The Eurozone black box
I find it difficult to get data on the eurozone. The second quarter NGDP data didn’t even show up until a couple of days ago. Other data is also hard to find. I wonder if that’s part of the problem.
Eurozone NGDP growth has averaged 3.44% since 2019:Q4. That seems low, but it may actually be a bit too high to achieve the ECB’s 2% inflation target in the long run. A few months back I argued that ECB policy had been about right (at a time when the Fed was too expansionary.) I’ll stick with that for now.
The bigger problem is the recent trend in NGDP growth is quite high, and needs to slow sharply if the eurozone is to avoid overheating. Indeed if Covid reduced economic potential, then it’s reasonable to assume that there has already been at least some overheating.
Thus I don’t necessarily buy the argument that the ECB has nothing to worry about, that it’s all supply-side inflation. But . . . and this is important . . . I suspect the dovish critics of the ECB will end up being correct. Given the hawkish bias of the ECB, they might well tighten into another recession, just as they did in 2008 when commodity prices were rising sharply. The ECB just raised rates by 75 basis points.
For the moment, I don’t feel I have enough data to offer a firm opinion. Looking backward, ECB policy has been pretty good during Covid. The German government bond yield curve is not inverted. That’s good. I wish I knew more about eurozone wage growth, eurozone inflation expectations, and other relevant variables. If commenters have any relevant data then please add it below.
PS. In 13 years of blogging, I think this might be my single most wishy-washy post!
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8. September 2022 at 11:40
Surely they can’t make same mistake twice
https://www.omfif.org/2022/06/ecb-should-steer-clear-of-the-ghost-of-jean-claude-trichet/
8. September 2022 at 17:01
Scott, I don’t have any data source to refer to you, but I’ll offer this: The Eurozone is basically operating as a wartime economy with the dual shocks of Covid and Putin’s war in Ukraine which is manifesting itself in Europe as a natural gas hostage situation. Data is going to be wacky for a while. We get spoiled in this country by FRED, BLS, etc…
Your comment about potential ECB hawkishness is appropriate–Cove77 should refer to Marx’s quip that history repeats itself as tragedy then farce. Lagarde is smarter than Trichet, though.
Britain is screwed. Truss is the wrong person for an impossible job. Might as well return to a full monarchy.
9. September 2022 at 04:41
I typically look at the data on Bloomberg’s ECO function as it comes in, which focuses on real GDP. There are typically three releases for Eurozone GDP (this quarter it was 7/29 [1], 8/17 [2], and 9/7 [3]), as in the US. However, while the US provides a detailed breakdown in all their releases, Eurozone doesn’t do the same thing. As far as I can tell from the links above, the PDFs aren’t including nominal GDP at all. We generally don’t get the breakdown until the third release. It’s hard for me to tell which releases include the nominal GDP update, but my guess is that it is a later one, rather than the first one.
Also, some data providers will have a separate time series for the advance estimates as the final ones. That’s another thing to potentially check for.
[1] https://ec.europa.eu/eurostat/documents/2995521/14644653/2-29072022-BP-EN.pdf/76432e7c-62cf-653b-6998-195b19b897ee
[2] https://ec.europa.eu/eurostat/documents/2995521/14675418/2-17082022-AP-EN.pdf/e2a24cfe-ee79-d042-0a17-be6a117fba1a
[3] https://ec.europa.eu/eurostat/documents/2995521/14698162/2-07092022-AP-EN.pdf/955b2522-9712-c5bd-5e3d-f7d26d221e6c
9. September 2022 at 04:55
timely nominal euro area nominal data is definitely an issue. this is the most recent nominal hourly labor cost release, from Q1. Q2 is out mid month.
https://ec.europa.eu/eurostat/documents/2995521/14644599/3-16062022-AP-EN.pdf/8a679b23-e418-dc2e-8f33-c7db46cca211
the ecb does have an experimental wages tracker project, which is in chart 8 here, but i kinda doubt its utility.
https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220505~dcbd30ecb6.en.html
EU inflation swaps are 5-6% over one year, 3.5-4% over two years and just under 3% over 5 yrs. breakevens in the large eurozone countries are similar.
9. September 2022 at 05:52
Sheila Bair: “Bull By the Horn’s”
The ECB guaranteed a lot more debt than the FDIC. That destroyed money velocity over and above that in the U.S.
9. September 2022 at 05:55
The FED doesn’t know a credit from a debit, money from liquid assets, a bank from a nonbank.
“When deposits are removed from the banks, the banks have less money to lend, and liquidity dries up.”
From the St. Louis FED – “Liquidity Dries Up”
9. September 2022 at 06:05
Contrary to the economists: there was no “Penalty on Thrift” caused by Reg. Q ceilings. The egregious policies were driven by the ABA.
Real rates of interest were the result of putting monetary savings back to work, in the nonbanks. Disintermediation was made in Washington.
So, if deregulation worked, why are savings rates today so low?
9. September 2022 at 08:01
Scott, aside from the European issues on this post, last night Jerome Powell briefly denounced NGDP targeting at a Cato Institute virtual conference. https://www.cato.org/events/40th-annual-monetary-conference (at about 25:00 on the video)
According to him, NGDP targeting looks good as a model, but it is hard to implement and communicate it with the public. He also seems to believe that NGDP targeting may not be able to properly deal with changes in trend of growth. I guess you would disagree with him. Especially, on implementation and communications issues, you have repeatedly mentioned on those, but how would you rebut Powell about the argument that changes in growth trend cannot be appropriately managed with NGDP targeting?
9. September 2022 at 09:44
John, Thanks. If the Europeans don’t understand that NGDP is the single most important macro variable, then there’s not much hope for ECB policy.
dlr, Interesting, Those figures don’t suggest that ECB policy is too tight. I have to think that the energy crisis will have eased in 5 years.
Lee, I’ll do a post.
11. September 2022 at 03:31
Scott, what do you make of the energy price cap soon to be imposed by the new UK chancellor Kwasi Kwarteng? How would you use fiscal and monetary policy amid the current energy crisis?
11. September 2022 at 07:55
“How would you use fiscal and monetary policy amid the current energy crisis?”
I would not use fiscal policy at all. With monetary policy I’d target NGDP growth.
I don’t know a lot about the energy price cap, but it seems like a bad idea.
12. September 2022 at 00:25
Hi Scott,
This is maybe a silly question, but it has been nagging me for a while when reading your posts. You argue that economy is overheating when NGDP is rising too fast. While I can see this in case of demand shocks, I am struggling to see the same conclusion in face of supply shocks. For example, in basic AS-AD model, whether NGDP would decrease or increase following a left shift in AS would depend on slope of AD. If the slope is pretty steep (aka “inelastic aggregate demand”) then left shift in AS would lead to higher NGDP.
Outside of model, it does seem plausible that following large increase in energy prices nominal spending should increase, not stay constant or decrease.
Could you explain?
Thanks!
CrisisStudent
12. September 2022 at 00:29
Btw. I think dlr is citing swaps for inflation over period from now to 5 years from now. These are elevated due to currently high levels of inflation (at m/m basis). Something more separated from current dynamics is pretty much at 2%, and long-term like 5y/5y are basically 2% after adjusting for risk premia.
13. September 2022 at 02:22
Peripheral country CPI rates eg Latvia and Lithuania are in the high teens and early 20s %. Do you think the ECB should worry about that?
13. September 2022 at 09:28
Crisis, I define demand shocks as NGDP shocks, so they are assumed identical. I understand that there are other definitions of aggregate demand.
Geoffrey, The ECB should ignore both small and large countries, and just focus on the eurozone as a whole. (Ditto for the Fed and the 50 states.)
19. September 2022 at 12:46
The problem with the Eurozone data is partly because the EU statistics agency, Eurostat, has to wait for each individual Eurozone country to report its own GDP data before issuing data for the whole zone. RGDP is calculated fairly swiftly but NGDP is much more patchily reported.
The link is one I set up at Eurostat, you have to download NSA and SA, for both NGDP and RGDP, so four tables (the NSA one is mostly empty), but you do get both the whole zone and individual countries. Ireland is always fun, currently growing at 18% NGDP yoy and 11% RGDP!
http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-406779_QID_-17486237_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;UNIT,L,Z,0;S_ADJ,L,Z,1;NA_ITEM,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-406779INDICATORS,OBS_FLAG;DS-406779UNIT,CP_MEUR;DS-406779S_ADJ,SCA;DS-406779NA_ITEM,B1GQ;&rankName1=UNIT_1_2_-1_2&rankName2=INDICATORS_1_2_-1_2&rankName3=NA-ITEM_1_2_-1_2&rankName4=S-ADJ_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_0_0_1&sortR=ASC_-1_FIRST&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=ROLLING&time_most_recent=true&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23