You still need a strong constitution or a taste for gallows humour to read most eurozone economic statistics, as today’s release of the preliminary Q1 gross domestic product
growth contraction data shows.
The bloc is now in its longest recession since the birth of the single currency, beating the post-Lehman Brothers slump in duration, though not in the depth of the downturn. Read more
The Institute for Fiscal Studies, along with Barclays, are currently presenting their annual fiscal forecasts and Budget judgement. Most of the central headlines are comforting to the government. The economists think that on the basis of the official economic forecasts, the public finances are broadly on track – the hole in the public finances will be closed by 2015 or so.
The concern is that all the risks seem to be on the downside relative to official forecasts.
There are good reasons to worry that the economy might be hit harder from austerity than the Office for Budget Responsibility thinks, such as the difficulty the Bank of England will have in offsetting tight fiscal policy with loose monetary policy. Consumers are being hit hard from high import prices squeezing incomes. UK investment rarely bounces back sharply from recessions. And export performance has been disappointing and we don’t really know why. Read more
This might be described as an anti-riot Budget: the pain is fairly equally spread. Wealthy pensioners are penalised. Benefits are reduced by €5-€10 per person per week, across several types including maternity pay, child benefit, jobseekers’ allowance and unemployment. Buying and selling homes is encouraged with a big reduction in stamp duty across all home values.
- €6bn spending cuts in 2011; roughly €4bn in spending cuts and €2bn from tax adjustments;
- Of €2.2bn costed gross savings, €1.6bn will come from the Health & Children, and Social Protection budgets;
- HOUSING: Stamp duty will be 1% on properties up to €1m; 2% on the balance (down from 7% and 9%);
- PUBLIC SALARIES: Ministers to take €10k pay cut; PM’s salary down €14k; public sector pay capped at €250k;
- WEALTHY PENSIONERS: Pension tax relief limit falls from €150k to €115k; maximum allowable pension fund for tax purposes more than halved to €2.3m; life-time limit of tax-free pension drawdowns reduced to €200k. All these will save about €35m next year;
- PENSIONS: No reduction in state pension this year; reduced tax exemption for employers and employees for pay-related social insurance (PRSI, like PAYE) contributions. Due to save €80m next year;
- TAX: Reduce the value of tax bands and credits by 10 per cent; top marginal tax rate of 52%; corporation tax to remain 12.5%; workers on the reduced minimum wage will be tax exempt.
Irish shares have risen on the announcements Read more
Greece is poised to accept tough conditions, including widespread job cuts and labour market reforms, in order to secure the third and fourth loan tranches of its €110bn bail-out by the European Union and the International Monetary Fund. George Papaconstantinou, finance minister, said on Monday the socialist government tried “to preserve the country’s interests as best we could,” in discussions with the “troika” – representatives of the European Commission, European Central Bank and the Fund.
The troika’s latest monitoring mission came amid rising concern in Athens that a future transfer might be blocked – a move that could trigger an immediate default and a disorderly restructuring of Greece’s €340bn sovereign debt. “It’s a difficult negotiation every time . . . bearing in mind that the next loan tranche is at risk,” Mr Papaconstantinou said. Read more
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.
Better than good news: the removal of bad news. Times two.
Ireland has stopped posting negative growth for the first time in more than two years, and the ECB auction suggests tomorrow’s end to one-year liquidity won’t trigger the meltdown many feared. Read more
You can always hope.
As more details unfold about European austerity programmes, reports asked Charles Evans, Chicago Fed president, what the potential effects would be on the United States. According to Reuters, Mr Evans responded:
I’m hopeful that our exposure will be minimal to modest.
Being hopeful is one thing, expecting something to happen is another.
Of course, there are those that are far less hopeful (or is it expectant?) Read more