properly.

The irony in this case is that Italy pleads for far shakier accounting than Brussels. Let's dive in for a closer look.

Italy has accused the EU of using “shaky” methodology to evaluate countries’ fiscal policies, raising the stakes ahead of next week’s first verdict on the budgets of eurozone member states by the new European Commission.

In an interview with the Financial Times, Pier Carlo Padoan, Italy’s economy minister, said the EU’s measure of output gaps – or the amount by which a country’s gross domestic product falls short of its potential – was outdated and underestimated the depth of the recessions which followed the financial crisis.

The size of Italy’s output gap is crucial because the EU uses it to calculate structural budget deficits, which take into account the impact of economic cycles. The greater the output gap, the greater the leeway conceded by the EU on fiscal matters.

The EU’s measure of the Italian output gap is 3.5 per cent of GDP. Mr Padoan noted that this figure was significantly lower than the equivalent one from the Organisation for Economic Co-operation and Development, of which he has been chief economist. The Paris-based body has estimated Italy’s output gap to to be 5.1 per cent this year, with a new and possibly higher projection due next week.

Mr Padoan added that if the latter number were applied, Italy “would be in structural surplus now and . . . for a long time”. “We would be in a different world, [with] no requests for additional resources, we would have to do nothing. It would change a lot,” he added.
Italy's Argument

Italy actually argues it would be in surplus if only Brussels would admit that Italy is 5.1% in the hole rather than 3.5% in the hole!

The idea that 5.1% in the hole is better than 3.5% in the hole is of course ludicrous. It's even more insane to propose that one has a surplus at 5.1% in the hole but not at 3.5% in the hole.

Clearly Brussels' math is idiotic, but Italy's math is even worse.

I keep wondering "Will the lunacy every stop?" Yet, we all know the answer: "No it won't".

Output Gap Idiocy

The idea that a nation can measure an "output gap" is an idiocy in and of itself. Here are four reasons.

  1. Alleged "output gaps" are measured off historical growth patterns, but those patterns are of an insufficient timeline to be meaningful.
  2. Huge structural changes are in play, including Italy's move to the euro. 
  3. Poor demographics. Aging populations are highly unlikely to grow at previous trends.
  4. It is impossible to accurately measure output in a fiat-based, fractional-reserve credit system with absolutely no controls on monetary printing or trade imbalances.

Yet, we hear the same "output gap" nonsense in the US. The Fed is a big believer in it.

Interestingly, all four rules above are in play, even for the US.

How so?

Simply replace point number two above with Nixon closing the gold window. Credit soared and along with it GDP. That artificial boom in GDP now constitutes part of the alleged "output gap".

 Mike "Mish" Shedlock

Thursday, November 20, 2014 2:27 PM

France Private Sector Output Drops 7th Consecutive Month, Orders Stagnate in Germany, Eurozone Flirts With Contraction

Let's take a look at weaker than expected reports from the Eurozone in aggregate, and France and Germany in particular.


The Markit Flash France PMI shows French private sector output falls for seventh successive month.

Key points:

  • Flash France Composite Output Index rises to 48.4 (48.2 in October), 2-month high
  • Flash France Services Activity Index climbs to 48.8 (48.3 in October), 3-month high
  • Flash France Manufacturing Output Index falls to 46.5 (48.0 in October ), 3-month low
  • Flash France Manufacturing PMI drops to 47.6 (48.5 in October ), 3-month low


While service providers reported the slowest fall in activity of the current three-month period of decline, manufacturers indicated the sharpest reduction in output since August. Lower output at French private sector companies reflected a further decrease in new business. November marked the third consecutive month in which new work has fallen, with the rate of decline accelerating to the sharpest since June 2013.

Employment in the French private sector continued to fall in the latest survey period, in line with the trend observed since November 2013.

French private sector companies reported another drop in outstanding business during November. The latest fall was the seventh in successive months and the sharpest since M ay 2013. Service providers indicated an accelerated decline in backlogs, whereas manufacturers reported a slightly slower fall.

Price trends continued to diverge in November. Input costs rose, with the latest increase the fastest in three months, albeit modest over all. Service providers and manufacturers reported similar rates of input price inflation. However, output prices fell further, amid reports of strong competitive pressures.
My comments on France

With falling commodity prices, especially oil, why have input costs risen? Labor?

Whatever the reason, margins are shrinking rapidly because prices paid is rising while prices received for final goods and services drops. VAT collection will decline as well.


The Markit Flash Germany PMI show Activity at 16-month low as new orders stagnate.
Key points:

  • Flash Germany Composite Output Index at 52.1 (53.9 in October), 16-month low.
  • Flash Germany Services Activity Index at 52.1 (54.4 in October), 16-month low.
  • Flash Germany Manufacturing PMI at 50.0 (51.4 in October), 2-month low.
  • Flash Germany Manufacturing Output Index at 52.0 (52.8 in October), 2-month low.


November’s flash data signalled a further slowing in private sector output growth in Germany, as highlighted by the seasonally adjusted Markit Flash Germany Composite Output Index falling from 53.9 in October to 52.1. While activity has now risen for 19 months running, the pace of expansion was the slowest since July last year, with companies commenting on a lack of new business. Sector data suggested that output growth slowed at both manufacturers and service providers.

The labour market showed further resilience to the growth slowdown in Germany’s private sector, with companies increasing their workforce numbers for the thirteenth month running. The rate of job creation slowed, however, to a three-month low.

German private sector companies signalled little change in input costs on the month, ending a 16-month spell of inflation. While lower oil and fuel prices pushed costs down at some companies, higher wages attributed to the upcoming introduction of a minimum wage drove input prices higher at others.

Companies continued to reduce their selling prices in November and largely attributed this to sharper competition. While the rate of price discounting was marginal overall, it was nevertheless the sharpest since April last year.
My Comments on Germany

Confirming my above suspicions, labor prices are rising even though output prices drop. The situation in France is likely the same. Thus, we have the answer to my above questions.

However, we now have another question: How is France supposed to compete with Germany if French wages rise along with German wages?

And what about profit margins with rising wages and falling output prices? That cannot bode well for employment in either country actually.


Precisely in accordance with Germany (now the entire "core" of Europe), the Markit Flash Eurozone PMI signals weakest eurozone growth for 16 months.
Key points:

  • Flash Eurozone PMI Composite Output Index at 51.4 (52.1 in October). 16-month low.
  • Flash Eurozone Services PMI Activity Index at 51.3 (52.3 in October). 11-month low.
  • Flash Eurozone Manufacturing PMI at 50.4 (50.6 in October). 2-month low.
  • Flash Eurozone Manufacturing PMI Output Index at 51. 8 (51.5 in October ). 4-month high.


The pace of economic growth in the euro area slowed to a 16- month low in November, according to the Markit Eurozone PMI. The headline index, which measures business activity in the manufacturing and services economies, fell from 52.1 in October to 51.4, its lowest since July of last year. Manufacturing output growth picked up slightly to the highest for four months, but the rate of expansion remained only modest. Growth in the service sector meanwhile eased for a fourth successive month to the weakest since last December. New orders fell very marginally, declining for the first time since July of last year. Orders fell for a third successive month in manufacturing, dropping at the fastest rate since May of last year, while inflows of new business in the services sector slowed to near- stagnation, registering the smallest rise since August of last year.

Overall backlogs of work fell at the fastest rate since June 2013, dropping for a sixth successive month. Levels of work-in-hand were down in both manufacturing and services.
Markit Comments

Chris Williamson, Chief Economist at Markit said ...
"A fall in the eurozone PMI to a 16-month low raises the risk of the region slipping back into a renewed downturn. The single currency area is struggling to eke out any growth, with the PMI indicating that GDP is likely to have risen by just 0.1 - 0.2% in the fourth quarter. A drop in new orders for the first time in almost one-and-a-half years, albeit only very marginal, suggests growth could slow further in December.

France remains a key concern, with business activity falling for a seventh successive month and demand for goods and services deteriorating at a faster rate. Growth in Germany has meanwhile slowed to the weakest since the summer of last year, with demand stagnating. The rest of the region as a whole continues to outperform the two ‘core’ countries, though even here the rate of expansion has cooled.

Policymakers will no doubt be disappointed that recent announcements and stimulus measures are showing no signs of reviving growth. The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously-announced initiatives."
Mike "Mish" Shedlock

12:22 PM

Spanish Reader on Rise of "Podemos" a New Far-Left Political Party in Spain

Following is an email from reader David, an unemployed accountant who lives in Spain. He writes about the alleged recovery in "main street", Catalan separatism, and the rise of a far-left political party named Podemos.

David writes...

Hi Mish

I'm a long time reader of your blog from Spain. I'm a 27 years old accountant, currently unemployed, and I enjoy reading your financial, economic and political insights because you are quite spot on regarding the issues you pay attention to, especially the Eurozone and its impact the global scenario.

You sometimes refer to readers who communicate to you about the issues they know and live, so I've decided to do the same, hoping it can be useful.

I remember a few years back during the 2011/12 sovereign bond-spread crisis when you were pointing directly towards France and Italy for troubles, and how you got it right. The flaws of those two countries really hit the headlines in short order. Obviously, Spain is and has been in a mess for many time and you're well aware of that, but I think Spain is going back to the headlines next year, and I wanted to explain why I think so.

Spain has been in a precarious, yet somewhat stable course since the ECB decided to do something on the sovereign crisis. But unemployment has gotten an insignificant relieve and deficit levels keep soaring. "Main Street" is still deteriorating, but we finally have a bit of a relief on layoffs. Even so, the average monthly salary was €1,000 a month before the crisis and now it's €800 or less. Also government largesse is still quite ample regardless of the public sector cuts so shouted by the left.

Nonetheless, the general feeling regarding the economy is that the hemorrhage has stopped. Of course the global downturn is going to halt any kind of "Spanish recovery", if it has ever been one, but the two key risks from Spain in 2015 are political: the new-found Podemos party, and the Catalan separatism issue.

Municipal elections are set to happen in May. Like the 2014 European elections, I expect a massive protest vote against the current party in government, the conservative PP, as well as the socialist PSOE, the second  traditional party in our two-party system.

The Podemos party, a far-left populist party, has emerged strongly due to the massive media coverage of its leader and the corruption cases now widespread in Spanish politics. You cannot imagine how pervasive the media coverage has been on the numerous and unending corruption cases coming from these two parties: You can zap on the TV the whole day and see corruption case to corruption case until you go to bed.

Podemos is a bit like Syriza in Greece in the sense that the larger the movement grows, the more moderate it turns out to be. Its initial talk on leaving the Euro seems to have banished, but their demands to end the corruption, the so-called political "caste", and revert the austerity measures imposed by the EU and the ECB are not in question.

It's not a moderate movement by any means, and whatever portion of power they can grab, they are going to raise a few eyebrows in the European Union. Plus, latest polls show that Podemos may be already leading the polls in a general election, and taking into account that December 2014/January 2015 is the limit date for the next Spanish legislative elections, they are going to keep a tough stance until that point.

President Rajoy now wants early elections to stop the ascent of Podemos and try to keep the government, even if he has to share power with PSOE.

And finally, there's the Catalan issue. After the banned referendum was celebrated on past week with a moderate success from the part of the separatists, the regional government is going to call for regional elections. These elections are probably going to be celebrated before May, and the results will likely be a rise of ERC, the socialist separatist regional party.

ERC has stated many times that their goal is to open a constituent process in Catalonia together with the other separatist forces, then declare a Catalan state in the Catalan parliament (to claim independence while leaving a door open of a Puerto Rico style associated state).

A new Catalan constitution is being prepared as we speak. There are other parties in the picture, but the sum of separatists vs. unionists in the regional parliament seems to be a 55/45 split: sufficient enough for a majority but perhaps insufficient for the changes the ERC wants. In any case, there's a high likelihood that Madrid will suspend the Catalan regional government in 2015, a move that would increase the tension and would fuel the Catalan movement even more in the future.

There's plenty of backstage talk about a constitution change or even of initiating a constituent process in all of Spain to end the pervasive corruption, to put the country on a far-left path, and to provide more autonomy in Catalonia and the Basque regions.

Whatever it happens with these issues, it's going to be a very turbulent year politically for Spain.

Thanks for your patience, and congratulations for your success.

Best regards,
Thanks David

I really appreciate these kinds of thoughtful emails.

Recall that it was reader "Andrea" who tipped me off in regards to the stunning rise of Beppe Grillo, long before mainstream media was writing about his M5S - Five Star Movement.

Even though the eurosceptic AfD movement fell just a tad short in the last German national election, reader Bernd (not AfD party leader Bernd Lucke) kept me abreast of their chances in Germany. I predicted AfD would get at least 5% in the national election.

AfF got 4.8%, just 0.2% shy of number needed to make parliament. Mainstream reports had AfD at 2-3%. AfD only fell short because of a massive turnout.

However, I can point out that AfD Wins Double-Digits in German Regional Elections so I feel somewhat vindicated.

Reader Bran who lives in Spain verified what David had to say above. And of course Reader Jacob Dreizin keeps me abreast on events in Ukraine.

I trust these sources more than what I read in any mainstream press.

Mainstream press was well behind the curve on Beppe Grillo in Italy, on the separatist surge in Ukraine (mainstream press had Kiev mopping up by September), on the rise of Marine Le Pen in France, and now on Podemos in Spain.

Thanks to my readers for these emails.

Mike "Mish" Shedlock

Last 10 Posts

Copyright 2009 Mike Shedlock. All Rights Reserved.
View My Stats