Growing divergence between countries’ economic policies is threatening the global recovery, Mario Draghi has said.”The economic recovery is strong in the emerging countries, weak in the United States and uneven in the euro area. The economic policy responses are divergent,” said the Italian central bank governor. As some countries intervene in currency markets and imbalances grow, floating exchange rates are “feeling the gap,” he added, concluding: “The world recovery itself is at risk.”

Mr Draghi, who is a contender to succeed Jean-Claude Trichet as ECB President next year, said the only option is for countries to co-ordinate their economic policies more closely. That co-ordination could include limiting current account imbalances, avoiding protectionist policies, encouraging flexible exchange rates and reducing the volatility of capital inflows to emerging markets. He also indirectly supported calls for semi-automatic sanctions in the eurozone. Read more

Minutes from Poland central bank show some MPC members favoured a rate rise at the August 24 meeting. A  motion to raise rates by 50bp was put to the vote and rejected; the refinancing rate remained at 3.5 per cent.
From the minutes:

While considering the decision on interest rates, some Council members argued that the present GDP growth, with a possibility of its acceleration and a likely reduced potential output growth, could contribute to a rise in inflationary pressure in the monetary policy transmission horizon. Those members emphasized that the current level of interest rates was adequate for a situation of strong slowdown in the growth of the Polish economy and the recession in its environment, and that given recovery gaining strength in Poland it was justified to increase the NBP interest rates. 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 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.

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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

Robin Harding

Back in April when I planned my move to the US, August looked like a safe time to be packing boxes and dealing with utility companies. The economy was growing, the Fed seemed set to keep policy on hold for at least a year, and surely nobody would do anything in the heat of the summer anyway? So much for my skills as an economic forecaster.

I’m back to find the Fed reinvesting the proceeds from maturing mortgage-backed securities – after what seems to have been a pretty lively FOMC meeting on the 10th – with no change to the steady decline in the economic data.

What strikes me is how continuously bad the news has been in the last month, with no progress in the labour market, and series such as today’s new home sales still hitting record lows. Read more

Are economics bloggers a more gloomy bunch, or do they just lack the political constraints that force the smiles of policymakers?

Below is a word cloud of bloggers’ responses to the question: “How do you rate the assess the overall condition of the US economy right now?” posed in a quarterly survey by the Kauffman Foundation. The words ‘good’, ‘promising’ and ‘dynamic’ are present, but they are roughly the same size as ‘encrusted’ and ‘moribund’ – not, one imagines, popular choices in a free text field.

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Alan Beattie

The risk of a slowdown in the global economic recovery has risen sharply, but governments should continue planning to tighten fiscal policy, the International Monetary Fund has said.

Updates to the IMF’s regular world economic outlook and assessment of global financial conditions, released on Thursday, said jitters in financial markets in May and June threatened confidence and growth worldwide. Read more

Ralph Atkins

The eurozone’s economic growth spurt is showing fresh signs of losing momentum with a closely-watched survey flashing warnings of a slowdown ahead. June’s purchasing managers’ indices for the 16-country region indicated that the brisk pace of export-led economic expansion seen in the second quarter of this year marked a peak in the upswing.

The latest readings could heighten worries of a lacklustre eurozone economy being hit increasingly by recessionary conditions in southern Europe, as well as fiscal austerity measures and weaknesses in banking systems across the continent. Read more

Canada’s is the third central bank in a week to cite increased downside risks to the economy. “The overall level of risks to Canadian financial stability has increased” in the past six months said the Bank of Canada’s financial stability review. Read more

Simone Baribeau

Is the growth in global manufacturing running out of steam?

Probably not. But in many countries, it did slow down in May. Read more

James Politi

Staff at the Federal Reserve Bank of San Francisco, home to Janet Yellen, the freshly-nominated Fed vice-chair, have just offered some fresh insight into their thinking on the shape of the US recovery.

In a 4-page letter published today, researchers Justin Weidner and John Williams took a close look at the pace of economic rebounds from previous recessions, starting in the post-second world war period, and conclude that this time around, US growth will reach nearly 4 per cent this year, and about 3.5 per cent next year. Read more

Simone Baribeau

Homeprices resume their fall after recent gains after the tax credit was set to expire.

Ben Bernanke, Federal Reserve chairman, earlier today cited “residential and nonresidential construction” as a headwind to the “moderate” economic recovery. But he also said that consumer spending will be boosted by “a gradual pickup in jobs and earnings, the recovery in household wealth from recent lows, and some improvement in credit availability.”

Household wealth is, of course, comprised of many types of assets, including retirement portfolios and other equity and bond investment holdings. But one of its major components is home values.

So is that portion of household wealth likely to grow? See the somewhat downbeat graph. Read more

James Politi

Ben Bernanke, Federal Reserve chairman, has predicted that a “moderate economic recovery” would unfold in the US over the next several quarters on the back of stronger spending by businesses and consumers.

In testimony before the Joint Economic Committee in Congress, Mr Bernanke offered a slightly more upbeat outlook for the economy than he had in recent remarks, suggesting that the recovery is gaining traction. Read more

Simone Baribeau

Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, today spoke of an ‘impressive’ turn-around in GDP and said that the tide of dismal economic news ‘appears to have turned.’ But there the upbeat message of the a leading dove ended.

The annual 5.7 per cent growth in fourth quarter GDP was unlikely to be sustained, she argued.

Unfortunately, I’m not at all convinced that a V-shaped recovery is in the cards. That fourth-quarter leap in GDP overstates the underlying momentum of the recovery.

The reason for her scepticism in the sustainability of last quarter’s growth was, of course, the same as everyone else’s: most of it was due to a slowdown Read more

The Bank of Israel yesterday raised its 2010 growth forecast from 2.5 per cent to 3.5 per cent. Bank forecasts are now more in line with analyst expectations: last week, Bank Leumi raised its forecast to 3.5 per cent and on Sunday, Bank of America Merrill Lynch did the same. An increase in demand for exports is driving the recovery, and the optimism.

The main assumptions underlying the 2010 forecast are that global trade will increase 7 per cent, terms of trade will deteriorate by 2.1 per cent. Unemployment is expected to fall below 7 per cent by the end of 2010. Details of the forecast and assumptions are below: Read more

The US will have a jobs rich recovery while Europe will have a jobless one. That is the unspoken conclusion of the OECD’s latest Economic Outlook, writes Chris Giles of the Financial Times. It uses some wonderful charts as evidence for its case.  Read more

More encouraging unemployment figures from the UK exacerbate the divide between most European labour markets and that in the US this recession. There are many possible explanations writes Chris Giles of the Financial Times, but the result must be a more optimistic Bank of England when it examines the prospects for recovery. Read more

An increasingly bitter dispute among economists is raging over the accuracy of the preliminary official figures showing a 0.4 per cent economic contraction in the third quarter. But a spirited defence of the official figures from Danny Gabay of Fathom Consulting is seriously flawed writes Chris Giles of the Financial Times. The logic of his view is that the benefit of hindsight is strictly time-limited.
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By any account, the UK’s third quarter contraction of 0.4 per cent is bad, writes Chris Giles of the Financial Times  Read more

If US retail sales figures were driven by auto sales, what will happen when the various cash-for-clunkers programs stop? The dollar may be the world’s new carry currency and global stimulus measures may be worsening future cycles Read more