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