Economics and politics - comment and analysis

Cyclical analysis of the European economy at the start of 2016. Part 1

I already remarked in my article on ‘The imaginary refugee republic’ (see here) that it looks as if the government’s policies to provide the refugees with basic necessities are generating positive impacts on the German economy. In any case, a significant increase in construction and in especially in the finishing trade can be witnessed.

It these positive developments continue or strengthen during the coming months, it will become very hard not to understand that policies that stimulate demand are much more effective than the monetary policies of the mainstream, although the problem remains that the Federal government is still not moving away for its nonsensical austerity policies by more than hardly a millimeter. As could be expected, the SPD has been satisfied with a minimal stimulus for more domestic demand.

For the German industry, the development has hardly been positive in January. New orders from abroad slightly increased, while domestic orders slightly fell. Basically, there is no change and therefore the stagnation that started now a full five years ago continues (see Figure 1).

Figure 1


The main business survey indicator, the Ifo index, also weakened substantially (see Figure 2). In particular, the expectations of companies with respect to the overall business climate for the next six months fell. We see stagnation here also, with the risk of further slippage in the face of a weak and potentially worsening global situation.

Figure 2


New orders from abroad remained weak. There are no new impulses, neither from within the euro zone nor from other countries (see Figure 3).

Figure 3


Unlike the volume of orders, industrial output clearly shows a positive development in January (see Figure 4). Production increased in the euro area as a whole and it increased significantly in France, Germany and Italy. However, without a growth of new orders, there must be unusual factors that explain the increase in productive activity.

Figure 4


For example, it is possible that the particularly mild January weather in Germany and France led to activity which in normal circumstances would have been postponed until spring. Seasonal adjustments, which implicitly assume normal weather, cannot capture such effects.

In southern Europe, this effect is not observed (see Figure 5). All three countries show an extremely slow improvement and, to be fair, this can only be said on the basis of a rather optimistic interpretation of the figures.

Figure 5


The developments in some neighbouring countries speak against the positive weather effect hypothesis. Neither Austria nor Belgium, where the weather is likely to have been similar to Germany, shows a positive effect. On the contrary, industrial output decreased in both countries (see Figure 6).

Figure 6


In the Nordic countries, only Denmark’s development was positive in January (see Figure 7). In Finland, the situation has become especially bad and there are no positive signs of any kind. Finland, one of the model countries of austerian reforms, finds itself today almost ten points below its 2011 level, which means nothing else than that the country’s industry suffered from a full five years continuing recession.

Figure 7


In Eastern Europe, the last figures ​​(for either January or December) are also consistently weak. The Baltic States are now looking back at five years of virtual stagnation (see Figure 8). This is a catastrophic evolution for these relatively poor countries that are trying to catch up because it creates discontentment within the population and many young and well-educated people are emigrating. But you can hardly read anything about that in the German newspapers.

Figure 8


The new year also started very modestly in the other countries of Eastern and Central Europe (see Figure 9). Even Slovakia, where so far industrial activity continually grew, is proceeding very slowly, while the Czech Republic, Hungary and Slovenia all show signs of a slowdown. Slovenia, which started well many years ago, now also looks back at five years of stagnation. In Poland, industrial ouput increases very slowly but relatively continuously.

Figure 9


Industrial output in Romania is also weakening, while both Bulgaria and Croatia show a slight upward movement.

Figure 10


You can read in the second part how other relevant indicators are evolving and how economic policy, particularly in Germany, should change.