via notayesmanseconomics:
On Friday the President of the ECB Christine Lagarde gave the Michel Camdessus Central Banking Lecture at the IMF. You might reasonably wonder what after her track record? For example her disastrous record loans to Argentina when head of the IMF. Or perhaps be wondering how such a committed climate change warrior could fly to Washington? But let us stick to Euro area issues where she opened her speech by inadvertently confessing her error in calling the inflationary surge a “hump” which she would not raise interest-rates to deal with.
This uncertainty comes, in part, from the famous “long and variable” lags of monetary policy transmission. It typically takes 18 to 24 months for a change in interest rates to have its peak effect on the economy and inflation.
In short you need to come out of the blocks like a 100m sprinter rather than spending months dithering,dallying and in denial like she and her colleagues did. There is a consequence from that in this morning’s Euro area economic data but if we stay with her speech for now we see how she presents her failure to act.
Our determined policy actions have successfully kept inflation expectations anchored, and inflation is projected to return to 2% over the second half of next year. Considering the size of the inflation shock, this unwinding is remarkable.
What was a disaster especially for the poor has been converted by her rhetoric into quite a triumph. Well played Christine! Says er Christine. This sort of twisting and perverting of language continues as one of the biggest ever central banking failures is presented like this.
Thanks to these developments, we are in a better position today to address these structural changes than our predecessors were.
There was also time for quite a word salad.
To ensure stability in the future, our approach must continue to embody “stability without rigidity”, allowing us to adjust swiftly as the economy transforms.
Those suffering from high food and energy inflation will be surprised to learn what a triumph of monetary policy this has all been.
Indeed, when the inflation goal is stated sufficiently clearly, and monetary policy is credible, inflation expectations will remain anchored, which makes the adjustment process to an inflationary shock less painful.
The idea that monetary policy is credible after what has happened just adds to the air of unreality here. I would say fantasy but that is not strong enough. The serve used is the controllable “inflation expectations” which do what she wants them too as opposed to inflation which did not.
The other worldly element continues as someone who has not reflected at all claims this.
Regular strategy reviews provide an opportunity for self-reflection.
Be Afraid, Be Very Afraid
We can start to bring in today’s economic news via this.
And remarkably, disinflation has come – at least so far – at a low cost to employment……..But employment has risen by 2.8 million people in the euro area since the end of 2022.
Lagarde crowing about employment should make people nervous if you note her track record. Plus let me bring in the quote from her I started with which is that monetary policy takes around 2 years to fully impact. This is significant as the interest-rate rises of the ECB began in July 2022 when it raised its interest-rate out of negative territory to 0%. It then raised interest-rates by 4% over the next year. So the full impact of the rises will be impacting from now.
Purchasing Managers Index
The line of thought above feeds right into this.
HCOB Flash Eurozone Composite PMI Output Index(1) at 48.9 (August: 51.0). 8-month low……September saw a renewed decline in business activity in the eurozone private sector, according to provisional PMI® survey
data. The fall in output was the first in seven months and was registered amid a sustained reduction in new orders. In fact, new business decreased at the sharpest pace since January.
As you can see the phase where higher interest-rates should by fully affecting the economy has seen a arrival of a decline in the economy. You can argue whether it caused it or contributed to it,but by the ECB’s own time schedule it is a factor. Even worse is the trend for new business and orders which set the tone for future months.
Moreover, the latest decline in new orders was solid and the most pronounced since the opening month of the year. Services new business decreased for the first time in seven months, alongside a further contraction of manufacturing new orders.
Indeed the whole picture here fits with the impact of higher interest-rates and it particular the timing failures due to the long delay in recognising the issue.
Business confidence continued to wane, dropping for the fourth consecutive month to the lowest since November last year. Sentiment was also weaker than the series average.
Also I did warn you earlier about the danger posed by ECB President Lagarde crowing about something.
Steeper reductions in new orders and backlogs of work, plus waning confidence in the outlook led companies to reduce employment again in September, the second month running in which this has been the case. Although modest, the drop in staffing levels was the sharpest since December 2020.
It is so far mostly a manufacturing phenomenon but services employment growth looks to be turning as well.
Manufacturing workforce numbers were scaled back to the greatest extent in just over four years. Meanwhile, services employment continued to rise, but at the slowest pace since August 2023.
Deindustrialisation
We can start by looking at the manufacturing sector in more detail. When you consider all the previous falls the numbers here are truly awful.
The downturn in eurozone manufacturing output extended to an eighteenth consecutive month, and showed signs of
deepening in September. Production decreased at a marked pace that was the sharpest in 2024 so far. Reductions in
manufacturing output were particularly marked in Germany and France, but the rest of the eurozone also posted a fall.
I doubt they think they are in a better position to address this particular structural change as Christine Lagarde claimed.
Thanks to these developments, we are in a better position today to address these structural changes than our predecessors were.
This is frankly an economic depression for this sector.
Manufacturing is getting messier by the month. The recession has now dragged on for 27 months and even worsened in September. Looking ahead, the sharp drop in new orders and companies’ increasingly bleak outlook for future output suggest that this dry spell is far from over.
But in the Lagarde speech we only get a mention of fintech which is US dominated, as she ends up admitting.
For example, just three US “hyperscalers” account for over 65% of the global cloud market. Google commands an outstanding market share of more than 90% among search engines.
Whereas you have to look really,really hard for a policy she has been an active supporter of that has destroyed areas of European manufacturing.
For example, Europe suffered much more than the United States from high energy prices,
Agriculture
It seems that having given one sector an economic depression the Eurocrats have learnt nothing.
The EU’s chief climate scientist has warned that the bloc will miss its climate targets if it does not force the agricultural sector to pay for its greenhouse gas emissions. ( Financial Times).
In addition he seems to think that people have not yet faced enough food price inflation.
“[Over] the last 15 years, the emissions in the agriculture sector remained quite stable,” Edenhofer said, while other sectors had cut their climate impact. “The price signal is important because without the price signal, it is very unlikely that, basically, we can reduce emissions,” he added. ( Financial Times)
Comment
The issue here is a central one. ECB policy was in fact too late for the main burst of inflation that Euro area citizens suffered from. But as you can see by its own logic it has arrived in time to contribute to the present slow down which looks to be the start of a new contractionary phase. We know that President Lagarde and Dr. Isabel Schanbel follow the PMI readings closely and thus they must be worried.
If we switch to ECB President Lagarde we see a career of failure and indeed a conviction for negligence. Yet we also see how the world establishment works as there is no responsibility acknowledgement or punishment but instead she is lauded and rewarded via giving an IMF honorary speech.