Posts Tagged ‘GDP’

Want to Feel Better About the Economy? Take a Look at the Rest of the World

Monday, September 10th, 2012

There is no doubt that America needs to get its economic mojo back: in the 2nd quarter its GDP grew at an annualized rate of 1.7 percent, according to revised figures published on August 29th.  That growth number is down from two percent in the 1st quarter and 4.1 percent in late 2011. But, anyone ready to ascribe that number to mismanagement or competition from emerging economies should consider the state of much of the developed world.

Europe remains the cautionary tale with GDP shrinking by 0.2 percent (an annualized decline of 0.7 percent) in the 2nd quarter. The Greeks are on the verge of quitting the common currency and Spain is looking for a bigger bailout.  According to the Economist, the research firm Markit is predicting a further fall in GDP in the 3rd quarter.

Finland’s economy shrank by 1.1% in the second quarter. The country had been one of the euro zone’s best performers, but the crisis is now starting to take its toll on exports, which account for 40% of Finnish GDP. In July the finance minister said Finland would “not hang itself to the euro at any cost”.

The Japanese economy is feeling the European gloom with exports to the European Union falling by a steep 25 percent in the year to July.  The only reason their economy grew by 3.5 percent over the last 12 months is because of all the reconstruction work after the tsunami and earthquake.

Even the high-flier BRIC countries (Brazil, Russia, India and China) are sputtering.  Brazil’s fall from grace has been particularly marked:  Brazil’s economy grew at an annualized pace of only 1.64 percent in the April-June period. It is forecasted to grow 1.9 percent this year, less than the 2.15 percent in the U.S. and 2.5 percent expected in Japan. One bright spot – Brazil scored the rare coup of winning the bid for the 2014 World Cup and the 2016 Summer Olympics, leading to $38.1 billion in foreign direct investment this year.

Flagging imports suggest that China’s slowdown will prove to be more severe than previously expected.  The country’s exporters are also having a hard time.  In August, new export orders for manufacturers were at their weakest since March 2009, according to Markit.

So, while the campaign rhetoric heats up, with each side blaming the other, it is important to see the bigger picture. A big part of our weak job numbers was that U.S. factory activity shrank for a third straight month in August — because of factors outside our control.  Weak demand from China (our 3rd largest market) hits our farmers, IT firms and chemical companies. When Europe contracts, that makes our manufacturing free fall because they buy 20 percent of our exports.  In the end, we need to place our woes in context and recognize that the recession is indeed world-wide.

Can You Be a Welfare State and an Economic Powerhouse?

Wednesday, July 18th, 2012

During this campaign year, you’ve heard about politicians referring to our country as a welfare state, heavy with unaffordable entitlements for seniors that are stalling our economic growth.  Our growing welfare state is slated to cost $10.3 trillion over the next 10 years-that’s $72,000 a household, said Mitt Romney to voters in Bedford, N.H., on Dec. 20.   Will the United States be an Entitlement Society or an Opportunity Society?

Over the past three years Barack Obama has been replacing our merit-based society with an entitlement society.” said Romney during the Primaries, buoyed by federal budget data showing direct payments to individuals shot up by almost $600 billion, a 32 percent increase, since the start of 2009.

And think tanks and pundits have joined the disapproving chorus towards handouts. Here’s George Will at an address at the Cato Institute: Given the fact that a welfare state exists to transfer wealth from the working young and middle-aged to the retired elderly, a welfare state depends on a rapid rate of economic growth…to pay the bills. But a welfare state, by giving people a sense of entitlement to protection against the risks of the churning of a market economy and the creative destruction of capitalism, produces a political backlash, a political drive to provide security that is incompatible with economic dynamism.

Along comes this chart showing the correlation between high levels of social welfare and GDP.  It’s worth staring at for a few minutes because it reveals Sweden, Austria and Finland substantially outpacing the US in terms of  welfare spending and still being ahead in terms of GDP growth. All in, 6 countries surpassed us on both fronts.  So perhaps we should be careful about mistaking correlation for causation? Maybe entitlements don’t automatically spell economic drain.

Spain Asks the Eurozone for a Bank Bailout

Wednesday, June 20th, 2012

Spain asked the Eurozone for a bailout of up to €100-billion to rescue its banks.  This is just a short-term fix for the troubled Eurozone because it doesn’t address the underlying problems in the monetary union.  The earlier bailouts of Greece, Ireland and Portugal didn’t resolve the problems either.  “The Spanish banking bailout is big enough for some shock and awe (€100-billion vs. talk of €40-billion) but details are murky,” said Kit Juckes, the chief of foreign exchange at Société Générale.

Still unanswered are who shares the burden, and just how much will Spain be limited in terms of talks over its debt troubles.  It’s crucial to keep in mind that in Spain, it’s currently a banking crisis.  “And where is the growth coming from to make the problems go away?” Juckes said.  “The Spanish bailout doesn’t solve Europe’s woes…but maybe it allows the rest of the world to focus on something else.”  There are many other questions, said Adam Cole of RBC in London.  Which bailout will fund the rescue?  How much will the final rescue total?  What will the ratings agencies do?  What terms will be attached to the funds?  “The International Monetary Fund’s (IMF) report concluded Spanish banks would need at least €37-billion,” Cole said, noting that the maximum of €100-billion is perceived as credible.  In terms of the ratings agencies, Cole said that “the loans will add directly to the Spanish government’s liabilities and so increase the debt-to-GDP ratio by around 10 per cent, leaving further downgrades likely.”

Spain’s bailout plan is seen as a robust answer to critics who accused European Union (EU) leaders of reacting too slowly, too late and with the least possible amount of cash while the crisis is spinning out of control.  “This is a very clear signal to the markets, to the public, that the Eurozone is ready to take determined action,” Olli Rehn, the EU’s top economic official, said.  “This is pre-emptive action.”

Instead of waiting for Spain to complete stress tests on its banks later, Eurozone officials agreed to move before the market turmoil that Greece’s upcoming elections may produce.  Rather than undershooting estimates of Spanish bank needs, they have been generous: the International Monetary Fund estimated a requirement of at least €40 billion, but the Eurozone agreed to provide at least €100 billion.  “We deliberately wanted to ensure there is some additional safety margin,” Rehn said.  “This is the first time Europe is willing and able to deal confidently and overwhelmingly with (such) a large contingency,” said an unidentified Eurozone diplomat.  “And all through a straightforward telephone conference.  No all-nighters, no devising new instruments in a panic, and no penny-pinching haggling over money.”

The bad news is that Prime Minister Mariano Rajoy’s request for a bailout for Spain’s banks may undermine his political authority and credibility in financial markets.  “The emperor’s clothes are tattered,” Simon Maughan, financial strategist at Olivetree Securities Ltd., said. “Unless he uses this money to attack the regions and control the failed cajas, what threads he has left will be stripped off him.”  Rajoy has to persuade the Spanish people to accept austerity, and convince bond investors the cuts will deliver the deficit goals he has pledged.  if he fails, he may have to return for a larger rescue, potentially draining the Eurozone’s financial ammunition.

“Clearly his domestic credibility will have been hampered by this U-turn but at least he is partially recognizing the depth of the problem,” said Stuart Thomson, a fixed income fund manager at Ignis Asset Management, who predicts another bailout, this time for the government itself, within the next year and a  half.  “This bailout is predicated on a return to growth next year and we don’t think that’s possible.”

Protestors demanded to know why billions would prop up broken Spanish banks, instead of helping people who are suffering financially.  According to Moody Analytic’s Mark Zandi, the reason why Spain is in so much trouble may sound familiar to Americans.  “Spain had a bigger housing boom and bust than we had here in the United States and that means a lot of bad mortgage loans bad real estate loans that undermined the capital positions of the banks.  They are broke, they need help from the European Union,” Zandi said.  “The Spanish must be very humiliated by having to take the aid.  For them to actually have to go to the European Union for help like this, I’m sure was very difficult.”  But the pain runs deep with 25 percent of Spaniards is out of work; among the young, unemployment is upward of 50 percent.

Prime Minister Rajoy warned that Spain’s economy, Europe’s fourth-largest, will get worse before it gets better.  ‘‘This year is going to be a bad one,’’ he said.  ‘‘By no means is this a solution,’’ said Adam Parker, of Morgan Stanley.  Spain’s aid ‘‘could be a near-term positive from a trading standpoint, but you haven’t solved anything in the long term.’’

European leaders must prove to the world that they are making a credible effort to repair flaws in the Eurozone that allowed the problems in Greece to threaten the world economy.  If Greek voters elect a government that is willing to live up to the terms of its €130 billion bailout by meeting its payments and narrows its enormous budget gap, strong doubts remain whether new leadership can fulfill those obligations.  A significant amount of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to put the country deeper in the hole.  ‘‘Even in case of a new government, I doubt whether the institutional framework in Greece can guarantee the program,’’ said Jurgen Stark, a former member of the European Central Bank’s executive board.  ‘‘Who has the competence to implement the program?  That is the key point.’’

Catalina Parada is an International, Marketing Consultant and Alter NOW’s Madrid correspondent.  She can be reached at catalinaparada@hotmail.com.

Eurodammerung?

Wednesday, May 23rd, 2012

Despite Germany’s strong manufacturing output in March, it was not enough to compensate for a slump across the rest of the Eurozone with declining production, a signal that an expected recession may not be as mild as policymakers hope.  Industrial production in the 17 Eurozone countries declined 0.3 percent in March when compared with February, according to the European Union’s (EU) statistics office Eurostat.  Economists had expected a 0.4 percent increase.

The figures stood in stark contrast with German data showing output in the Eurozone’s largest economy rose 1.3 percent in March, according to Eurostat, 2.8 percent when energy and construction are taken into account.  “With the debt crisis, rising unemployment and inflation, household demand is weak and globally economic conditions are sluggish, so that is making people very reluctant to spend and invest,” said Joost Beaumont, a senior economist at ABN Amro.

According to Eurostat, output declined 1.8 percent in Spain; in France — the Eurozone’s second largest economy after Germany — output fell 0.9 percent in March.  Many economists expect Eurostat to announce that the Eurozone went into its second recession in just three years at the end of March, with households suffering the effects of austerity programs designed to slash debt and deficits.

“Industrial production is a timely reminder that first-quarter GDP will likely show a contraction,” said Martin van Vliet, an economist at ING.  “With the fiscal squeeze unlikely to ease soon and the debt crisis flaring up again, any upturn in industrial activity later this year will likely be modest.”  European officials believe that the slump will be mild, with recovery in the 2nd half of this year.  The strong economic data seen in January has unexpectedly faded point to a deeper downturn, with the drag coming from a debt-laden south, particularly Greece, Spain and Italy.

Economists polled by Reuters estimated the Eurozone economy contracted 0.2 percent in the 1st quarter, after shrinking 0.3 percent in the 4th quarter of 2011.  “We suspect that a further slowdown in the service sector meant that the wider economy contracted by around 0.2 percent last quarter,” said Ben May, an economist at Capital Economics.  “What’s more, April’s disappointing survey data for both the industrial and service sectors suggest that the recession may continue beyond the first quarter.”

“It is evident that Eurozone manufacturers are currently finding life very difficult amid challenging conditions,” said Howard Archer at IHS Global Insight. “Domestic demand is being handicapped by tighter fiscal policy in many Eurozone countries, still squeezed consumer purchasing power, and rising unemployment.”  Eurozone governments have introduced broad austerity measures in order to cut debt, and these have undermined economic growth.

European watchers also expect to see Greece exit the Eurozone.  Writing for Forbes, Tim Worstall says that “As Paul Krugman points out, the odds on Greece leaving the Eurozone are shortening by the day.  In and of itself this shouldn’t be all that much of a problem for anyone. Greece is only two percent of Eurozone GDP and it will be a blessed relief for the Greeks themselves.  However, the thing about the unraveling of such political plans as the Euro is that once they do start to unravel they tend not to stop.”

The European Commission hopes Greece will remain part of the Eurozone but Athens must respect its obligations, the European Unions executive Commission said.  “We don’t want Greece to leave the Euro, quite the contrary – we are doing our utmost to support Greece,” European Commission spokeswoman Pia Ahrenkilde Hansen said.  Greece is likely to face new elections next month after three failed attempts to form a government that would support the terms of an EU/IMF bailout.  Opinion polls show most Greeks want to stay in the Eurozone, but oppose the harsh austerity imposed by the emergency lending program.  “We wish Greece will remain in the euro and we hope Greece will remain in the euro … but it must respect its commitments,” according to Ahrenkilde.  “The Commission position remains completely unchanged: we want Greece to be able to stay in the Euro.  This is the best thing for Greece, for the Greek people and for Europe as a whole,” she said.

European Central Bank (ECB) policymakers Luc Coene and Patrick Honohan voiced the possibility that Greece might leave the currency bloc and reached the conclusion that it will not be fatal for the Eurozone.  According to Luxembourg’s Finance Minister Luc Frieden “If Greece needs help from outside, the conditions have to be met.  All political parties in Greece know that.”  There are powerful incentives for keeping Greece stable, one of which is that the ECB and Eurozone governments are major holders of Greek government debt.  A hard default could mean heavy losses for them; if the ECB needed recapitalizing as a result, that debt would fall on its members’ governments, with Germany first in line.  “If Greece moves towards exiting the Euro…the EU would then need to enlarge its bailout funds and prepare other emergency measures,” said Charles Grant, director of the Centre for European Reform think-tank.

Meanwhile, Britain’s Deputy Prime Minister Nick Clegg warned euro skeptics to avoid gloating over the state of the Eurozone as Greece tries to assemble a workable government.  According to Clegg, “We as a country depend massively on the prosperity of the Eurozone for our own prosperity, which is why I can never understand people who engage in schadenfreude – handwringing satisfaction that things are going wrong in the euro.  We have an overwhelming interest – whatever your views are on Brussels and the EU – in seeing a healthy Eurozone.  That’s why I very much hope, buffeted by these latest scares and crises in Greece and elsewhere, that the Eurozone moves as fast as possible to a sustainable solution because if the Eurozone is not growing and the Eurozone is not prosperous it will be much more difficult for the United Kingdom economy to gather momentum.”

Tepid 1st Quarter Growth Disappoints

Tuesday, May 15th, 2012

The American economy grew less than expected during the 1st quarter as the biggest gain in consumer spending in more than a year failed to overcome a diminished contribution from business inventories.  Gross domestic product rose at a 2.2 percent annual rate after a three percent increase in the 4th quarter of 2011, according to Department of Commerce Department statistics.  The median forecast called for a 2.5 percent increase.  Household purchases rose 2.9 percent, exceeding the most positive projection.  Home building grew at its fastest pace in almost two years.  The GDP data confirm the view of Federal Reserve officials who expect “moderate” growth as they repeated that borrowing costs are likely to stay low at least through late 2014.

In addition to the improvement in consumer purchases and home building, the economy benefited from a rise in auto production.  The GDP was negatively impacted by a drop in government spending and slower growth in business investment.  The United States is faring better than some other major economies.  The United Kingdom is in the throes of its first double-dip recession since the 1970s.  In Japan and Germany, GDP declined in the final three months of 2011, while China’s economy, the world’s second-largest, is also cooling.

“Consumers are remarkably stable and steady,” said Julia Coronado, chief economist for North America at BNP Paribas in New York.  “We’ll need to see final demand continue to improve.  We’re still in muddling-along territory.”

According to MarketWatch, the devil is in the details. “Growth of 2.2 percent is mediocre, but it’s worse than that once you peel away a few layers — about a fourth of the growth in gross domestic product was accounted for by a build-up in inventories, and half of it came from the building and selling of motor vehicles.  Strip away the inventory growth, and final sales in the economy increased 1.6 percent, the 4th quarter in the past five that was below two percent.  Although all the headlines report on the GDP numbers, the number to watch is final sales, because that gauges demand for our products, not merely how much we made.  Away from King Consumer, the rest of the economy is slowing.  Business investment spending dropped 2.1 percent, the first decline since 2009.  Let’s not get carried away too much by the gloom and doom.  The economy IS growing, even if it’s not as fast as we’d like.  The economy has grown by nearly seven percent since depths of the recession in 2009.”

As disappointing as the 2.2 percent is, the market will have to learn to live with lowered expectations.  From a market perspective, lukewarm growth could force Ben Bernanke’s hand to unfreeze lending, keep interest rates at their current lows, or re-use other monetary policy tools to keep money flowing.  Ironically, even with the Fed’s relaxed monetary policy, most of the extra cash in the economy remains on corporate balance sheets (Apple has billions on hand) or is going into the securities markets.

Official reaction was as expected. “Today’s advance estimate indicates that the economy posted its 11th straight quarter of positive growth, as real GDP (the total amount of goods and services produced in the country) grew at a 2.2 percent annual rate in the first quarter of this year.  While the continued expansion of the economy is encouraging, additional growth is needed to replace the jobs lost in the deep recession that began at the end of 2007,” said Alan Krueger, chairman of the White House’s Council of Economic Advisers.

Fed chairman Ben Bernanke called the slow pace of recovery “frustrating. Here we are almost three years from the beginning of the expansion, and the unemployment rate is still over eight percent.  It’s been a very long slog.  And that, I think, would be the single most concerning thing,” he said.

Britain Slides Into Double-Dip Recession

Monday, April 30th, 2012

Europe’s financial woes have spread across the English Channel as the United Kingdom slid into its first double-dip recession since the 1970s. Britain’s GDP fell 0.2 percent from the 4th quarter of 2011, when it declined 0.3 percent, according to the Office for National Statistics (ONS).

As anti-austerity backlash grows on the Continent, Prime Minister David Cameron said the data was “disappointing” and promised to shore up growth without backtracking on the UK’s biggest fiscal squeeze since World War II.  “I don’t seek to excuse them, I don’t seek to try to explain them away,” Cameron said.  “There is no complacency at all in this government in dealing with what is a very tough situation, which frankly has just got tougher.”  Cameron said “We have got to rebalance our economy.  We need a bigger private sector.  We need more exports, more investment.  This is painstaking, difficult work but we will stick to our plans, stick with low interest rates and do everything we can to boost growth, competitiveness and jobs in our country.”

Opposition leader Ed Miliband said the figures are “catastrophic” and asked Cameron why this had happened.  “This is a recession made by him and the chancellor in Downing Street.  It is his catastrophic economic policy that has landed us back in recession,” Miliband said.

The Bank of England is in the last month of economic stimulus and the fall-off in output comes as prospects dim in the Eurozone, Britain’s biggest export market.  “This isn’t supportive of the fiscal consolidation program, so the government is likely to be concerned about that,” said Philip Rush, an economist at Nomura International in London.  “The data were bad, and that supports the view that the Bank of England will do a final £25 billion of quantitative easing in May.”

According to ONS, output in the production industries decreased by 0.4 percent; construction fell by three percent.  Output of the services sector, which includes retail, increased by 0.1 percent.  The decline in government spending contributed to the particularly large fall in the construction sector.  “The huge cuts to public spending – 25 percent in public sector housing and 24 percent in public non-housing and further 10 percent cuts to both anticipated for 2013 — have left a hole too big for other sectors to fill,” said Judy Lowe, deputy chairman of industry body CITB-ConstructionSkills, said.

The UK’s last double-dip recession, defined as consecutive quarterly drops in GDP, was in 1975. At that time, Labour Prime Minister Harold Wilson was in office and Margaret Thatcher was elected leader of the opposition Conservatives.  UK Treasury forecasters and the International Monetary Fund (IMF) believe the economy will grow 0.8 percent this year, the same as last year.  According to Chancellor of the Exchequer George Osborne, the UK’s economic situation is “very tough” and the government should stick to its plans of eliminating a majority of the deficit by 2017.  “The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.  It’s taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime,” Osborne said. “The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.”

Chris Williamson, chief economist at Markit, said: “The underlying strength of the economy is probably much more robust than these data suggest.  The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession.”

Not everyone agrees that the data indicates a double-dip recession.  Writing in the Telegraph, Philip Aldrick says that “Economists have been questioning the reliability of the ONS numbers for a while now, but the latest data drew the debate sharply into focus.  At -0.2 percent, the GDP reading was considerably worse than the consensus of 0.1 percent growth.  The ‘discrepancy’, as Goldman Sachs’ Kevin Daly described it, was ‘unbelievable’ because much of the recent survey data – from the Bank of England’s agents’ reports to the purchasing managers’ indices – have been encouraging.  Andrew Goodwin of the Ernst & Young ITEM Club agreed.  ‘Our reaction is one of disbelief,’ he said.  ‘The divergence is virtually unprecedented and must raise significant question marks over the quality of the data.’  They are not alone.  No lesser institution than the Bank of England has queried the ONS data.  Last week, minutes to the Monetary Policy Committee meeting damningly noted: ‘The sharp falls in construction output in December and January were perplexing, and the Committee was minded not to place much weight on them.”

Is Greece Headed Towards a Third Bailout?

Monday, April 23rd, 2012

Lucas Papademos, Greece’s prime minister, said that his crisis-plagued country could require a third bailout just weeks after it secured a second round of rescue funds after much discussion in Brussels. Athens may have received the biggest bailout in history but another lifeline could not be ruled out, according to Papademos.  To date, the European Union (EU) and International Monetary Fund (IMF) have committed a total €240 billion to the nearly bankrupt nation.  “Some form of financial assistance might be necessary but we have to work intensely to avoid such an event,” Papademos said, noting that additional spending cuts are inevitable.  Whatever government emerges after the upcoming general election, it is vital that is it prepared for the measures.  “In 2013 – 2014, a reduction in state spending of about €12 billion is required under the new economic program,” Papademos said.  “Every effort must be made to limit wasteful spending and not to further burden salaries of civil servants.”

Greece’s new government will have “about 60 days” to enact long-overdue structural reforms and agree on ways of reining in public debt before officials make a decisive inspection tour in June.  “It is very important that there is no let up in the pace of reforms after elections,” said a senior Papademos aide.  The chiefs of both the EU and IMF missions to Greece said while progress is being made in meeting deficit-reducing targets, a lot of work remains to be done.  “There are still many measures to be taken, painful ones too.  I believe we’ll be able to see in the second half of the year in which direction we’re going, whether we’re on the right path or not,” said Matthias Mors, head EU monitor.

Papademos reiterated that Greece will do everything necessary to remain in the Eurozone, saying the cost of an exit would be “devastating.  More than 70 percent of the Greek people support the country’s continuing participation in the euro area,” he said.  “They realize, despite the sacrifices made, that the long-term benefits from remaining in the Eurozone outweigh the short-term costs.  Greece will do everything possible to make a third adjustment program unnecessary,” Papademos said.  “Having said that, markets may not be accessible by Greece even if it has implemented fully all measures agreed on.  It cannot be excluded that some financial support may be necessary, but we must try hard to avoid such an outcome.”

Private investors in Greek debt wrote down the value of their investment by 53.5 percent, or risk losing everything in a possible default.  Public-sector jobs are being slashed, workers ‘ wages are being frozen, welfare payments are being slashed, and taxes are being raised.  Greece’s official unemployment rate is currently more than 20 percent.  If Greece does default, it could start a domino effect that would drag down other ailing European economies — possibly plunging the Eurozone into recession.

According to Papademos, “The real economy is still weak, and high unemployment is likely to persist in the near future.  The challenging period ahead of us needs to be addressed with great care.  If we do things right, implementing all measures agreed upon in a timely, effective and equitable manner, and if we explain our policy objectives and strategy convincingly, public support will be sustained.  An improvement in confidence would have a positive multiplier effect on economic activity and employment.”

When asked if Greece might return to its old currency, Papademos said “The consequences would be devastating.  A return to the drachma would cause high inflation, unstable exchange rate, and a loss of real value of bank deposits.  Real incomes would drop sharply, the banking system would be severely destabilized, there would be many bankruptcies, and unemployment would increase.  A return to the drachma would increase social inequalities, favoring those who have money abroad.”

Rising Unemployment Could Push Eurozone Into a Double-Dip Recession

Wednesday, April 18th, 2012

Europe’s unemployment has soared to 10.8 percent, the highest rate in more than 14 years as companies from Spain to Italy eliminated jobs to weather the region’s crisis, according to the European Union’s (EU) statistics office.  That’s the highest since June 1997, before the Euro was introduced.  European companies are cutting costs and eliminating jobs after draconian austerity measures slashed consumer demand and pushed economies from Greece to Ireland into recession.

According to Eurostat, the number of unemployed totaled 17.1 million, nearly 1.5 million higher than in 2011.  The figures stand in marked contrast to the United States, which has seen solid increases in employment over the past few months.  “It looks odds-on that Eurozone GDP contracted again in the first quarter of 2012….thereby moving into recession,” said Howard Archer, chief European economist at IHS Global Insight.  “And the prospects for the second quarter of 2012 currently hardly look rosy.”

The North-South divide is evident, with the nations reporting the lowest unemployment rates being Austria with 4.2 percent; the Netherlands at 4.9 percent; Luxembourg at 5.2 percent; and Germany at 5.7 percent.  Unemployment is highest among young people, with 20 percent of those under 25 looking for work in the Eurozone, primarily in the southern nations.  The European Commission, the EU’s executive arm, defended the debt-fighting strategy, insisting that reforms undertaken by governments are crucial and will ultimately bear fruit.  “We must combat the crisis in all its fronts,” Amadeu Altafaj, the commission’s economic affairs spokesman, said, stressing that growth policies are part of the strategy.

According to Markit, a financing information company, Germany and France, the Eurozone’s two powerhouse economies, saw manufacturing activity levels deteriorate.  France fared the worst with activity at a 33-month low of 46.7 on a scale where anything below 50 indicates a contracting economy.  Only Austria and Ireland saw their output increase.

Spain, whose government recently announced new austerity measures, had the Eurozone’s highest unemployment rate at 23.6 percent; youth unemployment — those under 25 years of age — was 50.5 percent.  Greece, Portugal and Ireland — the three countries that have received bailouts — had unemployment rates of 21 percent, 15 percent and 14.7 percent respectively.

With unemployment rising at a time of austerity, consumers have stopped spending and that holds back the Eurozone economy despite signs of life elsewhere.  “Soaring unemployment is clearly adding to the pressure on household incomes from aggressive fiscal tightening in the region’s periphery,” said Jennifer McKeown, senior European economist at Capital Economics.  She fears that the situation will worsen and that even in Germany, where unemployment held steady at 5.7 percent, “survey measures of hiring point to a downturn to come.”

The numbers are likely to worsen even more. “We expect it to go higher, to reach 11 percent by the end of the year,” said Raphael Brun-Aguerre, an economist at JP Morgan in London.  “You have public sector job cuts, income going down, weak consumption.  The economic growth outlook is negative and is going to worsen unemployment.”

Writing for the Value Walk website, Matt Rego says that “By the looks of it, Europe could be heading for a recession very soon.  If the GDP contracts this 1st quarter of 2012, they will most likely be in a double dip.  Those are some pretty scary numbers and forecasts because they would send economic aftershocks around the world.  If Europe goes into a double dip and U.S. corporate margins do peak, we could be looking at trouble.  If you are a ‘super bull’ right now, I would reconsider because we are walking the line for both factors coming true and there really is nothing we can do, the damage is done.  Could we have seen all of the year’s gains in the beginning of this year?  Probably not but this European recession scare would certainly trigger a correction in the U.S. markets.  Bottom line, get some protection for your portfolio.  Buy stocks that aren’t influenced by economic times and buy protection for stocks that would react harshly to a double dip.”

Economists Predicting Rosier Outlook

Wednesday, March 7th, 2012

Economists are increasingly optimistic that certain elements of the economy will improve throughout 2012, although they are still cautious in their expectations on the overall pace of economic growth.  According to the National Association for Business Economics (NABE), forecasters have increased their expectations for employment, new home construction and business spending this year.  But they held on to their average prediction that America’s GDP will grow at a rate of 2.4 percent.  That’s a slight improvement when compared with 2011; economists say the economy grew 1.6 percent last year.

GDP represents the economy’s total output of goods and services.  The latest forecast is in line with one issued by the group last fall that called for the economy to grow 2.4 percent this year.  Forecasters predict growth will be stronger in the second half of 2012 than it will be through June.  NABE economists see the unemployment rate sticking at 8.3 percent this year. That’s improved from their November forecast of 8.9 percent and a sharp drop from October of 2009 when unemployment peaked at 10 percent.  The economists expect job growth to accelerate in 2013, with the unemployment rate falling to 7.8 percent.  GDP growth needs to be above three percent to reduce unemployment significantly.

Homebuilders are expected to break ground on 700,000 new homes this year, a 15 percent increase when compared with 2011.  Another 850,000 are expected to be built in 2013.

The economists are also forecasting robust business spending growth in 2012, slightly raising their forecast to 8.1 percent growth this year.  For 2013, spending is likely to slow slightly, but remain strong at 7.3 percent.  Industrial production is expected to increase more or less 3.5 percent this year and 3.3 percent next year.  Estimates for 2012 spending on new equipment and software rose to 8.1 percent from 8 percent, according to the NABE.

Despite a brightening forecast for employment, housing and business spending, the NABE Outlook Panel expects consumers to continue to save their money this year.  They expect that spending will increase just 2.1 percent this year and 2.3 percent in 2013.  The rate is below historical average of 2.8 percent, highlighting an economy that’s going in the right direction, but still sluggish.

The improved jobs outlook comes at the same time as larger gains in business investment and homebuilding than were anticipated.

Three consecutive months of accelerated job growth are sustaining the economic expansion that began in June 2009.  Employers added 243,000 jobs in January, the highest number in nine months.

According to the study, Economists responding to the latest NABE Outlook Survey are seeing strength in a number of economic measures and have subsequently increased their expectations.  Despite increases in a number of forecasts, however, economists remain guarded on US economic growth.  Economists’ expectations for export growth have also weakened over the last four months.  Collectively, forecast uncertainty among the economists appears to have diminished slightly over the last several months.”

In terms of exports, the economists expect 4.6 percent growth in 2012, compared with their November prediction of 6.1 percent.  They also reduced their projection for 2012 import growth from 4.3 percent to 3.5 percent.  Both rates are expected to improve next year.

Hungary’s Debt Downgraded to Junk

Wednesday, January 4th, 2012

Yet another European nation – and one not in the Eurozone – is facing a financial crisis now that Standard & Poor’s (S&P) has downgraded its credit rating to junk status. The nation is Hungary, whose status was changed as a result of concerns about proposed policy changes regarding the country’s central bank.  S&P cut its rating on Hungary’s debt to the non-investment grade of BB+ and warned that there could be additional adjustments.  Its negative outlook on the Hungarian front means there is at least a 33 percent likelihood of another downgrade over the next year if Hungary’s fiscal performance worsens.

The lower rating could mean that Hungary has more difficulty borrowing, and may have to pay higher rates on its debt.  Moody’s Investor Service, a rival credit-ratings agency, had already reduced Hungary’s rating to junk status in late November.  According to S&P, policy changes related to Hungary’s central bank will curtail its independence; these changes by necessity complicate the scene for investors.  They’re likely to negatively impact investment and fiscal planning, which will weigh on Hungary’s medium-term growth prospects.  “The downgrade reflects our opinion that the predictability and credibility of Hungary’s policy framework continues to weaken,” S&P said.

Not surprisingly, the European Central Bank (ECB) is concerned about Hungary’s draft law that it says would undermine the independence of the country’s central bank. The government recently introduced proposals to merge Magyar Nemzeti Bank (MNB) with the Financial Supervisory Authority, name a new president who will outrank the current central bank governor and increase the number of members of the governing council.  All of this would be “to the detriment of central bank independence,” the ECB said.  “In particular, by appointing a new president with authority over the Governor of the MNB, who would become the vice-president of the new institution, the personal independence of the MNB’s Governor would be impaired and Article 14.2 of the Statute of the European System of Central Banks concerning the possible reasons for dismissing the Governor of a national central bank would be breached,” the ECB said.  “The Governing Council of the ECB has requested the Hungarian authorities to bring their consultation practice into line with the requirements of European Union law and to respect the obligation to consult the ECB.  Three major revisions of the central bank law in 18 months are incompatible with the principle of legal certainty.”

The independence of the central banks in European nations is enshrined in European Union treaties. However, Hungarian Prime Minister Viktor Orban wants to use his two-thirds majority in parliament to push through changes in the make-up of the decision-making entities of the MNB, with whom he has frequently disagreed over policy.

According to Business Week, “Hungary will probably overshoot its budget-deficit target next year, the central bank said.  The shortfall may be 3.7 percent of gross domestic product, compared with the government’s 2.5 percent goal, the Magyar Nemzeti Bank said.  The gap may be reduced to 2.6 percent with the ‘complete cancellation’ of budget reserves and assuming no unexpected spending and no shortfall in revenue in 2012.  A decline in risk premium may allow keeping the benchmark interest rate unchanged at seven percent, the highest in the European Union, or its ‘cautious reduction’, the central bank said, citing the rate-setting Monetary Council.  The rate may have to be ‘permanently’ higher if the pace of disinflation is slower than the bank’s forecast.”