Abenomics for Europe (Minerd)

by Scott Minerd, CIO, Guggenheim Partners LLC

The monetary policies pursued in Japan, informally known as “Abenomics,” may indirectly save the European Union. Japan, which is a direct export competitor with Germany, has devalued the yen by approximately 30% since last September. The euro, on the other hand, is currently overvalued by roughly 20% on a purchasing power parity basis. This means German goods have become relatively more expensive and German export data has begun to slow as a result of this.

This dynamic could lead the European Central Bank to act more aggressively in devaluing the euro, which would help the periphery. Importantly, the measures could be carried out under the banner of stimulating economic growth through boosting exports in Germany and France, thereby avoiding the political backlash from the core, which is reluctant to provide help to the periphery. This development, combined with the recent announcements that the European Union is not likely to implement any further austerity measures, can be interpreted as evidence that Europe could return to modest economic growth within the next 6-12 months.

Economic Data Releases

Better Retail Sales and Small Business Sentiment

• Retail sales rose 0.1% in April, with core retail sales rising at the fastest pace in four months. Nine out of the thirteen major categories saw growth in April.
• Initial jobless claims fell for a third straight week to 323,000, the lowest since January 2008.
• The NFIB small business optimism index rose to 92.1 in April, the highest since October 2012.
• Import prices fell for a second straight month in April, led by falling fuel prices.
• Wholesale inventories increased 0.4% in March after falling in February, while wholesale sales fell by the most in four years.

Improving Production Numbers in the Eurozone, Chinese Data Rebound Modestly

• Industrial production in the eurozone had the largest monthly gain in 20 months in March, rising 1.0%.
• German industrial production gained 1.2% in March, the second consecutive increase. Production in Italy fell more than forecast, while the U.K. saw a 0.7% rise.
• The ZEW survey of economic expectations in Germany ticked up to 36.4 in May from 36.3, a less-than-forecast increase.
• Germany’s trade surplus widened for a third straight month as exports grew 0.5%.
• China’s exports rose 14.7% from a year earlier in April, a better-than-expected increase.
• Chinese industrial production rose 9.3% year-over-year in April, rebounding from 8.9% in March.
• Chinese retail sales growth also rebounded in April, in line with forecasts of 12.8%.
• Japanese M2 money supply grew 3.3% year-over-year in April, the fastest 12-month growth since November 2009.

Chart of the Week

Recession in the Eurozone Ending in 2014?

The eurozone’s economy is expected to return to growth in 2014, according to official projections. The region’s most drastic fiscal cuts have already been implemented, meaning the public sector may cease to be a drag on growth over the next few years. Additionally, the private sector should respond favorably to the cessation of government austerity, which will further propel economic recovery.

EUROZONE REAL GDP GROWTH – CORE VS. PERIPHERY

Source: EU European Economic Forecast Spring 2013, Guggenheim Investments. *Note: 2013 and 2014 are forecasted projections. Core countries include Germany and France; Periphery refers to Italy, Spain, Ireland, Greece, and Portugal.

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