Europe's stuttering engine
By Justin Pyvis β€“ Delivered on 11 Nov 2021

Good morning! A new survey showed that 72% of West Australians support maintaining the state's hard border until 90% of eligible people are vaccinated. That's strong but is actually down from 82% just three weeks ago (and 92% last year) as people in "more affluent areas of Perth, which also have the highest vaccination rates", are starting to get frustrated about the relatively slow reopening.

Elsewhere, Queensland officially hit 80% first doses (people aged 16+) yesterday which means the indoor mask rule for most venues has been scrapped, effectively immediately. πŸ₯³

Speaking of restrictions, yesterday was also the first day for three months that many businesses in Auckland were allowed to open as New Zealand officially began its transition to 'living with COVID', easing restrictions for retail, outdoor gatherings and certain public facilities.

Fully vaccinated population (aged 12+)


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 was down 0.80% despite the latest weekly jobs report (released early because of the Veterans day holiday tomorrow) showing initial jobless claims fell yet again to a fresh pandemic-low of 267,000.

The sell-off was likely due to October's 30-year high inflation reading, which also caused shorter term Treasury bonds to be sold off amid speculation the Fed might finally concede it was wrong about higher prices being "transitory" and raising interest rates accordingly (see Economy below).

Locally, the ASX200 followed a weak Wall Street lead and finished down 0.14%, with the materials sector (-1.47%) leading the falls after another day of iron ore price declines. Tuesday's laggard NAB jumped 4.4% after Macquarie, Morgans, JPMorgan and Citi all upgraded their outlook for Australia's fourth largest bank.


The big one arrives: US consumer price inflation hit a stunning 6.2% in October, the fastest annual rate since 1990. Even so-called 'core' inflation – which strips out food and energy – increased 4.6% from a year ago, making the Fed's "transitory" argument increasingly difficult to defend.

Consumers confident: The November Westpac-Melbourne Institute Index of Consumer Sentiment showed a slight rise (+0.6%) in consumer confidence, "underpinned" by the successful vaccination rollout and state re-openings. "However, by far and away the most stunning development was around labour market expectations... [which reached] the lowest level for the Index since the mid-1990s." A lower reading is "a positive signal for confidence in the jobs market".

Yet the RBA is still betting that wage rises won't hit "around 3 per cent" until "the end of 2023" (implying declining real wages). πŸ€”

Back to work: South Korea's unemployment rate jumped 0.2 percentage points to 3.2% after the participation rate increased for the first time in months, following a loosening of social distancing rules that allowed many hospitality businesses to reopen.

Perhaps a precursor to what might happen in Australia, where unemployment is only at historic lows because people exited the labour force entirely?

Chinese inflation is here: Official consumer prices in China hit 1.5% in October, more than double the 0.7% reading in September even as much-lower (-44%) pork prices continued to suppress the index. But the real kicker were producer prices (the prices factories charge wholesalers), which surged 13.5% – the most since July 1995 – due to rising energy and raw material costs.

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Europe's stuttering engine

Not all is well in Germany and the pandemic is only partially to blame. Writing in the WSJ, Tom Fairless observes that "German industrial output in August was about 9% below its 2015 level, compared with a 2% increase for the eurozone as a whole... In Italy, whose manufacturers are closely tied with Germany’s, industrial output rose about 5% over the six-year period."

Breaking it down: Germany – the world's third largest exporter – is unique in that nearly half of its GDP comes from exports (more than double China and the US, the world's top two exporters) and "some 30% of jobs and output are tied to overseas demand, roughly four times the share in the US".

That means a lot of what happens is out of Germany's hands, although comparing the outcomes with Italy (see chart above) indicates that the decline in Germany's industrial output and exports since 2017 appears to be specifically German, rather than a more general industrial/export demand problem. While supply-chain challenges have undoubtedly affected Germany during the pandemic, they have also affected Italy (and every other country in the world).

Why this matters: Europe, a place so used to poor economic performance that the word "Eurosclerosis" was developed in the 1970s to describe the persistent state of low growth and high unemployment on the continent, is used to being pulled out of slumps by the "reliable engine" that is Germany. But not this time.

There are likely multiple reasons for the recent decline in German output. Fairless notes that Germany may be especially affected by the green transition, given that Germany's automotive industry "accounts for 5% of the nation's overall economic output... [but electric] vehicles require far fewer parts than traditional ones".

Manufacturing is also incredibly energy intensive. However, Germany's government has not only pledged to phase out all nuclear-generated power by the end of 2022 (a reliable base-load generator) but renewables are being strangled by "an enormous increase in bureaucracy", which according to official data costs firms about half of what the nation spends on research and development.

In one of many examples, Fairless highlighted the regulatory process a man went through to upgrade a wind turbine on his property to a new one that produced 40 times as much energy. The original turbine cost about €5,000 in today's money and took three months to be approved, but the upgrade approval cost almost €300,000 (over 5% of the total investment) and took nearly seven years before it was finally rubber stamped.

Looking forward: Germany's long-standing Chancellor Angela Merkel's departure after 16 years in the role presents an opportunity for Germany's political leaders to undertake an economic overhaul. Get it wrong, and Germany risks becoming "the sick man of Europe again".

The Wrap Up
    πŸ₯From mid-December, France's government will require those aged over 65 to prove they have had a third shot of a COVID-19 vaccine to be considered fully vaccinated, a requirement for restaurants, trains and planes.
    🐊A 60-year-old man was fishing in remote Queensland when a crocodile attacked, only escaping after "he managed to retrieve his knife from his belt and stabbed the crocodile in its head until it let him go".
    🧐Elon Musk's brother Kimbal sold around $US109 million worth of Tesla stock the day before Elon created his twitter poll signalling he may sell 10% of his holdings. Tesla stock is currently down 12.6% since Musk tweeted.
    ⚱️Tasmania's Premier Peter Gutwein has formally written to Cricket Australia requesting that his state be considered for the 5th Ashes test "if Western Australia can't".
    β›ˆοΈThere was plenty of rain around yesterday with even the normally dry Alice Springs notching up 100mm, "the highest daily total in more than 20 years".
    πŸ§’Australia's drug regulator, the TGA, gave Moderna's COVID-19 vaccine "provisional determination" for use in children aged 6-11, meaning the drug maker can now apply for a provisional approval.
    πŸ₯Former NSW Premier Bob Carr said Australia should follow Singapore's model "and legislate no medical or hospital expenses to be reimbursed to people who are not vaccinated without medical justification and then contract Covid".
    🏭Australia dropped four places to 58th out of the 64 countries included on the 2021 "Climate Change Performance Index", an annual ranking that tracks performance against the Paris Agreement's goals, published by German-based advocacy group Germanwatch.
    🏈The head coach of NFL team the LA Rams has an assistant at games whose sole job is to make sure he doesn't run into the officials.
    🍎Apple CEO Tim Cook said crypto is "something that we're looking at... [although] I don't think people buy an Apple stock to get exposure to crypto".
    πŸ¦—New Zealand knocked off favourites England by 5 wickets (with 6 balls remaining) to progress to the T20 World Cup final, where they will play the winner of Australia and Pakistan.
    🀝China and the United States issued a joint pledge "to increase their cooperation on climate action despite their strong disagreements on other matters".
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