Decomposing the velocity of money

We've received some questions about the ongoing declines in the velocity of money in spite of stronger US GDP growth in the past couple of quarters.

The velocity of money (as calculated by the Fed) is the ratio of quarterly nominal GDP to the quarterly average of money stock (M2 in this case). It's one of the measures used to assess how quickly money in circulation is used for purchasing goods and services.

The broad money stock growth in the US is currently quite close to its 30-year average of around 6% per year.

On the other hand, the nominal GDP gains in the US have been materially below historical averages. The ratio of Nominal GDP to M2 has therefore been declining.

However, with US inflation subdued, a relatively low nominal GDP increase has recently translated into decent real GDP results. Going forward, as long as inflation remains low, we could continue to see reasonable real GDP growth while the velocity of money remains depressed.

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Still extrapolating the bubble

Economists and pundits continue to draw a line through the US GDP chart to show how the current economic growth is so far below trend (blue line below). Look, we are operating so much below capacity because of ... whatever it is that they want to complain about.

Nonsense. The real trend is the red line. Extrapolating the “bubble era” trend is suggesting that the credit/housing bubble was the norm.

Source:  @mattyglesias

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From our sponsor:

Markets dismiss the risk of higher rates inhibiting growth

Many continue to argue that the rate normalization taking place now will slow business activity in the US. Good luck betting on that however. There is no question that corporate America had benefited tremendously from extraordinarily low rates. Many US firms have locked in these rates over the past couple of years by refinancing - interest expense savings that go directly to the bottom line. But what will happen now as rates "normalize"?

One approach is to see what the markets are telling us. To start, let's look for example at the 5-year tenor where a great deal of corporate America borrows. Over the past year, the 5-year treasury yield has almost tripled.

Source: Investing.com

The markets however do not seem to imply slower growth. For example one indicator of corporate activity expectations is the Dow Jones Transportation Index (DJTI) - the oldest equity index that is still in use (launched in 1884). Increased transport usage is thought to precede improvements in industrial activity. When the DJTI outperforms the Dow Jones Industrial Average, the market is expecting stronger corporate performance going forward. And in spite of significantly higher rates (chart above), the DJTI outperformance has been quite pronounced.

Source:Ycharts

Some would say the markets are undergoing a bout of Greenspan's "irrational exuberance". Perhaps. But here we are not talking about the market's lofty absolute levels - only the transport shares' outperformance. Other cyclical shares have been outperforming as well (see chart).

At the same time the current treasury yield curve shows the 5-year yield to almost double over the next two years based on implied forward yield (see methodology). Significant rate increases are therefore already priced in. This tells us that at least for now the markets don't view higher rates (rate normalization) as inhibiting growth.

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From our sponsor:

The meager 1.6% GDP growth in 2013 is partially self-inflicted

More evidence is emerging that the US economic activity has slowed recently. In addition to the manufacturing output decline (see Twitter chart) and slower home sales (chart), the latest private payrolls number from ADP now shows a decline in job creation.

Source: ADP

The US is now on track to reach only 1.6% real GDP growth for 2013 - in spite of the extraordinary amount of central bank stimulus. The sad part about this weakness is that to some extent it has been self-inflicted. Policy uncertainty, including "taper"-related fears and the recent dysfunction in Washington have continued to impede growth in the United States.

The chart below shows the Conference Board's consumer confidence index. Consumer expectations, which tend to influence larger expenditures and investment, have been particularly vulnerable to "internally generated" shocks. Corporate spending and hiring is not far behind the consumer.

Source: Barclays Research

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From our sponsor:

Is the treasury sell-off overdone?

ETF Trends recently published an article called "Treasury ETFs: The Ultimate Contrarian Trade" (here). It seems that from the near-term technical perspective, treasury yields may have peaked. That is certainly possible, as portfolio managers - including some sovereign funds and other foreign institutions - have been indiscriminately dumping US government paper each time they hear the word "taper". One can even see the public's strong focus on the topic: the search frequency for the term "tapering" on Google has spiked to record levels (chart below). Furthermore, as the article points out, only "23% of investors are bullish on bonds" - the lowest level since early 2011. This has the makings of a contrarian indicator.

Source: Google Trends

But what about the fundamentals? Where should the 10yr yield be if for example Goldman's recent forecast (see post) of roughly 3% nominal GDP (1.8% real) for Q3 persists for much longer? - not an unrealistic scenario. It turns out there is a long-term relationship between treasury yields and preceding GDP growth. The correlation is not that strong (r^2 =0.4), but thankfully this is a blog post instead of an academic publication.

The quarterly data is from 1962 to today and the points in the negative GDP territory are from the Great Recession. One can see that the Fed (as well as the Eurozone crisis to some extent) had recently pulled the yields down from the more "natural" level. Based on this fit, the 10y treasury should be yielding about 4%. This was roughly the situation during the recovery from the 2001 recession - a 3% trailing nominal GDP and a 4% treasury yield. It tells us that based on long-term history and without the Fed's interference, we could easily go up another 100bp on the 10yr - in spite of tepid GDP growth.

The Fed however will be in play for some time, even as it slows the pace of purchases. It is therefore possible that the oversold technical indicators described by ETF Trends may indeed be valid in the near-term - at least while the Fed continues to apply downward pressure on yields - and growth remains subdued. We could stay just above the "QE3 cluster" on the scatter plot.

ETF Trends: - “This isn’t to say Treasury yields will nearly undo their entire surge this year or that they won’t eventually climb above 3% in response to expectations of a less-generous Fed or a pickup in economic growth,” [Michael Santoli] notes. “But for now, the yield advance has arguably overshot, and the sectors pummeled as a result have suffered from investors planning for a rapid and relentless climb in rates that isn’t likely to happen.”

A pullback in 10-year Treasury yields here also makes sense from a technical perspective. Chris Kimble at Kimble Charting Solutions points out that the rally has lifted the 10-year yield to the top of its long-term channel resistance, while momentum is the most overbought [on yield basis, oversold on price basis] in seven years.

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From our sponsor:

Wages in the US remain suppressed

One of the key reasons for the mediocre economic growth in the US has been the ongoing weakness in household wages. As the chart below shows, US median inflation-adjusted household income (red line) remains well below pre-recession levels (the chart also appropriately shows U6 unemployment).

Source: Gordon Green and John Coder Sentier Research (click to enlarge)

A large part of this wage dislocation can be explained by significantly higher use of part-time labor in the US. The chart below shows the ratio of part-time to total payrolls which remains elevated.

Furthermore, a good part of the US job creation over the past couple of years has been in the low wage sectors. That, combined with the part-time employment trend (above) keeps household wages from rising substantially in spite of lower unemployment figures.

Source: WSJ (see story)

The cheaper labor costs in the US and the recent increased use of part-time workers have significantly improved corporate bottom lines. Some US labor advocates argue that over the years corporations have been able to participate in the overall economic growth in part at the expense of lower wages (chart below). The counterargument of course is that this wage compression is critical for US-based firms to remain competitive globally and should ultimately result in more US-based business activity and hiring, particularly in manufacturing (see post). While we've seen more firms moving facilities to the US, it has not been the panacea some have been hoping for.

Source: Barclays Capital

Barclays Capital: - During the recession and the subsequent recovery with its weak growth, companies have been aggressively managing their bottom line. They’ve refrained from hiring, raising pay or otherwise investing in business expansion. Compensation as a percentage of GDP has been falling since the end of 2008 and now stands close to a 13-year low.

Moreover, some are suggesting that the Patient Protection and Affordable Care Act will ultimately result in even higher ratios of part-time employees - and therefore lower household incomes. While there is little evidence for this currently (see Bloomberg analysis), longer term effects remain uncertain. Whatever the case, with wage growth suppressed and consumers still driving over 70% of the nation's GDP, weak economic growth should not be a surprise.

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From our sponsor:

Air cargo industry's woes may point to weakness in Asia's growth

One of the leading indicators analysts often look to in order to understand economic trends is the air cargo volume. For example, according to Reuters, Singapore's Changi Airport "moved 1.8 percent less cargo in April from a year ago". That's a potential indication of weakness in demand not just in Singapore, but across Asia's other economies.

The health of the air cargo industry is also plagued by another (related) factor: overcapacity. Singapore Air for example just announced it is mothballing its second cargo plane since December of last year.

This combination of global economic weakness and overcapacity has resulted in a sharp decline in ISI's air cargo industry survey. And unless Apple comes out with another high-demand product, things don't look good for the industry. This may also be a signal that the relative weakness across some of Asia's major economies is worse than many had assumed (we may already be seeing signs of that in China's latest PMI numbers) .

Source: The ISI Group ("iPad Launch" refers to iPad 2 and iPad "3d generation")  

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From our sponsor:

What caused the temporary spike in personal income?

The drop in personal income last week got some media attention, particularly given that it was the largest one-month drop in 20 years.

USA Today: - Personal income growth plunged 3.6% in January, the biggest one-month drop in 20 years, the Commerce Department said Friday. And consumer spending rose just 0.2% with most of it going toward higher heating bills and filling up the gas tank.

The income drop was offset by Americans' savings a hefty 2.6% rise in December. But most of that gain, analysts said, reflected a rush by companies to pay dividends and bonuses before income taxes increased on top earners at the start of 2013.

There were spending declines in January for big-ticket items that last three years or more, like cars and appliances, and non-durable goods, like clothing and food. Some economists said the declines could be blamed on a 2% federal payroll tax cut expired Dec. 31.

$MM, Source: BEA

Many immediately attributed this decline to the difference in dividend income. Companies who paid special dividend before the year-end generated an artificial one-time jump in personal dividend income in December. That made January look like a large decline on a month-over-month basis. It turns out the dividend was indeed a large portion of the "biggest one-month drop in 20 years". But as the chart below shows, it wasn't all of it.

Some have attributed a portion of January's decline directly to the increase in payroll tax and higher social security payments. However, if one adjusts for all the movements associated with "government social benefits" (payroll tax, social security, veterans benefits, etc.), the shape of the personal income trajectory remains relatively unchanged - in fact the decline in January looks worse.

Anecdotal evidence suggests that just as companies paid special dividends before the tax regime change, they also paid some bonuses and other distributions to employees (mostly executives) prior to the tax increases.

Moreover, it's important to remember that in December it wasn't at all clear who exactly will pay higher taxes - the discussion initially was focused on $250K/year and then $400K/year and higher. That could have impacted a much larger group than the fiscal cliff compromise ultimately did. Since there is generally some flexibility around the timing of income recognition, some people tried to shift as much of it into 2012 as possible. And that generated the temporary spike in personal income that can't be explained by special dividends.

When all the dust settles, the reality is that personal incomes are increasing at around 2% per year or less, just keeping up with the GDP growth. For now it's simply about muddling through, as near-term economic growth in the US is expected to remain subdued.

USA Today: - "With tax hikes and spending cuts buffeting the economy, growth in the first half of the year is likely to be at a sub-2% pace," James Marple, senior economist at TD Economics wrote in a note. "At this pace, the unemployment will not improve and pressure will remain on the Federal Reserve to continue its asset purchase program."

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From our sponsor:

5 reasons to remain cautious on U.S. equities

US equity markets are touching multi-year highs as investors increasingly allocate to the risk-on trade. But there are a few signals that may indicate some need for caution - at least in the short-term:

1. As discussed earlier (see post), consumer sentiment remains quite weak, which could easily create headwinds for corporate earnings.

2. Energy prices have been on the rise, with WTI crude oil at the highest level since September.

3. Regional manufacturing data isn't showing much improvement. The Richmond Fed index came in significantly below expectations.

Richmond Fed Manufacturing Activity Index

What's particularly troubling about this index is that the component tracking manufacturing output prices declined while input prices rose. Not great for margins.

Richmond Fed Manufacturing Activity Index

The Philadelphia Fed Survey and The Empire State Mfg Survey also both came in materially below expectations last week.

4. At the national level, activity remains subdued. The Chicago Fed National Activity Index today came in below analysts' forecasts. U.S. economic growth is still fairly weak.

Source: Econoday

5. From a technical perspective, the world all of a sudden turned bullish. According to Merrill Lynch, investor "cash allocations fell to the lowest level since February 2011" and "allocation to bonds fell to lowest level since May 2011". We may not yet be at a level professionals would view as a contrarian signal, but this should certainly signal a need for caution.

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From our sponsor:

2012 corruption rankings are out; fight against corruption not making much headway

The 2012 Corruption Index is out. Republic of Botswana and Uruguay seem to have almost the same score as the US. Maybe it shouldn't be a surprise.

Reuters had an interesting point on the topic. Some of the most corrupt nations (such as Libya) are also some of the fastest growing ones (see this post for 20 fastest growth nations from DB).

Reuters: - Uzbekistan, Bangladesh and Vietnam found themselves cheered and chided this week.

The Corruption Perceptions Index, compiled by Berlin-based watchdog Transparency International, measured the perceived levels of public sector corruption in 176 countries and all three found their way into the bottom half of the study.

Uzbekistan shared 170th place with Turkmenistan (a higher ranking denotes higher perceived corruption levels) . Vietnam was ranked 123th, tied with countries like Sierra Leone and Belarus, while Bangladesh was 144th.

Those findings are unlikely to surprise. But consider this. All three countries are said to boast some of the best prospects for business and growth over the next two decades. That’s according to the findings of a separate study released in the same week.

Uzbekistan, Vietnam and Bangladesh made it into the top 20 countries with the best growth prospects for business, outranking the United States, a study by political risk consultancy Maplecroft found.

Source: Transparency International (click to enlarge)

China and India continue to rank poorly on the corruption scale. India in particular is not happy with the score.

Zee News: - India's ranking in the global Corruption Perception Index is "distressing", Vice President Hamid Ansari today said and suggested fourfold approach to treat "deadly social ailment".

"Our ranking in the global Corruption Perception Index is, to say the least, distressing. The disease is not of recent origin but, in an earlier period, carried a social stigma less evident today," Ansari said, delivering Annual Bhimsen Sachar Memorial Lecture on 'Virtue in Public Life' here today.

Unlike India however (who has been trying to fight corruption for some time now), most nations who scored poorly seem to be ignoring this measure altogether. In fact the fight against corruption globally is not progressing well.




Here is the latest overview from Transparency International

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From our sponsor:

Goldman cuts US Q4 GDP forecast to 1% (annualized)

As discussed earlier (see post), US manufacturing data for November shows shrinking inventories. This is true for both the ISM survey ...

ISM Inventories index (source: ISM)

as well as the Markit PMI index:

US Markit PMI Inventories Index (orange line, source: JPMorgan)

Goldman looks at the change in private inventories (also called "inventory investment") as a good predictor of GDP growth. The Q3 GDP exhibited relatively strong inventory accumulation, which is being reversed this quarter (as the charts above show).

GS: - Inventory investment is often an important contributor to quarterly fluctuations in real GDP. Most recently, real GDP growth in Q3 saw a sizable boost from inventory accumulation. ... Given the soft early indicators from business sentiment surveys to date, and our own econometric analysis, we expect that the boost to GDP growth from inventory investment seen last quarter will not persist into Q4. Inventories will probably be a moderate drag on GDP growth into year-end.
...
The recent decline in the series is consistent with a moderation in inventory investment in the current quarter, and hence a decline in the contribution from inventory investment to real GDP growth. A simple regression of quarterly inventory investment on our indicator [R-squared = 0.8] suggests that inventory accumulation could fall by $34 billion in Q4 ($135 billion at an annual rate) to $27 billion, enough to detract roughly a full percentage point from Q4 real GDP growth if taken at face value.

This reduction of inventories (which to a large extent is driven by the impasse in Washington) resulted in Goldman's downgrade for Q4 GDP forecast to 1% (annualized rate). What makes this anemic growth projection particularly painful is that it is likely caused (see discussion) by a political gridlock over issues that have been well telegraphed for quite some time (see discussion). The irresponsible behavior of politicians is not surprising, but sad nevertheless.

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From our sponsor:

Business confidence volatility is unhealthy for economic growth

The ISI Group combined four US regional Fed indices with Markit Manufacturing PMI to create a comprehensive US manufacturing index (chart below). A pattern of growth starts followed by fairly sharp corrections emerges. Some have speculated that this volatility, at least in part, can be explained by the Eurozone uncertainty flare-ups: Greece (2010), Italy (2011), Spain (2012). The pattern also exists in the economic surprise indices (see post-1 and post-2).

Source: ISI Group

What's particularly concerning is that subsequent recovery has not been as strong as the previous "cycle". Businesses are becoming increasingly skeptical about spurts of growth. A similar pattern can also be seen in the ISM Business Confidence measure.

Source: Tradingeconomics.com

Anecdotal evidence suggests that the current "cycle" will not go into its full upswing until there is clarity with respect to the US fiscal situation.  But already some are talking about a strong first quarter of 2013 induced by Hurricane Sandy reconstruction expenditures - and then possibly another dip next summer, repeating the pattern once again. In the long run, this volatility in confidence is highly undesirable because it inhibits capital investment and hiring, forcing corporations to sit on cash (or pay cash out in dividends).

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From our sponsor:

Goldman's world GDP projection for 2050

Goldman recently published their projections for GDP levels by nation 38 years into the future. This has to be a difficult forecast to make - involving assumptions that, if changed slightly, could impact the outcome materially. Nevertheless it is worth taking a look at these results.

Source: GS

Here are some observations:

1. BRIC nations (a term coined by Goldman some 10 years ago) dominate the world's economic output by 2050. These four countries generated close to half of the world's GDP growth in the past decade, and in spite of slower growth expectations going forward, this projection does not seem unreasonable.

2. It is a bit surprising to see Nigeria ahead of Turkey and Egypt in front of Canada. It is also strange that Saudi Arabia did not make this list, given the nation's rapid growth. GS seems to be projecting rapid growth for some non-BRIC EMG nations such as Indonesia and Nigeria (possibly because of population growth).

3. Projections for GDP per capita look quite different of course, with BRIC nations still lagging. It does seem strange however to see Russia's GDP per capita ahead of Italy's (currently Italy's GDP per capita is almost twice that of Russia - see chart). It's also interesting to see France ahead of Germany in the total GDP output as well as GDP per capita. Apparently the world will look very different in 38 years.

Source: GS

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Spooky Halloween surprise from Goldman

The Goldman Sachs Analyst Index (GSAI) hit a new post-recession low this month. The index is a composite of corporate outlook by industry from Goldman's company research. In the past, the index generally fell in line with other economic activity indices such as ISM Manufacturing - but not recently. While the ISM index is showing a slight expansion (though we don't yet have the October ISM number), GSAI is pointing to the sharpest contraction across US industries since 2009. Sales, shipments, new orders - all came in weak. This indicates that the positive economic numbers in September (see discussion) may have been an aberration.

GS: - The Goldman Sachs Analyst Index (GSAI) tumbled to 32.9 in October from 44.1 in September. Underlying components also fell across the board, suggesting depressed business activity from the bottom-up.
...
In addition to the headline index, most of the underlying components of the GSAI also fell sharply. The sales index gave back its gain in September, falling 12 points to 36.4 in October from 48.4, registering the fifth consecutive month below the 50 mark. Similarly, the new orders index fell 15.4 points to 26.3 from 41.7, contributing 4.6 points alone to the headline drop. The inventories index saw the lone gain, rising 1.6 points to 43.3. Consequently, the orders-inventories gap fell back into negative territory at -17.0 versus flat in September. The sharp reversal in the sales, new orders, and orders-inventories gap measures suggest that the broad improvement in September was likely transient, and that activity and demand will likely remain depressed despite tight inventories.

Source: GS

This points to significant downside risk to the ISM Manufacturing number that comes out tomorrow (Thursday). Another troubling indicator from GS is the GSAI Employment Index - a component of the overall GSAI measure.

Source: GS

GS: - The employment index fell for the second consecutive month to 39.3 from 45.3 in September. This is the lowest index level since February 2010, and—similar to weakness in the employment component in the Empire State and Philadelphia Fed surveys—continues to point to a slow recovery in the labor market. While the September employment report showed encouraging improvements particularly from the household side, the pace of improvement is unlikely to sustain; we expect only a moderate gain of 125,000 in nonfarm payrolls in the October employment report on Friday.

Based on the GSAI indicators, we could be looking at a series of negative economic surprises as October economic numbers are released next month. Economic activity and corporate earnings in Q4 may in fact end up being far less rosy than many expect.

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Name the 20 fastest growing economies in 2013

Here is DB's forecast for 2013 GDP growth by country. Looks reasonable, with slow growth for G7, recession in the Eurozone, stronger growth in emerging markets, particularly Asia.

Source: DB

But the fastest growth is expected in places one would not necessarily pick out intuitively. Some of the smallest economies don't need to generate a great deal of output to show a high percentage growth. Here are the top 20 countries by GDP growth in 2013 according to DB:

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Are US households about to re-lever? That's the implication of CBO's latest forecast

The latest Congressional Budget Office (CBO) projection for the US economy and the agency's forecast for the trajectory of US budget deficit seem inconsistent with one another.

The CBO projects the US federal budget deficit to go from 7.3% in 2012 to 1.2% in 2015. That's an incredible rate of fiscal consolidation in just 3 years.

How is that possible? Surely such contraction in government spending and tax increases (a form of "fiscal cliff") should do some serious damage to the GDP growth. The CBO indeed projects that the US will undergo a recession in 2013 as a result of these cuts, but according to the agency, growth will accelerate from that point on. One year of pain and the problem is "solved". The projected average real growth for the 2014-2017 period is 4.3%!

In fact the CBO's base case scenario forecasts the US rapidly closing the so-called output gap (after 2013), with the "Potential GDP" based on the aggressive extrapolation from the bubble years (see discussion).

Source: CBO

How can this fiscal consolidation continue so rapidly after 2013 while the real GDP growth stays in the 4%-5% range? Haven't we learned anything from the Eurozone's experience?

According to the latest analysis by the Levy Economics Institute (h/t Kostas Kalevras), the only way this is possible is if the US private sector, particularly the consumer, goes on a massive borrowing spree - re-leveraging to levels not seen even during the bubble years.

US Private Sector Debt (Source: Levy Economics Institute)

Levy Economics Institute: - Given net exports and fiscal policy, if the economy has to reach the growth rates projected by the CBO, the gap in demand can only be filled by an increase in domestic investment and consumption fuelled by borrowing.

Given this analysis, there are really only two possibilities here:

1. The US consumer is getting ready to start borrowing unprecedented amounts. Thus far there has been absolutely no evidence of that. In fact various economic forecasts point to US households continuing to delever (see discussion).

2. The CBO's optimistic US GDP growth forecast is simply wrong.

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JPMorgan vs. the IMF on global growth forecast

JPMorgan's near-term global GDP growth projection is lower than the IMF's. The difference amounts to about 0.5% in growth a year from now.

Source: JPMorgan

Here is how they differ by country. These do not look like material variances, but they matter in forecasting global growth.

Source: JPMorgan

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The UK's poor labor productivity may be signaling more layoffs

The UK economy is in a "double dip" recession, with the longest recovery in recent history - and still nowhere close to the pre-recession GDP. The nation was impacted by the US financial crisis as hard as it was hit by the Eurozone contraction.

Source: DB

Somewhat surprisingly however, the UK's overall workforce rebounded this year.

UK Employment Workforce Jobs By Industry All Jobs
(unit = 1000, Bloomberg)

More workers and low GDP means that the output per worker (productivity) has worsened dramatically.

DB: - ... output per person or per hour worked – has been exceptionally weak in this recession. In fact, depending on exactly how we measure it, UK workers are 2-3% less productive than before the crisis five years ago. In the absence of a crisis, we would have expected to be well over 10% more productive than five years ago. In terms of the sectors that have been responsible for this weakness, it has been services rather than manufacturing, but also the extraction sector (North Sea oil/gas extraction and production) where we’ve seen productivity slide the most.

DB proposes multiple explanations for the UK's relatively poor productivity, including declining wages (that allow companies to keep more workers), public jobs, and fewer bankruptcies than in previous recessions. None seem to provide the full answer. A more troubling explanation however is that the UK unemployment is simply lagging the GDP decline and we will see more layoffs going forward. The reduction in the number of employees in turn will improve labor productivity as it did in the US where companies were quick to let employees go.

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Italy's prolonged recession could harm fiscal balances

Italy's deep recession is now a year old and the economy shows no signs of improvement. But it's important to point out that unlike Spain, Italy's main problem for now is growth (exacerbated by poor competitiveness), not fiscal balance.

Growth:

Relative GDP growth (source: DB)

Fiscal Balance (better than the Eurozone and the US):

Fiscal balances (source: DB)

Of course if the recession deepens even further and lasts considerably longer, the fiscal situation could worsen. There are signs this may already be taking place.

Reuters: - Finance Minister Vittorio Grilli said Italy's government would overshoot its 2012 deficit goal because of worse-than-expected growth but planned no extra budget cuts because Italy was on target to meet its EU obligations, a newspaper reported.

"We know there will be a worsening of the nominal deficit," Grilli told Rome's la Repubblica in an article published on Sunday. "Nonetheless, our compass remains the structural deficit, and on that we are and we will be perfectly in line."
... 

"When this recession is over, (the debt reduction plan) would permit a lowering in the debt-to-GDP ratio of 20 percentage points in five years," he said.

This is particularly dangerous because of the size of Italy's debt (some €2 trillion). If bond yields spike again, interest expenses alone could worsen the fiscal situation considerably. As discussed earlier, time is not on Monti's side  - as he desperately tries to cap Italy's cost of funds via the ESM/ECB.

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Sentiment surveys vs. growth - some observations

Deutsche Bank analysed the recent Pew Research publication called "Pervasive Gloom About the World Economy" (which is quite informative).  In particular DB looked at the past GDP vs. the surveys of current conditions as well as forecast GDP vs expected conditions.

1. Current conditions:

Source: DB

2. Expected conditions

Source: DB ("WO" stands for World Outlook - DB's internal forecast)

Here are some observations.

1. Sentiment surveys seem to correlate reasonably well with the actual growth as well as economic forecasts.

2. People of the Eurozone periphery seem to be well aware of their economic predicament.

3. Some emerging market nations, with younger populations and limited recent memories of recessions maybe too optimistic about future growth. And by the way so is the DB's growth forecast for emerging markets (by their own admission).

4. Germans feel good about the nation's current conditions, which according to DB may allow Merkel to push through the necessary aid to the Eurozone periphery.

DB: - Germans feel fairly confident about their country and themselves and seem willing to assist other countries in the context of Chancellor Merkel’s approach of help under strict policy conditionality.

5. But given the expectations of German growth grinding to a halt in the next 12 months, Merkel may not have much time.

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