International Forecaster Weekly

European Fascists and Black Market Legitimized

Black market revenues now in European GDP statements. Drugs and prostitution now figure in Italian GDP. Marnie Le Pen and far right parties stun euro elections. US retail correction. Reforms in China no reform at all.

James Corbett | May 28, 2014

Everything you need to know about the state of the Eurozone in a single factoid: in September of this year, the Italian government will begin factoring prostitution and illegal drug sales into their GDP figures. The move comes as the EU implements regulations requiring member states to factor illegal revenues into their GDP stats to come up with more reliable economic indicators. In Italy's case, the changes are expected to boost their GDP performance by 2%. The move works out well for the Italian government; they are pledged to limit their budget deficit to 2.6% of GDP this year, and if GDP is higher they will have more money to spend. In the UK, Austria, and the Netherlands the illegal money boon is expected to be an even bigger shot in the arm; their GDP is expected to increase 3%. In Sweden and Finland the impact will be even greater, with some analysts expecting a 4% GDP boost. Such is the state of the EU, and such is the patently ridiculous nature of arbitrarily defined (and redefined) government statistics.

European Elections bring in far right wing parties

    In the US, the retail story is shaping up to be the major unreported story of the year. Q1 earnings were dismal almost universally across the board: Urban Outfitters earnings were off 20%. Gap revenues dropped 22%. McDonalds earnings were down by $66 million. Staples profits were down 44%. Wal-Mart profits were down $220 million. Target profits were off $80 million. American Eagle profits lost a staggering 86%, prompting the company to promise closure of 150 stores. Sales were down at Macy's, Kohl's, Sears and a host of other household name retail outlets. This is not unexpected.

As Jim Quinn of The Burning Platform painstakingly documents, US retail space has steadily balooned since the 1960s with no pullbacks during any recession. In 1960 there was 4 square feet of retail space per person in America. In 1990 it was 19 sq ft. By 2005 that had mushroomed to 38 sq. ft. and in the last 9 years that has grown to 47 sq. ft. / person despite the massive global economic meltdown of 2007/2008 intervening.

To make matters worse, the American population is aging and retirees' retirement savings are worryingly low. The bottom half of 50-64 year olds had a median retirement savings account of $0 as of November 2010. That does not bode well for any retail upturn in the coming years. The market is only now catching up with this phenomenon as the S&P's retail ETF, SPDR, down over $5.50 from last November's all-time high.

    Meanwhile in Asia, President Xi continues talking big about free market reforms in China. Following an abysmal (for China) growth rate of 7.4% in Q1 of this year (which, as we know, is a doctored and unreliable figure, but at least gives a relative sense of the cooling economy), Xi told the nation's Politburo that China must reduce direct state intervention in micro-economic activity. It is unclear if, when or how these reforms will be implemented, but whatever it means, the markets didn't take much solace from the words; every major Chinese stock index was down yesterday, while rival Japan's TOPIX, Nikkei and JASDAQ were all up on the day.