Monthly Archives: August 2010

Ralph Atkins

Which is Europe’s most boring economy? Competition has been tough in the past three years. With banking systems almost collapsing, economic activity slumping, and then crawling back up again, policymakers – and journalists – have felt they were on a roller coaster pretty much everywhere in the continent.

Even countries such as Belgium, which prior to the crisis were not only economic stable but also small, have attracted international headlines. Its weak public finances led it to being dubbed the “Greece of the north”.

A strong contender would be the Netherlands. In the past year its unemployment rate has scarcely budged from around 4 per cent, amazingly low by European standards. Read more

Ralph Atkins

Did I detect a slight fin de siècle feel to Jean-Claude Trichet’s comments in Jackson Hole? The European Central Bank president did not talk about monetary policy – he is in “purdah” ahead of next Thursday’s ECB council meeting (and, anyway, would not have wanted to distract from Ben Bernanke’s comments). Instead, he talked mostly about the urgency of reducing indebtedness in the private and public sectors.

But in the last part of his speech – entitled “central banking in uncertain times: conviction and responsibility” – Mr Trichet took a philosophical approach to  the challenges of heading a central bank at a time of turmoil. It appeared a little like a summary of his time in office. By the time central bankers gather in Jackson Hole next year, it is likely a successor will have been chosen to take over at the ECB when his non-renewable term ends in October 2011.

One observation made by Mr Trichet was that policymakers win praise if they are seen as being effective in combating a crisis that has erupted. But they win little recognition for taking tough decisions that prevent a crisis in the first place. Read more

“Central bankers alone cannot solve the world’s economic problems,” Ben Bernanke said today in a speech that – had it not been so carefully phrased – would have been guilty of wilful optimism.

Stripping out the padding, for example, we can pull together one logical sequence from his speech:

Fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand–notably, consumer spending and business fixed investment–must ultimately take the lead… The prospects for household spending depend to a significant extent on how the jobs situation evolves… Incoming data on the labor market have remained disappointing.

And as for prospects for a revival next year, Bernanke’s assertion is quite damning in its timidity:

Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.

So, the necessary (but not sufficient) conditions for growth currently in place do not appear to be getting any worse for next year. Well phew. Read more

Ralph Atkins

Just a few months ago, Jean-Claude Trichet, the European Central Bank’s president, would have felt some trepidation about spending a weekend with US counterparts. Back then, Europe’s debt crisis was troubling the world, and Washington was piling pressure on European policymakers to take firm action to stabilise the crisis.

Today, it will be a more confident Mr Trichet who addresses the central bankers’ summit in Jackson Hole, in the US. In Germany, where the ECB is headquartered, the economy is powering ahead, with scant signs of anything more than a modest slowdown after an exceptional second quarter performance. Eurozone prospects overall have brightened as a result. For the global economy, a slowdown has been factored in – but a dangerous “double dip” is not foreseen.

Instead – at least from a European point of view - the onus is now on US policymakers to address the weaknesses in its economy. No doubt, Mr Trichet will be as charming as ever, but his perspective is different to that of his US hosts. Read more

Jackson Hole

Other news

You might ask: what double dip?

UK gross domestic product rose by 1.2 per cent Q-o-Q in volume terms, revised up from the 1.1 per cent estimate published in July. Compared with Q209, the UK economy expanded by 1.7 per cent, up from an estimate of 1.6 per cent.

Construction and agriculture showed the greatest growth rates, as the chart below shows. (Agriculture contributed nothing to overall GDP growth, however: see table at bottom.) Transport, storage & communications began to contract this quarter, probably because of energy prices. Utilities also began to contract.

The ONS provides Read more

Argentina’s central bank on Thursday relaxed key monetary targets after overshooting annual goals for growth in monetary aggregates, heralding a stance that favours stoking growth over reining in inflation.

It is the first time the central bank has failed to meet the monetary programme since Argentina introduced the method in 2003, and points to a central bank increasingly at the service of a spendthrift government, which ejected the former central bank president earlier this year for refusing to hand over reserves to pay debt. Read more

Personal and company savings* have fallen significantly in Greece and Hungary since the start of the year, while rising across most EU members. Perhaps more surprisingly, deposits in the Netherlands also fell.

More than offsetting the falls, deposits increased in the UK, Italy and Cyprus – the latter may be because, as Ralph points out, withdrawals from Greece are flowing into neighbouring Cyprus. Read more

Authorities wanting to kick-start the economy using debt, take note: Russian shareholders dislike debt-financing, unlike their developed market peers. This is the implication of research from the Finnish central bank, which seeks to explain low levels of debt-financing in Russian companies.

The research considered company stock performance on days when the company announced debt financing. Most research on this subject has considered developed markets only; typically, these stocks respond positively to such announcements. Debt financing confers tax benefits – and also removes the need for potentially dilutive equity issuance.

Russian stockholders react in an equal and opposite way, however. Controlling for normal movements of the stock market index (RTS), the study finds that Russian company stocks fall by roughly the same amount that Western stocks rise, when a debt announcement is made. Why the debt-aversion? The authors point to perceptions of risky behaviour associated with taking extra debt, and recommend improved corporate governance: Read more

House purchase borrowing rose significantly last month in France and Italy, while continuing to fall in many of their eurozone peers. Annual growth in house purchase lending rose by 50bp to 6.3 per cent in France, and 30bp to 8.6 per cent in Italy.

Lending is still contracting in Ireland, for example, and growing at a falling rate in Portugal, Spain and Greece. Even in Germany, where many economic indicators look strong, growth in house purchase lending is static, and at just 0.5 per cent annually. Read more

Robin Harding

Back in April when I planned my move to the US, August looked like a safe time to be packing boxes and dealing with utility companies. The economy was growing, the Fed seemed set to keep policy on hold for at least a year, and surely nobody would do anything in the heat of the summer anyway? So much for my skills as an economic forecaster.

I’m back to find the Fed reinvesting the proceeds from maturing mortgage-backed securities – after what seems to have been a pretty lively FOMC meeting on the 10th – with no change to the steady decline in the economic data.

What strikes me is how continuously bad the news has been in the last month, with no progress in the labour market, and series such as today’s new home sales still hitting record lows. Read more

Five-year Treasuries can be added to the growing list of US government debt being auctioned at record low yields. They join two- and three-year Treasuries in this unusual attribute.

The auction was agreed at a high yield of 1.374 per cent – a staggering 42bp drop from last month’s yield of 1.796 per cent. That’s a fall of 23 per cent. Read more

Breathe easy: Luxembourg’s banks have performed well in a national stress test. The two larger banks, Dexia and KBC, performed well in Europe-wide stress tests earlier in the year, so you’ll be forgiven for having been quite unconcerned about the small state’s banking sector.

The scenarios were concocted a while back, it seems. Of the four shocks, falling property prices or falling EU GDP have the greatest negative impact on the banks’ capital ratios. The good news is that the ratios remain comfortably above 4 per cent in each case. The bad news is that the shocks are independent, and it is more than plausible that house prices would fall and growth reverse at the same time. After all, we’ve seen that before, quite recently. Read more

S&P joins Fitch in placing Ireland on a sovereign rating of AA- today; Moody’s rating remains a notch higher at AA. Ireland keeps its second position in the PIIGS’ line-up, however, which runs broadly: Spain, Ireland, Italy, Portugal and then Greece. Play with the graphic below for more.

The Bank of Thailand has raised the policy rate to 1.75 per cent from 1.5 per cent, citing faster-than-expected growth in Q2 in spite of the domestic political situation. Growth is expected to slow in the second half, said the Bank, and inflation is expected to remain low for 2010. However, the rising cost of production is set to push inflation up in 2011, possibly above the target range, and this is the main driver for the rate change. The move was widely expected.

Hungary’s forint is under pressure again and the consensus explanation is Monday’s comments by Hungary’s central bank, which analysts viewed as somewhat hawkish.

The National Bank of Hungary raised its average inflation forecast for 2011 and 2012 by half a percentage point (in part because of the weaker forint) and cut its 2011 economic growth by 0.4 percentage points to 2.8 per cent.

Added to the mix was a report in Hungarian newspaper Népszava that the new centre-right Fidesz government is still determined to get rid of central bank governor Andras Simor, whose monetary policy and personal finances have made him persona non grataRead more

Per capita GDP growth as a function of [public debt/GDP]Beware governments sporting 90 per cent public debt-to-GDP ratios: that’s the conclusion of a new research paper from the ECB.

Up to 90-100 per cent, increasing public debt increases GDP growth, finds the research. Beyond this magic range, increasing debt is associated with ever lower growth rates (see chart, right).

More than this, debt-fuelled increases in the growth rate start to slow when public debt reaches 70-80 per cent of GDP. Austerians will be pleased. A handy map from the Economist, left, shows us which countries are likely to feel the heat first. But even German debt may classify.

The paper, by Cristina Checherita and Philipp Rother, looked at the average impact for 12 eurozone countries since 1970:

It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP.

 Read more