Mario Draghi has warned that, though unlikely, Europe’s fledgling economic recovery could be derailed by the turmoil in Ukraine.
While the direct financial and trade linkages between the European Union and Ukraine are small, the ECB president told lawmakers in Brussels yesterday that the geopolitical dimensions of the tensions could have a strength that goes beyond mere statistics on capital and current accounts.
One of the most important economic aspects of those geopolitical dimensions is the supply of Russian gas to the EU.
The EU’s reliance on Russia has dwindled over the past decade, but it still matters. The relationship still accounts for 30 per cent of all gas imported into the bloc and when Gazprom cut off Ukraine in 2009, the disruption to energy supplies hit the EU hard. And though the EU is now less reliant on receiving its gas via this route, there’s no way of Russia using the gas button against the Ukraine without it having some impact on the rest of Europe.
The popularity of this tweet by Reuters’ Jamie McGeever highlights the interest this geopolitical dimension has received:
But there are good reasons to bet against Russia turning off the gas tap, regardless of whether or not one believes relations with the EU are the direst since the Cold War. Read more
There could be serious financial turmoil when the Fed eventually raises interest rates, even without a lot of leverage in the financial system, according to this year’s paper at the US Monetary Policy Forum in New York. If the analysis is correct then it is an argument against very easy monetary policy – but the paper is quite limited.
(The USMPF, organised by the Chicago Booth business school, is a once-a-year event where a group of market economists present a paper to a gathering of Fed pooh-bahs. The authors this year are Michael Feroli of JP Morgan, Anil Kashyap of Chicago Booth, Kermit Schoenholtz of NYU Stern and Hyun Song Shin of Princeton.) Read more
Once upon a time, the Bank of England’s Monetary Policy Committee sounded like a group of nine individuals with differing views. One of the most interesting aspects of Mark Carney’s arrival is the monotone now coming from the interest-rate setting committee.
It has been noticed: for example Fathom Consulting put this slide up at its recent monetary policy forum.
In a note last week, JP Morgan also made a rather damming comparison between the BoE’s reticence to acknowledge any discussion over a new form of guidance with the Federal Reserve’s minutes which demonstrated a healthy debate over the options. Allan Monks, the author of the note, concluded:
” In our view, the lack of discussion about the presentation and specifics of this new ‘framework’, or the consideration of any alternatives, does not suggest the committee as a whole is strongly invested in it. While Governor Carney may suggest policy-setting has undergone another innovation, the rest of the MPC has merely acquiesced and views the changes through a different lens.”
The question seems absurd. John Rentoul of the Sunday Independent would be tempted to add it immediately to his list of journalistic questions to which the answer is “no”. I think the answer is obviously “no”.
But the Treasury and the Information Commissioner believe anyone revealing details of the Bank of England’s forecasts is doing something that is:
“likely to have a destabilising effect on the financial markets and thus have a prejudicial effect on the economic interests of all or part of the UK”.
Hence, in the eyes of government, Mr Carney, who revealed details of the BoE forecasts on Wednesday, is something of a traitor. At least that was the view of the Treasury last year. Read more
After the Reserve Bank of India’s Raghuram Rajan took the Fed and other developed country central banks to task this week for ignoring turmoil in emerging markets, Richard Fisher, president of the Dallas Fed, gave the standard retort on Friday. He said the US central bank must make policy according to what is best for America.
Doing so means the only reason the Fed would change its monetary policy is if trouble in emerging markets had a direct effect on the US. There are two main channels – exports and financial markets – but neither looks likely to hurt the US unless the EM turmoil gets a lot more severe. Thus while the Fed may make a greater show of consultation, and soak up some flak at the G20, its actions this year are unlikely to change. Read more
At the World Economic Forum in Davos, Mark Carney got to speak briefly at the main debate on the global economy. Asked about the news on forward guidance he talked about it coming to the end of its “first phase”. He said:
In terms of exit, I am not signalling an exit on UK monetary policy, just to be clear. Our first phase of forward guidance with a 7 per cent threshold of unemployment rate is approaching – we don’t know exactly when – the achievement of that threshold. We will assess the overall conditions in the labour market; more broadly the supply capacity of the economy, just as we’ve said all along that we would do at that point and set policy appropriately. Read more
By Hugh Carnegy in Paris
Update: Since we published this post, Chris Williamson, chief economist at Markit, has been in touch to say there is no significant divergence with Insee. There has been a lot of comment on this among economists in recent months so his take is important. Thanks to him for the contribution added at the bottom of the post.
Trying to work out exactly what is going on in France’s economy? Recently there has been a marked divergence between indicators from Markit and those from Insee, France’s statistics institute, with the former a good deal more gloomy than the latter.
This continues to be the case – but at least this month there is a bit of convergence, with Insee indicators level-pegging compared with December, while Markit’s figures show a three-month high.
Headlines are headlines. British unemployment plummeted from 7.4 per cent between August and October to 7.1 per cent between September and November. This puts it 0.1 percentage points away from the point the Bank of England said it would start considering raising interest rates. It is a big story but there has to be a question whether the unemployment rate is a false friend to the BoE. Could it be suggesting strength in the labour market and a drop in slack that other labour market measures do not show.
Luckily, when the BoE introduced guidance, it published a pentagon diagram of other labour market indicators. It is inserted below and each point shows the same degree of slack, pretty much, (1 standard deviation from normal levels). I call it the BoE’s presumptive pentagon. It was presumptive because it was suspiciously regular (rarely things show such a consistent message in economic data) and it presumed unemployment would behave similarly to other indicators. The time has come to find out. Read more
So, China’s gross domestic product grew by 7.7 per cent in 2013. Much media comment has focused on how this performance, by Chinese standards, is relatively lacklustre. It is, together with last year’s 7.7 per cent expansion, the lowest growth rate since 1999.
However, there is another perspective. A quick look at the International Monetary Fund’s list of countries’ GDP numbers shows that China grew last year by an amount somewhat smaller than the size of the entire Indonesian economy but larger than Turkey. Read more
On Wednesday, the Office for National Statistics for the first time published regional growth figures for the UK. The obvious question that popped into my mind was to compare the Scottish growth with that published by the Scottish government.
I produced the following chart and wrote what looked like a cracking story because the ONS measure showed little over half the growth of the Scottish Government data, raising questions over the strength of Scotland’s economy. Read more