Chris Giles

Although the IMF is super-orthodox and Anglo Saxon, when it comes to advanced economy monetary policy, even with a French managing director and chief economist, there are some signs of a softer IMF this spring.

Capital controls
Most attention has focused on capital controls, on which the Fund has issued its first ever guidelines on their use. This is seen as the IMF giving ground to countries, such as China, seeking to build foreign exchange reserves for currency management rather than expose itself to volatile capital inflows. This is a misreading of the IMF’s intentions.

The Fund could not have been clearer that capital controls are only a valid part of the macroeconomic toolkit if a country’s currency is not undervalued, it has sufficient foreign exchange reserves and it is unable to use monetary or fiscal policy. Only one  - foreign exchange reserves – of these three criteria apply to China.

In contrast, in the World Economic Outlook, the Fund complains repeatedly about China’s exchange rate Read more

Chris Giles

I am currently engaged in an entertaining tussle with the Office for Budget Responsibility, the newish and independent fiscal watchdog. I am sure our disagreement will be resolved quickly. I have no reason to doubt the independence of the OBR staff, nor their stated desire for transparency. But at the moment they are being surprisingly secretive over the most important judgment in their forecast.

The OBR’s remit is to determine whether the government has a greater than evens chance of meeting its binding fiscal goal to balance the structural current budget deficit by 2015-16. Regular readers of this blog will know that I am boringly consistent in thinking this goal is useless because it relies upon splitting the forecast for borrowing into structural and cyclical components, a task which is so difficult as to make it not worth bothering.

But we live in a world where a public body – the OBR – has been given this difficult task and so its judgments need to be scrutinised. Your taxes and the level of public spending literally depends on the OBR’s assessment. Read more

Chris Giles

I am sure George Osborne’s second Budget will soon be forgotten. The public will not thank him much for avoiding the scheduled rise in petrol duties – being hit by a bullet is more noticeable than dodging one. And the growth agenda – laudable though it is in its intentions – is hardly new for British chancellors.

In the minutes after an admirably clear speech from the chancellor without last year’s duplicitous use of numbers, the striking thing about the newish and independent Office for Budget Responsibility is the number of times it has taken the approach – “We hear what you are saying, but forget it”.

  • Growth: The OBR had the opportunity to endorse the “plan for growth” by raising its estimate of the long-term potential growth rate of the economy. It said forget it:

“We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in Budget 2011″.

  • Growth forecasts: The OBR downgrades

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Robin Harding

Macroadvisers have put out their estimates of the economic effect of passage of the House Republicans $61bn of FY11 spending cuts. They are lower than Goldman Sachs, higher than the Fed, and look pretty solid to me.

  • Our simulation analysis suggests this near-term fiscal drag would reduce annualized growth of real GDP during the second and third quarters of this year by ¾ percentage point, with smaller impacts for a few subsequent quarters.

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Robin Harding

Ben Bernanke is testifying at the House today (it’s pretty dull) but he has spelled out the Fed’s estimate of what a $60bn cut to federal spending in FY11 (i.e. in the remaining months until the end of September) would do to the economy.

It would cut 0.1-0.2 percentage points from output this year and 0.1 percentage points next year. At some unspecified time horizon, it would lower employment by 200,000. Read more

Eurozone price rises sound alarms at ECB – FT

Libya turmoil crushes risk appetite – FT Read more

Robin Harding

Today’s UK GDP shocker once again raises the question of whether the rapid, pre-announced tightening of fiscal policy underway in Britain is wise. But at least one new academic paper suggests that chancellor George Osborne has it right.

Ignazio Angeloni and colleagues at the Kiel Institute for the World Economy run fairly comprehensive simulations on exit strategies from crisis fiscal and monetary policies and conclude: Read more

Chris Giles

Giving evidence to the Treasury Select Committee this morning, George Osborne claimed the UK economy was back on track.

He added that it was pretty clear to him that the previous Labour government had overstated trend growth for much of its time in office and there had been a big “boom” in the economy for much of the decade.

Warming to this theme, the chancellor referred the Committee to his favourite chart of the June Budget, which shows what the output gap would have looked like if a more modest figure – and what Mr Osborne said was “more realistic” estimate for trend growth – had been assumed by the previous government. Read more

In the early days of the telephone, human operators played a crucial role: you called the operator, asked for the Joneses at a certain address, and she called them for you and connected you. Telephones were never forecast to be ubiquitous: their number would be forever constrained by the cost and availability of human operators required to make the system work.

Few people – if any – envisaged automatic connection. When it finally came along, no doubt it was unpopular with telephone operators. But the sacrifice of their jobs – painful as it was – paved the way for the highly efficient system we know today. It is unlikely the telephone operators were consulted on the matter, much less given the deciding vote.

So there is a level on which it seems strange that EU policymakers should get to choose whether or not they remain a part of the fiscal sanctions process. Euro member states might be punished if they are fiscally irresponsible, going forwards, but then again they might not: it will depend upon votes by policymakers. The ECB’s proposal for semi-automatic sanctions has been thwarted: the decision to punish will remain lengthy – and political.

There is a problem with this. Read more

Creating a central fiscal agency for the eurozone is one of two solutions suggested in a new staff paper from the IMF. The current (decentralised) system doesn’t work properly, argues the paper, because buffers are not built up in good times; there is insufficient central risk management; and decentralised crisis response is inefficient, increasing the chance of ad hoc bail-outs.

“The case for binding fiscal constraints in a fiscally decentralized monetary union ultimately rests on the fact that all members’ solvency constraints need to be simultaneously satisfied, effectively exposing the credibility of the common currency to fiscal policy mistakes by the weakest performer,” reads the paper.

Centralising European functions has two proposed elements: a central fiscal agency, and the creation of a single European bond. Such moves would require changes to the Treaty on the Functioning of the European Union. Less radical suggestions, requiring minimal legislative changes, include broader sanctions such as financial penalties in good times, and reduced voting rights in bad times. Read more

Are Bulgaria and Luxembourg unsung heroes of the global recession? Estonia has received wide praise for its fiscal position, and Poland’s economy is likewise admired for its refusal to contract. But this useful graphic from the Economist shows two additional players for the fiscal saints.

Public debt in Bulgaria and Luxembourg is between 0 and 19 per cent of GDP – a distinction shared only with Estonia. Both countries also share low deficits, as proportions of their GDP. But unlike Estonia, Bulgaria and Luxembourg enjoy below-average unemployment rates: 9.7 and 5.2 per cent respectively, compared to 19 per cent for Estonia. Read more

Chris Giles

The 2010 emergency Budget has lived up to its historic billing. Huge spending cuts and big tax rises are planned to bring borrowing down from its current rate in excess of 10 per cent of national income.

No allowance has been given to those who worry that such rapid deficit reduction might hit the economy too hard and make it counter-productive. We are back to Lord Snowden’s in 1931, described as an “evangelical Pennine socialist” by Lord Jenkins. I don’t think that description applies to George Osborne; and he must hope his reputation survives better than his 1930s predecessor. Here are four things that have interested me so far.

  • The big news. Obviously, real spending cuts of 25 per cent in government departments outside health and overseas aid are big. Very big. This will mean the pain from this Budget will be felt for years and not just tonight. The really interesting thing is that

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Has anyone noticed how Europe’s fiscal sinners aren’t faring too well in the World cup, while fiscal saints enjoy a winning streak? Well, a back of the envelope calculation has shown a 70 per cent correlation. By this logic, Estonia should have made it to the final.

Switzerland’s win is best described as reward for prudence, while England’s dismal draw against the US is divine retribution for years of overspending. Who said there was no justice? Read more

Chris Giles

Sterling is being sold across the board. At lunchtime it was down almost 2 per cent against the currencies of Britain’s main trading partners. There are a bunch of technical reasons why it seems to be in freefall. Figures from the Chicago Mercantile Exchange suggest traders are building up short positions in sterling, the news that Prudential has agreed to buy the Asian operations of AIG insurance group for $35.5bn will create a significant new demand for foreign currency, and the FT’s story today that gilts are trading as if it has already lost the prized AAA_rated status have all put the skids Britain’s currency.

But the big concern in the markets is the chance of a hung Parliament after weekend opinion polls put the Conservative lead over Labour at only 2 per cent. On a uniform swing, this would not be far from sufficient for a majority Conservative government and would indicate a minority Labour administration is most likely. The fear is that such a government would be weak and indecisive in reducing the budget deficit, leading to further economic chaos. Read more

Robin Harding

Dylan Grice of the Societe Generale strategy team put a punchy note out yesterday on the Japan-national-debt-default-or-hyperinflation theme that occurs when one looks at forecasts of 2010 government net and gross debt of 115 per cent and 227 per cent of GDP.

Here’s a taster (the note has also been written up in apocalyptic tones today by Ambrose Evans-Pritchard of the Telegraph).

Japan’s government borrows from Japanese households and has done for decades. But Japanese households are retiring, and traditionally retirees run down their savings. So who will fund Japan’s future deficits, which are already within the range identified by inflation historian Peter Bernholz as hyperinflation ‘red flags’? Twenty years ago, who could predict long-term JGB yields below 1%? Who sees uncontrolled inflation as the primary risk facing Japan today?

Government debt cannot rise indefinitely as a share of GDP, while the greater the stock of debt and the greater the flow in any given year, the greater the chance of a crisis. I don’t agree, however, that (a) Japan is about to run out of domestic savings to fund its deficit or that (b) the most likely nature of the final crisis is hyperinflation.

As Mr Grice argues, Japan’s household savings are in decline as the population ages. Governments that need to borrow from overseas – most seriously those that need to borrow in a currency they cannot print – are in much greater danger of a debt crisis.

Japan is still very far from that position, however. Read more

Krishna Guha

Did you spot the big hole in the Obama speech on job creation today? Nothing new on small business access to credit – possibly the single biggest obstacle to job creation in the US. This is a huge issue for the economy, the White House and the Fed.

With the Fed rightly withdrawing from sectoral intervention via financial markets now the financial system has normalised, supporting small business access to finance is properly a job for the government.

On paper this is not difficult. The government could provide guarantees to limit losses on small business loans or create a funding vehicle to coinvest in such loans alongside banks (I prefer this route as the taxpayer and the bank would have the same economic interests). Read more

Mure Dickie

Pity Japan’s Democratic party. When they took power less than three months ago, party heavyweights were hoping to use the fat from a huge stimulus package drawn up by the former ruling Liberal Democratic party to help fund implementation next year of some of their generous manifesto pledges.  Read more

Ralph Atkins

Is the economy doing better in Germany than in France? Or is it the other way around? Third quarter eurozone gross domestic product data indicated it was the former. German GDP rose by 0.7 per cent, compared with a measly 0.3 per cent in France.

But purchasing managers’ indices today still show France doing much better than its larger neighbour. The French composite index – covering manufacturing and services – stood at 59.8 in November. The equivalent reading for Germany was just 53.5. With the exception of a short burst in 2006, French private sector activity is growing at the fastest rate for about nine years Read more

Mure Dickie

In the great Japanese debate on how to balance the contradictory demands of reining in the deficit and continuing stimulative spending, chalk up another political point for Shizuka Kamei, Japan’s minister for financial services. Read more

Ralph Atkins

What will the ECB make of the new German government, asks Ralph Atkins in a Financial Times blog Read more