Latest Fed projections for the US economy are expected to have worsened considerably from last quarter. Robin suggests the 2011 growth forecast, due for release tomorrow, will fall to 3-3.5 per cent for next year. Unemployment might rise above 8 per cent in 2012, with long-term unemployment rising by more than a percentage point to 6 per cent. Below is a summary of recent projections with Robin’s figures added to the November row:
You can take a gloomy view of today’s eurozone GDP figures. Third quarter growth, at 0.4 per cent on the previous three months, was weaker than in the US and UK – where the talk is about quantitative easing and further measures to boost the economy - and the underlying trend appears to show a clear deceleration from the first half of the year.
But I suspect the ECB is not going to be too disappointed. Germany still managed an impressive 0.7 per cent expansion, while the French and Italian economies continue to expand, even if at a modest pace. Yves Mersch, Luxembourg’s central bank governor, has just told Bloomberg that the latest data were in line with the ECB’s “baseline scenario”. Certainly, the growth outlook will not stop the ECB from pressing ahead with its “exit strategy” to unwind emergency measures taken to support the financial system. Whether Ireland or the other “peripheral” eurozone countries do is another question…
German industrial production fell 0.8 per cent in September, according to the Berlin economics ministry, which was a bigger drop than analysts expected. After Friday’s disappointing orders data, the latest news seems to confirm that Germany’s economy has shifted down a gear.
Still, don’t write off yet the recovery in Europe’s largest economy. Export figures for September – released a few hours earlier by the federal statistics office in Wiesbaden - went in the opposite direction. Exports were 3.0 per cent higher than August – and a whopping 22.5 per cent higher than September last year. External demand, it appears, is continuing to power German growth.
Moreover, third quarter gross domestic product data on Friday are expected to show Europe’s economy was growing at a fair clip. Even forecasts at the gloomier end of the range are for a rise of about 0.4 per cent Read more
UK output rose by 0.8 per cent in the third quarter, according to a preliminary estimate from the Office for National Statistics. The rise is smaller than the surprise 1.2 per cent increase in the second quarter, but substantially above expectations of 0.4 per cent, and the ONS argues that underlying growth in the two quarters is essentially unchanged: “Allowing for the recovery in Q2 following the bad weather at the start of the year, the underlying growth in Q3 is broadly similar to that in Q2.” The UK’s output, or gross domestic product, rose 2.8 per cent between Q309 and Q310.
Output is likely to be restricted in the coming quarters as the spending cuts start to bite, but one of the benefits of the austerity programme has been underlined as S&P raised the UK’s outlook to stable from negative. They said: “In our opinion, the decisions reached by the United Kingdom coalition government in its 2010 Spending Review reduce risks to the government’s implementation of its June 2010 fiscal consolidation program. Moreover, the coalition parties have shown a high degree of cohesion in putting the U.K.’s public finances onto what we view to be a more sustainable footing.”
The IMF tends to be a bit sniffy about countries’ economic policies in its annual report on countries’ economies. That often helps finance ministries in domestic political battles to do the right thing.
But with the new government adopting Fund-friendly fiscal policy, the Bank of England insisting it is ready to act either way on monetary policy and a strengthening of financial policies on the way, the Fund has been reduced to a schoolkid’s crush in its latest assessment of the UK economy. I understand from the Treasury that the chancellor is pleased.
Here are some highlights. On the immediate economic outlook:
“This progressive strengthening of private and external demand should underpin a moderate-paced recovery, even as the public sector retrenches.”
Even though the IMF said Read more
First, Germany leads the euro area to a jump in GDP in Q2. Then, just a month later, a sharp fall in Germany’s PMI leads a drop in the index for the eurozone as a whole. The Purchasing Managers’ Index is not, of course, GDP. It is a survey of 4,500-odd buyers in the eurozone on a number of measures. But historically the two are closely linked. So what’s going on?
Ralph offers some insights on ft.com. First, we may be seeing an expected cooling from the rapid expansion seen earlier in the year. Second, he writes:
Earlier this week, the Bundesbank warned that the pace of German economic growth had weakened “markedly”. But it ascribed the slowdown to weaker global prospects and said the recovery remained “intact”. Although German policymakers worry about the county’s exposure to a fall in demand for its export goods, evidence is growing that the recovery is broadening with increases in real wages and falling unemployment gradually feeding through into stronger consumer spending.
You might ask: what double dip?
UK gross domestic product rose by 1.2 per cent Q-o-Q in volume terms, revised up from the 1.1 per cent estimate published in July. Compared with Q209, the UK economy expanded by 1.7 per cent, up from an estimate of 1.6 per cent.
Construction and agriculture showed the greatest growth rates, as the chart below shows. (Agriculture contributed nothing to overall GDP growth, however: see table at bottom.) Transport, storage & communications began to contract this quarter, probably because of energy prices. Utilities also began to contract.
The ONS provides 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.
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
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
Japan’s economy grew by just 0.1 per cent in the second quarter, a sharp slowdown on the 1.2 per cent growth in Q1. Hurt by a strengthening yen, annualised, seasonally-adjusted Q2 growth is now 0.4 per cent, against last quarter’s (revised) 4.4 per cent.
The slowdown means China’s economy was larger than Japan’s during the second quarter. From the paper: Read more
American unemployment is worse than forecast under the “No Stimulus” scenario. This from Dallas Fed research (h/t zero hedge).
This rather sobering chart shows unemployment more than two percentage points above plan. The forecasts, which come from the Bureau of Labour Statistics in January 2009, predicted an almost immediate turning point in labour market fortunes. In fact, unemployment continued exactly on trend. Read more
Views on eurozone inflation are converging. So too, views on GDP growth and unemployment. Headline rates were largely static from today’s Q3 Survey of Professional Forecasters; GDP growth and unemployment both ticked down compared with the Q2 survey, but it was marginal.
But as these charts show, views among the 55 or so forecasters are converging, even if the one-decimal-place standard deviations don’t show it.
More charts below the jump. Read more
The Bank of England has reduced its growth forecast – but views the dip as a temporary blip and not a turning point.
Spot the difference in the fan charts: see the little dip 2010-11 in the upper (August) chart compared to the lower (May) chart. Growth will dip thanks to “persistent tight credit and faster fiscal consolidation” – but the latter has also reduced the downside risks. Risks to growth fall on the downside.
Further, inflation is likely to remain above target till the end of 2011 – a full year longer than projected in May. Mervyn King has just said at the press conference that after 2011 – once the base effects are removed – he expects a period of below-target inflation. Risks to the projection fall mostly on the upside.
Understandably, given this, the governor is concerned about the effects on inflation expectations: Read more
There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.
Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.
The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.
Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward Read more
Ben Bernanke is not quite a native of South Carolina – he was actually born in nearby Georgia. But he did grow up in the state, and returned there this morning to give his latest assessment of the US economy.
The headline, in my view, was that there is a “considerable way” to go before the US recovery is complete – a no-less dreary variation on his comments last week that the economic outlook is “unusually uncertain”.
Unemployment is high, the housing market is weak, financial conditions are less supportive of growth than they were earlier in the year, Mr Bernanke said, in his first remarks following Friday’s disappointing growth data, which showed real gross domestic product increasing at a slower pace in the second quarter than it did in the first.
But if anyone was hoping for Mr Bernanke to discuss what steps the Fed might consider at their monetary policy meeting next week to reboot the recovery, they were disappointed. Mr Bernanke did not address the issue, presumably to avoid speaking ahead of his colleagues on such a crucial, market-sensitive matter. Read more
The second quarter GDP figures for the US were published last Friday. The financial markets do not usually get very agitated about these figures, because the official quarterly data lag the many sources of more timely information on the economy. But this is an unusually sensitive time for the US economy. Many observers are beginning to fear the onset of a double dip recession, and even a slide towards chronic deflation. Since this is by far the biggest risk facing the global economy at present, I feel I should start this new blog on global macro-economics with a comment on what I learned from these figures. Three points stand out, all of them worrying.
First, the annualised growth in GDP in Q2 was only 2.4 per cent, a disturbing figure because it indicates decelerating momentum, compared with growth rates of 5.0 per cent and 3.7 per cent in Q4 and Q1 respectively. A growth rate of 2.4 per cent is no better than trend, and is not sufficient to bring unemployment down. The US labour market is currently trapped in its worst recession since the 1930s, with many troublesome signs which remind me of the dysfunctional European labour market in the 1980s. It cannot afford a period of sub trend GDP growth.
Second, the economy remains far too dependent on the upswing in the inventory cycle. This is an inherently temporary force which is now overdue to fade away. As the graph below shows, the swing in inventories has explained much of the recovery in the economy in the past year, but it is now well past its peak. Read more
Canada was the first G7 country to start raising rates, and has enjoyed consistent growth for nine months, bar a static April. Latest data show slight growth in May of 0.1 per cent.
However, data show non-farm payrolls fell in May by 0.2 per cent, or 25,000 people. To add to the mixed picture, the central bank reduced growth forecasts 10 days ago, even as it raised rates, and three days later, inflation fell to just 1 per cent. It seems Ben Bernanke’s oft-quoted description of unusual uncertainty, would apply equally well north of the border.
G20 nations must implement policies agreed at the latest summit, otherwise “large imbalances may re-emerge, with the attendant risk of disorderly adjustment.”
This from the Bank of Canada’s latest Monetary Policy Report, which finds Canadian growth “proceeding largely as anticipated” and risks to Canada’s economy roughly balanced. Read more
Another day, another bad report on the state of the US recovery.
Today, it was the US Census Bureau’s report on retail sales for June that ended up disappointing economists, showing a 0.5 per cent drop over the month as well as revisions to earlier data. Clearly, US consumers, who had started to spend again quite aggressively in late Winter, have since retrenched, amid persistently high unemployment and weakness in equity markets.
Yesterday, the bad news had been on the trade side, with an unexpected widening of the US trade deficit as imports, particularly from China, outpaced exports. Read more