Monthly Archives: August 2010

Ralph Atkins

What did German consumers do at the height of the crisis over eurozone public finances earlier this year? A good many went shopping, according to the country’s statistical office. A detailed breakdown of gross domestic product data for the second quarter shows consumer spending increased by 0.6 per cent compared with the previous three months. That followed three consecutive quarters of contraction.

Thus, private consumption became a positive factor that contributed towards an overall 2.2 per cent increase in second quarter GDP. Although it was not as important as exports or investment spending, that is a big deal for Germany, where consumer spending is notoriously sluggish, even in boom years. Read more

The Bank of England and the Centre for Economic Policy Research hosted their fourth monetary policy roundtable on July 14, the summary report of which has only just been published.

The events follow the Chatham House Rule, which means none of the opinions or discussions are attributed to any individuals. Plus, the whole thing carries a big caveat about how it doesn’t represent the views of the BoE or the CEPR, blah blah blah. Still though, it’s an enticing read.

First up, that sticky UK inflation and the nebulous output gap:

It was also noted that the level of spare capacity might be lower than many currently judged. In particular, the financial crisis might have impaired potential supply by more than had been expected. Furthermore, the effect of a given level of spare capacity on inflation might have changed. Alternatively, inflation expectations may have risen.

 Read more

Israel is the latest in a long line of rate-raisers to keep interest rates on hold. Australia maintained its cash rate at 4.5 per cent on August 3; South Korea held at 2.25 per cent a week later. Sweden is expected to hold at its September 1 meeting and Brazil expects to hold till at least December. Malaysia, a three-time rate-raiser, is expected to hold on September 2.

Plenty of other countries are holding – or, indeed, cutting – but that is less of a surprise, since in these countries, rates haven’t risen since the financial crisis. Mexico and Colombia both held on Friday and Poland is expected to do likewise tomorrow. The Philippines, which had been expected to raise rates at its August meeting, is now expected to holdRead more

The Swiss franc is close to record highs against the euro, trading today at 1.3103, just shy of July’s record high of 1.3070.

Location and stability are giving the currency a double boost, say analysts. Read more

A double-dip recession, inflation at 6 per cent and interest rates at 8 per cent by 2012 – that’s the scenario sketched out by a think tank chief economist over the weekend.

Andrew Lilico, chief economist of the Policy Exchange, has bravely laid out his view of the likely path for the UK economy over the next few years. There are, as he puts it, “huge uncertainties in all directions”. Read more

Tax receipts ease UK borrowing – FT

Upward mobility and falling budgets mix badly – Paul Gregg, FT Read more

Ralph Atkins

August’s news lull has just been rudely broken by an extraordinary interview Axel Weber, Bundesbank president, gave to Bloomberg Television. In it, Mr Weber set out what he thought should happen in the next few months with the ECB’s liquidity operations – something that was only supposed to be discussed behind closed doors ahead of the ECB meeting on September 2. For good measure, Mr Weber dismissed the ECB’s controversial bond purchasing programme, which he opposed, as having had “a minor role only”.

I suspect all this will not go down well at all with other ECB governing council members. Hitherto, Jean-Claude Trichet, ECB president, has generally kept everyone in line, and announced the big decisions himself. If Mr Weber is allowed to speak out publicly, why not everyone else? The lack of verbal discipline is all the more telling as Mr Weber is a possible candidate to succeed Mr Trichet next year.

Will it help or hinder Mr Weber’s chances? Read more

James Politi

In late July, James Bullard, president of the Federal Reserve Bank of Saint Louis, gave a speech which for all intents and purposes signalled that the central bank was contemplating a tilt towards easier monetary policy. Usually known for being an inflation hawk, Mr Bullard raised that Japan-style deflation could unfold in the US, and said quantitative easing might be an appropriate response.

Well, Mr Bullard was back in action today, and at a presentation in his district – Rogers, Arkansas was the location – he argued that if the economy worsens, additional asset purchases (beyond the reinvestments of proceeds from expiring mortgage-backed securities that were agreed on August 10 by the Fed) might be necessary. Read more

Cutbacks hit business confidence – FT

Beijing doubles holdings of S Korean treasuries – FT Read more

Yes, you can now vote on the best way for the UK government to cut spending. It might take you a while: there were 44,000 suggestions and they have received only rudimentary classification.

Nonetheless, people are busy voting. Popular suggestions so far include: Read more

Ralph Atkins

With Europe’s performance hanging largely on the fate of Germany, it is hardly surprising that any fresh news from the continent’s largest economy. But some indicators are more useful than others.

The ZEW “economic sentiment” indicator published by the Mannheim-based ZEW institute has the advantage of early publication: August’s was released on Tuesday. But since the global financial crisis erupted in mid-2007, it has been unclear exactly how it should be interpreted.

During the early 2009, for instance, when German GDP was collapsing, the ZEW was rising steadily. But for much of the second half of last year – when a recovery was underway – it was broadly flat and then falling.

Now, I have realised what we have all be doing wrong. We have been looking at the chart upside down. Read more

States in northern Europe have formed a new group to boost financial stability, the Nordic-Baltic Stability Group. Members – Norway, Sweden, Finland, Estonia, Latvia, Lithuania and Iceland – hail from in and outside the EU, and in and outside the euro.

Banks beware. The memorandum of understanding says members will keep tabs on – and share – information about significant banks, draw up risk assessments in a common template, and share the burden when things go wrong. Faced with cross-border banks and the risks they pose, states are fighting back:

The financial integration between the Nordic and Baltic countries warrants deeper cooperation

 Read more

Rapidly falling inflation and continued appreciation of the krona has prompted the Icelandic central bank to double its rate cutting to 1 percentage point.

Sedlabanki, the Icelandic central bank, has been cutting continuously since 2008, though held rates constant (as most banks did) during early 2009. Since then, rates have been cut in 50bp notches at consecutive meetings – half today’s cut. Read more

Market expectations of the future base rate have changed considerably, according to the Bank of England’s latest minutes:

There had been a significant shift down in the path for Bank Rate implied by forward market interest rates over the three months since the May Inflation Report – by 90 basis points by the middle of 2012. Further out, UK implied forward rates at ten years had fallen 30 basis points over the past three months: real implied forward rates had risen by around 20-30 basis points and implied forward inflation had fallen by 50-60 basis points.

Other interesting tidbits:

The recent decline in goods price inflation suggested that the impact on prices of sterling’s
depreciation might be near to completion

And: Read more

The Fed’s decision to reinvest has denied the patient more methadone; it has merely postponed an inevitable period of cold turkey:

If you diagnosed the horrific financial crisis at the end of 2008 and early 2009 as a temporary depression, the prescription was clear: vast amounts of antidepressants in the form of the biggest fiscal and monetary stimulus the world has seen. Eventually the patient would feel cheerier and the world a brighter place. In time, it could be weaned off the medicine. Read more

One US dollar will be worth 18,932 Vietnamese dong tomorrow, up from 18,544 since February. This 2.1 per cent devaluation is the third since November of last year. The move will help exports in a country recently downgraded by Fitch.

Recent dong devaluations:
(1) November 2009 (16,992->17,941, 3.4 per cent);
(2) February 2010 (17,941->18,544, 5.6 per cent).

James Politi

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, has just delivered a very interesting speech in Marquette, Michigan, on the shores of Lake Superior. His focus was basically educational: to explain how the Federal Open Market Committee functions – though he did have a message for the markets – that their negative reaction to last week’s monetary policy statement was “unwarranted” and the US economy was in no worse shape than they thought before the meeting.

But in the meantime, he waded into the debate over whether the US is facing a worrying structural shift in the labour market that could lead to high unemployment rates for a very long time. Read more

Ralph Atkins

When Wolfgang Schäuble, Germany’s finance minister, next meets his European counterparts, will he be heaped with praise – or brickbats? Germany’s economy is on a roll. It grew by 2.2 per cent in the three months to June, its best quarterly performance since reunification in 1990. But that has not necessarily gone down well with colleagues in other European capitals.

Unnoticed beyond his tiny country’s borders, Jean-Claude Juncker, Luxembourg’s prime minister, earlier this month launched an extraordinary attack on German economic policy, according to the Luxemburger Wort. Germany’s success was based on “wage and social dumping,” Mr Juncker is reported as having said. “The way Germany went about improving its competitiveness, I would not like to see in our country.” Since the launch of the euro in 1999, German workers had seen a meagre 12 per cent rise in wages, whereas his countrymen saw a 41 per cent rise, he went on. Read more