Posts Tagged ‘eurozone’

The data coming out of the US has been so very good over the last few weeks that I am beginning to think the unthinkable. The thing they some said can never happen, if you like, a reverse Black Swan; the economic crisis that descended on the US in late 2006/2007, which deepened with the collapse of Lehman Brothers in October 2008, and then acted as a catalyst for the rest of the world to enter a sustained crisis period, is drawing to a close. The economic crisis may be over or almost over. This is why and these are the lessons we can learn.

If I were to list all the positive data relating to the US economy over the last few weeks this article would drag on and on, but instead let me focus on the highlights.

Number one: and most obvious, we have the markets. The Dow Jones hit a new all-time high on Tuesday (28 May). The markets don’t always get it right – in fact they often get it very wrong, but it is evidence.

Number two: US house prices. They rose 7.2 per cent in the year to March, according to the Federal Housing Finance Agency. That was the biggest annual increase recorded since May 2006. In fact as of Q4 last year, US house prices were 24 per cent down from peak and, according to the latest OECD report, the ratio of average US house prices to average US income is 85 per cent of the long term average.

Number three: US consumer confidence. According to the Conference board, this hit a five year high in May.

Number four: the US fiscal deficit. Earlier this month, the Congressional Budget Office revised its estimate of the US deficit for this year downwards by $200 billion. It is now saying the deficit will be $642 billion. To put this in context, last year the deficit was $1.1 trillion. And if the estimate proves right, it will be the first time the US budget deficit was less than $1 trillion in five years.

Number five: US household debt. This reduced by $11 billion in Q1, and now totals $11.2 trillion, from $12.7 trillion in 2008. According to the IMF, US household debt to income has fallen from a ratio of around 1.3 in the mid-noughties to about 1.06 at the end of 2012. See page five of this report.     The OECD has drawn similar conclusions. See page 20 of this report.

Number six: US inflation was just 1.1 per cent in April. In fact prices dropped no less than 0.4 per cent month on month between March and April.

Number seven: US unemployment fell to 7.5 per cent in April, the lowest level since Barack Obama became US President. Since last November the rise in US non-farm payrolls has been in excess of one million. The next jobs report is out at the end of next week (7 June), and Capital Economics predicts a 175,000 rise in non-farm payrolls. There are signs that companies are moving manufacturing back to the US as wages rise in China. Talk is that the much hyped new Google Android phone will be made in the USA.

Number eight: earnings at US banks in the first quarter of 2013 were $40.3 billion, which is the highest ever recorded. Over the past 12 months, US banks have maintained a capital tier one ratio of 13.3 per cent; that too is a record high.

Okay, so why? I can think of three key reasons. The first is creative destruction. Softer rules regarding bankruptcy, and the fact that when a home in the US is repossessed, any shortfall between the mortgage and the value of the home is covered by the bank, have all helped the US get the pain over with much faster. The second is less austerity. Contrast the US policy towards austerity with the UK and Eurozone. The third reason is shale gas, which has pushed down the cost of energy in the US.

The US still has problems. Household debt to disposable income is still higher than it was in 2000. See the aforementioned OECD report. I am very worried about the awful levels of income inequality in the US. Maybe if manufacturers do start moving from China to the US this issue will be partially addressed. I think economist Joseph Stiglitz is right when he says US student loans has the potential to be a crisis on a scale comparable to the sub-prime debacle.

Don’t think that because I am optimist on the US, I feel the same way about Europe. The continent is stuck in depression. I don’t see this ending any time soon, and I worry about the global implications of the Eurozone adopting a Germanic type export-led model. There is even a chance that an escalation in the Eurozone crisis could hit the US.

As for the UK, I think the jury is out. The UK economy usually follows the US, albeit with a time lag. But austerity, the fact that our main export market is in depression, the fact that real wages are still falling, and that the UK is not likely to see a US style shale gas revolution are reasons for caution. But on the other hand, house prices are going up. Whether you think the UK’s reliance on rising house prices is sustainable or not, the fact is that in the short run, in Blighty, rising house prices are often associated with rising GDP.

© The Share Centre Blog 

It appears that the Chinese economy lurched backwards again in May. The Eurozone remained firmly in recession, or is that depression? So much for things looking up!

You may know that the Purchasing Managers’ Indices follow a formula, with any score over 50 meaning expansion; under 50 indicates contraction. However, with China it is not that simple, and normally a score under 50 suggests growth slowing rather than outright contraction.

This morning the flash composite PMI for China from HSBC/Markit and for the Eurozone from Markit were out.

These are preliminary readings, with the fuller and more accurate PMIs due out at the beginning of June.

The May flash composite PMI for China was 49.6, the first reading under 50 since last October. The May flash composite PMI for the Eurozone was 47.7, the highest reading in three months but still consistent with recession.

Let’s see what the more accurate and detailed PMIs for both China and the Eurozone say in ten days’, or so, time.

© Investment & Business News 2013

The recession continues, but maybe there were a couple of bits of good (ish) news lurking in the latest data on the economies that make up the Eurozone.

The Eurozone is still in recession. GDP contracted by 0.2 per cent in Q1 of this year, according to data out yesterday. The region has now contracted for six quarters on the trot.

Germany and Belgium both expanded, but of the region’s major economies they were the only ones to see growth. The growth was nothing special either – 0.1 per cent in both cases. To put that in context, Germany contracted by 0.7 per cent in the final quarter of last year.

France contracted by 0.2 per cent, Italy and Spain both by 0.5 per cent, Portugal by 0.3 per cent, and the Netherlands by 0.1 per cent. In Austria the economy was flat. Ben May, European Economist at Capital Economics, said: “We still think that the consensus forecast of a 0.4 per cent fall in euro-zone GDP this year is too optimistic and expect something closer to a 2 per cent decline.”

Chris Williamson at Markit said: “The worse than anticipated start to the year will clearly worry policymakers at the ECB. The central bank has already responded to signs of a renewed weakening in the region’s economy, cutting its main policy rate to a record low of 0.5 per cent on 2nd May, but today’s data will add to calls that more action is required beyond what many see as a token gesture of a rate cut. The focus is turning to how the ECB might possibly emulate recent successful-looking efforts by the Bank of England to stimulate lending to small and medium sized companies.” The news on Greece, however, is oddly encouraging. Then again, everything is relative.

The Greek economy contracted by 5.3 per cent in Q1 over the same period last year. You might not think that is very good. But in fact that was the smallest contraction in Greece since the third quarter of 2011. Furthermore, credit ratings agency Fitch, recently upgraded Greece.

Then again, with unemployment at 27 per cent, further austerity yet to take its toll, and lending to businesses and households still falling, there are still reasons to be cynical about such optimism.

Capital Economics has long been predicting the partial break-up of the euro. It concedes that thanks to better than expected data on Greece, the chance of this happening imminently is “zero”. It still reckons a Greek exit is possible in a few years’ time, however.

© Investment & Business News 2013

May 14 2013: put that date in your diary. For on that day in history data was released showing industrial production across the euro area rose by no less than 1 per cent in March on the month before. It was the second month in succession to see a jump in production, although in February the increase was a more modest 0.3 per cent.

Chris Williamson at Markit said: “The March rise in production was the largest since July 2011.” He added: “The data therefore bode well for GDP to show a significantly weaker decline than the 0.6 per cent contraction seen at the end of last year, and even raises the possibility of the recession having ended.”

Alas, look a little closer and the story that emerged is not quite so good. Mr Williamson put it this way: “[The rise in production] was in part buoyed by a 3.8 per cent surge in energy production. The upturn also masked worryingly strong variations within the single currency area: production surged 1.7 per cent higher in Germany but fell by 0.9 per cent and 0.8 per cent in France and Italy respectively.”

He said: “Any improvement or respite from recession looks likely to be short-lived, as the business surveys have already started signalling a renewed weakening.”

On the other hand, at least there are signs that Germany may be turning. Not only did data reveal a rise in industrial production, the latest Zew index – a measure of investors’ expectations – rose. According to Capital Economics, it is consistent with growth in the Germany economy of around 2 per cent, from just 0.4 per cent in Q4.

So there you have it, Germany is doing well but other parts of the Eurozone are not so strong. Maybe May 14th was not so unusual after all.

© Investment & Business News 2013

Last year Mario Draghi, president at the ECB, said the Eurozone central bank was ready to do “Whatever it takes to save the euro.” The markets loved it, and have been loving it ever since, but they forgot about the prefix, because Mr Draghi also said a few things at the beginning of the “whatever it takes statement.” In fact, he said: “Within our mandate.” That was a pretty important proviso. It is like celebrating because someone says you have done something that is good, but ignoring the fact that it was prefixed by not.

That was last summer. Now it seems that at last Super Mario Draghi has done something other than talk with prefixes that get ignored.

Yesterday the ECB voted to cut interest rates to half a per cent. So at last they are at the same level as the UK – not so long ago they were 1 per cent.

Mr Draghi said the “ECB was ready to act,” and those words got the markets all excited again.

But why has it taken so long? Inflation in the Eurozone was just 1.2 per cent in April. Across the region, and for the time being, inflation is as about as threatening as a puppy wearing a muzzle.

Well, there is an answer to the question. One ECB member voted to keep rates on hold. Jörg Asmussen, a German economist, who is normally thought of as a Draghi supporter, voted to keep rates on hold. He felt the rate cut would have little impact. Jens Weidmann, President of the German Bundesbank, held similar doubts but voted with the rest of the pack on this occasion.

So what’s next? Will the ECB really announce quantitative easing (QE)? Just remember last year Mr Weidmann likened QE to a Faustian pact. See: Quantitative Easing 

It hardly seems likely that when the topic of creating money comes up at the ECB Mr Weidmann will vote in the affirmative.

© Investment & Business News 2013

Where were you? Where were you when you heard about the death of Diana? Where were you when you heard about the release of Mandela? If you are more advanced in years, where were you when Kennedy was assassinated? There are certain things we never forget. If you are Cypriot, here is another question of that ilk. Where were you when you heard about plans to force all depositors in Cypriot banks to pay a levy to meet the costs of bailing out the economy?

Okay, the plan got revised to something not quite as unpleasant, but still pretty awful. All that happened three weeks or so ago now. Cyprus was left reeling, but its bad luck got largely forgotten by the media, and all that was left was a nasty taste, and renewed fears that the Eurozone is on a one way route to somewhere not very pleasant.

The European Commission did not forget, however. Its economists sat down and got on with the important task of revising their projections for Cypriot growth. Then the penny dropped. Because Cyprus has to contribute seven billion euros to its 17 billion euro bail-out, the economy will suffer. It revised projections for 2013 growth downwards from minus 3.5 to minus 8.8 per cent, and 2014 growth from minus 1.3 per cent to minus 3.9 per cent. These are nasty numbers – although some economists reckon its forecasts are too optimistic. Alas, if Cypriot GDP is going to be lower than previously expected, it will need a bigger bail-out. In fact the commission has worked out that Cyprus now needs six billion more than was previously thought, or 23 billion euros.

The European Stability Mechanism (ESM) and IMF had already agreed to contribute 10 billion euros to the original bail-out. Would they add to their funding? Errr no: they are staying put.

So that means Cyprus has to raise 13 billion euros, instead of the seven it was originally required to raise.

Do you see where this is going? If Cyprus has had so much difficulty working out how it will lay its hands on seven billion euros, and the resulting costs will cause GDP to slump even more than previously feared, how on earth is it going to rustle up 13 billion euros? And then what effect will that have on the economy, and how much will GDP contract as a result, and how much more money will Cyprus have to raise, and how much will GDP then contract as a result, and how much money will Cyprus then have to raise, and now much will GDP contract as a result, and then how much more money will Cyprus have to raise and…(shame the author is not being paid by the word, this example could carry on forever).

©2013 Investment and Business News.

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Do you remember when Gordon Brown sold much of the UK’s gold reserves? Not a good move that, since the yellow metal soared in price soon afterwards.

Then again, back then gold was not fashionable. Keynes called it a barbarous relic, and for a while during the noughties, that description seemed about right. Could Brown have known how much things were going to change?

They did change, and gold became many investors’ best friend.

The thing about gold is psychology. You can’t do much with it, other than look pretty when you wear it – although it is a good semi-conductor. But because of gold’s history, and its presence in our psyche, it is seen as safe, really safe, safer than houses, as safe in fact as gold.

But the yellow metal has not being doing as well of late. Back in the summer of 2011 it was trading at about $1,900 a troy ounce, now it is down to around $1,560.

Maybe it is not so safe.

In recent years, the price of gold has been correlated with expectations of US QE. It was seen as a hedge against the dollar as much as anything. The Fed is not so QE friendly these days. The latest minutes revealed that many Fed members felt QE needs to slow down.

But consider this point of view. If gold can’t do much, in times of really big trouble when we need money, why hold on to it?

The combination of austerity, lack of QE and sovereign debts in the Eurozone is combining to tempt many countries to sell their gold.

Cyprus is selling 400 million euros worth. It needs the cash, for obvious reasons. For almost as obvious reasons, it may have timed the sell-off perfectly.

Will other countries follow suit? Is gold going back to being a barbarous relic?

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here