Daily Archives: September 22, 2010

Every day another news story predicts recession or redemption based on a different indicator. Wouldn’t it be great if there were one reasonably accurate indicator incorporating elements of them all?

Introducing ALI, the euro-wide Area Leading Indicator. This is a new index from researchers at the ECB that claims to lead the business cycle with reasonable accuracy 6 months in advance. By its reckoning, things are looking good – very good – for the next few months.

In the chart, ALI is green and pointing sharply upwards; the business cycle is black, lagging ALI by 6 months. Researchers extended the lead time (by trading off accuracy) – and that is shown by the red and yellow lines. They are in negative territory but heading sharply north.

Unlike models, ALI is quite simple and it’s real-time: it’s a number formed by Read more

Ralph Atkins

Germany’s exports get all the attention, but are we missing something more interesting about the recovery in Europe’s biggest economy? The country’s statistical office has just release figures for real incomes in the second quarter of this year. They show a 2.3 per cent rise compared with the same period a year before.

In itself that is not remarkable. The second quarter of 2009 saw a steep fall in incomes as German companies put employees on short time working schemes. So a catching up a year later is no big surprise.

What is striking is that German real wages were actually higher in Q2 than before the collapse of Lehman Brothers in September 2008 – even though the economy, in terms of levels of activity – was still way below pre-crisis levels. Read more

Iceland’s central bank has further reduced its key interest rates, this time by a blanket 75bp; the current account rate is now 4.75 per cent. The Sedlabanki cited an appreciating krona and falling inflation. Prices are still rising at an above-target pace, but the rate is forecast to fall below the 2.5 per cent target early next year.

The Committee considers that, if the króna remains stable or appreciates and inflation subsides as forecast, the premises for some further monetary easing should be in place. However, the prospects of capital account liberalisation create uncertainty about short-term room for manoeuvre. The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.

 Read more

Structural deficits disease is pretending you know the precise size of the hole in the public finances, basing the entire fiscal strategy of government on an estimate of the unknowable output gap, using a measure of that structural deficit which contains many cyclical elements and allowing perverse conclusions to be drawn from data. So what is the cure?

John Kay beat me to a pretty good answer in the FT today, when he said the basic question that should be answered is:

“What is the level of taxation that is needed to support current and future expenditure plans on a sustainable basis?”

Where I would disagree with John is that to provide a credible answer to this question, you still need to look into a crystal ball. But crucially, what you do not need to do is come up with spuriously ‘precise’ estimates of the output gap and the structural deficit. Read more

Portugal is the latest PIIGS government to suffer a sharp increase in its cost of debt. Like Ireland earlier in the week, Portugal has raised a significant amount of debt at auction at roughly one percentage point above the last auction.

Unlike Ireland, Portugal raised just three-quarters of its intended €1bn offering – not because of a lack of demand, but because Lisbon refused to accept the very high yields demanded by some investors. €400m of 2014 bonds sold at 4.695 per cent; €350m 2020 bonds sold at 6.242 per cent. Read more

The September minutes of the Monetary Policy Committee show the nine members still split 8:1 in favour of doing nothing. Only Andrew Sentance voted for higher interest rates on the grounds that the recovery had “sufficient momentum” to withstand a gradual easing of the stimulus.

Most, but not all of the rest of the Committee became a little more downbeat over the month, worried by weaker surveys of the services sector and concerned that “the headwinds to a recovery in private sector demand in the United Kingdom and overseas were somewhat stronger than previously thought”.

Why did the MPC move marginally closer to restarting asset purchases?

“For some of those members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased.”

I would stress the word marginally.  Read more