Monthly Archives: August 2010

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. 

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. 

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. 

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. 

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 grata

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.