Some days several economic themes come at us at once and this morning is an example of that. Only yesterday I was pointing out the problems of establishment Ivory Tower economic forecasting via the continued failures of the Office for Budget Responsibility or OBR. For many in the media it was a case of carry on regardless in spite of the fact that it was a Budget essentially based on past OBR errors. Perhaps they did not realise as they gave credibility to the GDP forecasts that they were based on the new establishment Ivory Tower theory that the economy cannot grow at an annual rate of more than 1.5%. A few decimal points were added and taken away at random to give a veneer of ch-ch-changes but that is the basis of it. Let me give you an example of this sort of Ivory Tower thinking from the OBR Report yesterday and the emphasis is mine.

In March 2017 and then again in November 2017, we reduced our estimate of the equilibrium rate of unemployment, in both cases reflecting the fact that unemployment had fallen below our previous estimate with little apparent impact on wage growth.

Actually those who recall the Bank of England using its Forward Guidance, which of course turned out to be anything but, pointing us towards a 7% unemployment rate will understand the intellectual bankruptcy of all this. But on this “output gap” rubbish goes mostly unchallenged.

Also what is not explained is why the future is so dim after so many extraordinary monetary policies that we keep being told were to boost growth.

The Italian Job

Those themes come to mind as yet another one has been demonstrated yet again by Italy this morning. From its statistics office.

In the third quarter of 2018 the seasonally and calendar adjusted, chained volume estimate of Gross Domestic Product (GDP) was unchanged with respect to the previous quarter and increased by 0.8 per cent over the same quarter of previous year.

This brings us back sadly to the “Girlfriend in a coma theme” where Italy cannot grow at more than 1% per annum on any sustained basis.

The carry-over annual GDP growth for 2018 is equal to 1.0%.

There was even a sort of a back to the future element if you take a look at the breakdown.

The quarter on quarter change is the result of an increase of value added in agriculture, forestry and
fishing and in services and a decrease in industry. From the demand side, there is a null contribution by
both the domestic component (gross of change in inventories) and the net export component.

If we now switch to forecasting it was only last Thursday lunchtime that Mario Draghi told us this at the ECB press conference.

Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed……remains overall consistent with our baseline scenario of an ongoing broad-based economic expansion, supported by domestic demand and continued improvements in the labour market.

Just like in the song New York, New York it was apparently so good he told us twice. As to looking at Italy specifically we got a sort of official denial.

On Italy, you have to remember that Italy is a fiscal discussion, so there wasn’t much discussion about Italy.

An interesting reply as we note that no doubt they did have an estimate of the number and without the third-largest economy can you call an expansion broad-based? Actually the latest Eurostat release challenges that statement much more generally.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19) and by 0.3% in the EU28 during the third quarter
of 2018…. In the second quarter of 2018, GDP had grown by 0.4% in the euro area and by 0.5% the EU28. Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.7% in the euro area and
by 1.9% in the EU28 in the third quarter of 2018, after +2.2% and +2.1% respectively in the previous quarter.

As you can see the annual economic growth rate in the Euro area has been falling throughout 2018 as we recall that in the last quarter of 2017 it was 2.7% as opposed to the current 1.7%. This poses a question for a central bank doing this.

Regarding non-standard monetary policy measures, we will continue to make net purchases under the asset purchase programme (APP) at the new monthly pace of €15 billion until the end of December 2018. We anticipate that, subject to incoming data confirming our medium-term inflation outlook, we will then end net purchases.

The simple fact is that if we allow for monetary lags then the reduction in monthly asset purchases from the peak of 80 billion Euros a month has been followed by a fall in economic growth. If we switch to the quarterly numbers we see a fall from 0.7% to 0.2% and there must be further worries for the last quarter of 2018.

Eurozone GDP growth continues to ease in line with PMI data, according to initial Q3 estimate. Flash October data signals further loss of momentum at the start of Q4. ( Markit PMI)

Back to Italy

Returning to an Italian theme there are genuine concerns of further trouble combined with some perspective from @fwred on twitter.

Italian GDP misses: stagnation in Q3 (+0.02% QoQ) and still 5% below pre-crisis levels. Material risk of a ‘triple dip’. Economic reality comes at you fast.

Let us hope that Italy has the same luck with a “triple dip” that the UK had back in 2012. But the real perspective and indeed measure of this part of the Euro area crisis is the fact that the economy is still some 5% smaller than a decade ago. No wonder voters wanted change.

A catch comes if we switch back to looking at forecasts again as we note that the new government has veered between optimistic ( 1.5%) on economic growth and what Cypress Hill described as “Insane in the membrane” with 3%. Politicians like a 3% growth rate as for example it was used by both sides in the UK 2010 general election. Why? It makes their plans look affordable and if (when) it goes wrong they simply sing along with Temptation(s).

But it was Just my imagination,
once again runnin’ away with me.
It was just my imagination runnin’ away with me.

If it goes really badly then they deploy Lily Allen.

It’s Not Me, It’s You

Meanwhile the tweet below describes the consequences.

Comment

There is a lot to consider here so let me start with the ECB. It now staring down a future like the one I have feared and written about for some time where the Euro area economy behaves in a junkie economics manner. Once the honey is withdrawn so is the growth. As ever that is not the only factor in play as economics does not have any test tubes but governing council members must be thinking this as they close their eyes at night. Well the brighter ones anyway.

What does it do then? It may still end monthly QE but that is mostly because it has been running out of German bonds to buy. My view that Mario Draghi intends to leave without ever raising interest-rates gets another tick. Maybe we will see the so far mythical OMTs or Outright Monetary Transactions deployed and Italy would be an obvious test case.

Also let me offer you one more morsel as food for thought. We keep being told about the OBR and ECB being “independent”. Have you spotted how “independent” bodies so regularly do the will of the establishment and sometimes manage to do more than the establishment itself could get away with?