Daily Macro: The Eurozone at 20 Part 1: Is It Working? and more

In this briefing:

1. The Eurozone at 20 Part 1: Is It Working?
2. FLASH: UK Partially Recovers into 2018 Yearend
3. Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll
4. Future Metals Curve in China
5. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained

1. The Eurozone at 20 Part 1: Is It Working?

As we reach the 20th anniversary of the introduction of Euro, now is a good time to assess the success or failure or the single European currency. From the perspective of employment it is fair to say the Euro has been nothing short of a catastrophe. Over the past 20 years the average rate of unemployment in the Eurozone has been 9.4%, or about 3 times higher than the level most economists would consider to be a normal level of frictional unemployment. The total number of man-years of lost output as a result of unemployment now mounts to over 280 million of which perhaps 185 million man-years of unemployment are structural rather than frictional. Given current productivity levels those 185 million lost man-years could account for up to USD 6 trillion of lost output. That is a heavy cost the blame for which arguably lies with the politicians who pushed ahead with a largely political project while ignoring the obvious economic ramifications of the single currency. As is nearly always the case when analyzing the Eurozone the average and the total hide a wide range of outcomes between countries.

2. FLASH: UK Partially Recovers into 2018 Yearend

• The UK’s services PMI rebounded by 0.8 points to 51.2 in Dec-18, which was above Consensus expectations but consistent with historical payback after large falls.
• I still expect the ONS to report growth in the equivalent services sectors of 0.5% in 4Q18, despite the PMI continuing to point weaker than that.
• Unfavourable rounding helps constrain my forecast for Nov-18 GDP growth to 0.1% m-o-m. Recent downside news in energy output reversed the upside from retail.

3. Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll

Relatively benign inflation benefits Widodo as the 17 April election approaches, but a succession of scandals in ministries threatens to weaken his image for clean governance.  Prabowo is suffering embarassment from a proposal for a Koran-reading contest (he is illiterate in Arabic) — while Widodo’s readiness to take part sets a negative precedent for upholding  pluralism.  Indrawati is The Banker’s 2019 Finance Minister of the Year, despite the problematic investment climate.  Revenue collection was strong in 2018, suppressing the fiscal deficit to 1.8% of GDP.

Politics: Hard‑line Islamic backers of Gerindra Chair Prabowo Subianto risked appearing hypocritical when Acehnese clerics proposed a Koran‑reading contest for presidential contenders.  The foreign‑educated Prabowo is apparently unable to read Arabic, and he rejects the contest.  In contrast, campaign aides to President Joko Widodo gleefully agreed to it, perceiving an opportunity to impugn Prabowo’s religious credentials Widodo himself is non-committal, but the stance of his campaign officials serves, in effect, to legitimize the Acehnese practice of requiring that leaders be literate in Arabic.  The president and his advisors are again willing to sacrifice principles of pluralism to make perceived campaign gains (Page 2).  Authorities debunked a claim from a Partai Demokrat official that a voting‑fraud conspiracy is underway.  The episode reflects poorly on a prominent Demokrat vice secretary general, Andi Arief – but, for the pro‑Prabowo alli­ance, it deflects critical press attention from Prabowo’s Koran‑reading predicament (p. 3).  In a speech in Jakarta, Prabowo reiterated dire environmental warnings (p. 5).  Finance Minister Sri Mulyani Indrawati is The Banker’s 2019 Finance Minister of the Year (p. 5). 

Disasters: The Sunda Straits tsunami, triggered by the eruption of Anak Krakatau Volcano, caused 437 fatalities on 22 December (p. 6). 

Justice: For the third time in six months, a ministry faces investigation from the Anti‑Corruption Commission (KPK).  Unseemly revelations affect the Public Works Ministry, as investigators believe that kickbacks occurred on the procurement of water pipes for disaster relief in Palu.  Corruption in disaster relief is potentially subject to capital punishment.  The succession of ministerial‑level scandals risks jeopardizing Widodo’s crucial image for clean governance (p. 7).  The sentence for PT Nusa Konstruksi Enginiring Tbk (NKE) fell short of what prosecutors sought (p. 7). 

Policy News: At last, the administration is invoking new reformist rules on managing the civil service, by dismissing 480 personnel convicted of corruption.  A joint ministerial decree on the matter shows welcome attention to issues of institutional dysfunctions (p. 9).

Economics: Fueled by commodity prices, state revenues attained 100 percent of the budget target in 2018, while spending reached 97 percent – producing a deficit equivalent to 1.8 percent of GDP (p. 10).  Inflation was low again in December, resulting in a 3.1 percent annual rate for 2018 (p. 11). 

Jakarta: The odd‑even license‑plate restrictions on traffic will remain in effect for at least another three months (p. 13). 

4. Future Metals Curve in China

Metals are an important part of China’s economic prowess. Specifically, metals are a spoke in the economic wheel with fortunes of commodities and real estate all centered around metals. As we look at metals futures, we see that most metals futures are very flat.

5. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained

Tax revenues in India are running sharply lower than budget estimate. At current run rate, tax revenues would miss the budget estimate by almost US$19bn or 0.7% of GDP. This short-fall is almost entirely due to weaker GST revenues. Direct tax revenues are running broadly inline with the estimate suggesting the economy is doing fine. This short-fall however will not result in a material widening of the fiscal deficit. The government has been remarkably conservative in spending so far with expenditure growth running well below budget estimate. Non-tax revenues are also running ahead of full year estimate. This coupled with higher small savings collections will mean that Government borrowings will be lower than budget estimate even if the fiscal deficit is modestly higher and that will be a relief to the bond market. However, the quality of deficit is worsening with the government resorting to even more questionable routes (the PFC-REC transaction is a case in point) to achieve its disinvestment target. Additionally, it has started to resort to off-balance sheet financing with the loan to the ailing Air India from the NSSF. The numerical focus on fiscal deficit is resulting in wrong precedents being set and government finances becoming more opaque.