MacroScope

Elusive China gas deal

Vladimir Putin is well into his second and final day of a trip to China during which he was hoping to sign a long-sought gas deal with Beijing. There’s no sign of white smoke so far and if the Russian president leaves empty handed it would be a serious blow.

Gazprom has repeatedly said negotiations are in their final stages but it seems there has been no agreement yet on price and Moscow may have to lower its sights given the prospect of it losing business in Europe, which has been spooked into considering how to secure its energy needs elsewhere in future, has rather strengthened Beijing’s negotiating hand.

There has been a lot of talk in Russia about a pivot to the east but some analysts say that could never fully compensate for lost business with the West and if the China gas deal which could be worth $400 billion or more does not come to pass the strategy will look hollow. Late on Tuesday, a Putin spokesman said negotiators from both countries have been unable to bridge differences on price.

Expectations had run high that Putin’s China visit would seal a contract under which state-owned Gazprom would supply China National Petroleum Corp with 38 billion cubic meters of natural gas a year for 30 years.

It could be that something will be announced at Putin’s St. Petersburg economic forum later in the week but whether it is definitive remains to be seen.
How the deal, or lack of one, will shape Russia’s attitude to the West, particularly over Ukraine, is difficult to read. In the short-term, there are signs of conciliation with Putin saying he had ordered Russian forces massed on Ukraine’s border back to base and offering some rhetorical support to Sunday’s election of a new Ukrainian president.

Why EU elections can matter

Some interesting action over the weekend: in a foretaste of this week’s EU elections, Greece’s leftist, anti-bailout Syriza party performed strongly in the first round of local elections on Sunday, capitalizing on voter anger at ongoing government austerity policies.

If it did even better in the EU polls it could threaten the ruling coalition and tip Greece back into turmoil just as there are signs that it has turned the corner.

Bank of England Governor Mark Carney sounded dramatically more alarmed about Britain’s housing market, saying it posed the biggest risk to the economy and harboured deep structural problems.

Bank of England sticks to its view and analysts, some defiantly, stick to theirs

Bank of England governor Mark Carney gestures during the bank's quarterly inflation report news conference at the Bank of England in LondonMark Carney has delivered what is probably the clearest message on the trajectory of interest rates from the Bank of England for a very long time.

There was no more  talk of “forward guidance”, but the guidance was pretty clear: no change to the view, on track for a first rate hike in a very gradual series, starting around a year from now. Nothing to see here.

There were a few grey areas, notably whether wage inflation will pick up significantly (it hasn’t yet) and if the elusive appearance of meaningful British productivity growth ever takes place (which will prevent the labour market from generating too much inflation).

Smoke signals from the Bank of England

Given the silence that attends Bank of England policy meetings which result in no change of course, today’s quarterly inflation report is the main chance to hear the latest thinking. Governor Mark Carney will talk to the media for an hour or so after its release.

The ongoing strength of economic data means the odds of a first interest rate rise this year are narrowing and one could certainly come before May 2015 elections, an unwelcome prospect for the government.

The main imponderable is how much spare capacity there is in the economy, which would allow further growth without feeding inflation pressures. There are differing views on that with no one quite sure how much activity was permanently destroyed by the financial crisis.

Russian sanctions … and France

After the EU widened its sanctions to include Vladimir Putin’s deputy chief of staff, the commander of Russian paratroopers and two Crimean energy firms, Ukrainian prime minister Yatseniuk is in Brussels today for talks. The EU is looking to shore up the situation to allow national elections to take place on May 25 and, along with Washington, has set any disruption of that vote as a red line.

Vladimir Putin, perhaps fearing significantly tougher sanctions, has belatedly given rhetorical support to the election. Whether it can legitimately take place given the chaos in parts of the country remains an open question.

The latest additions bring to 61 the number of Russians and Ukrainians the EU has slapped with asset freezes and visa bans and for the first time it has targeted companies after foreign ministers agreed to broaden the scope of sanctions. However, only broader trade and financial sanctions would really bite and on that, Washington is much keener than Europe which is heavily dependent on Russia for its energy needs.

from Lawrence Summers:

Britain and the limits of austerity

The Bank of England is seen in the City of London

The British economy has experienced the most rapid growth in the G7 over the last few months. It increased at an annual rate of more than 3 percent in the last quarter -- even as the U.S. economy barely grew, continental Europe remained in the doldrums and Japan struggled to maintain momentum in the face of a major new valued added tax increase.

Many have seized on Britain’s strong performance as vindication of the austerity policy that Britain has followed since 2010, and evidence against the secular stagnation idea that lack of demand is a medium-term constraint on growth in the industrial world.

Interpreting the British strategy correctly is crucial because of the political stakes in Britain, the question of future British economic policy and, most important, because the British experience influences economic policy debates around the globe. Unfortunately, when properly interpreted, the British experience refutes the austerity advocates and confirms John Maynard Keynes’s warning about the dangers of indiscriminate budget cutting during an economic downturn.

Britain’s economic sprint probably tripled U.S. growth in Q1

What a difference a year makes.

This time last year, analysts and investors were nearly unanimous in their expectation for a whole lot of nothing from Britain’s economy which, after a valiant leap higher from a spectacularly successful 2012 Olympic Games hosted in London, was back to just bumping along.

Now the UK is looking to clock the best sprint in the G7 for the first three months of a year – and by a wide margin.

The Reuters poll found a consensus for 0.9 percent growth in the UK in the first three months of the year on the quarter before. That would be the best in nearly four years, and just slightly below the Bank of England’s newly upbeat prediction. The data are due on Tuesday.

Deconstructing UK job numbers

On the face of it, the good news for the British government keeps on coming. Britain’s economy grew surprisingly fast last year and inflation fell below the Bank of England’s target for the first time in over four years in January. The government this month even got a nod from the International Monetary Fund which only last year criticized its austerity programme.

The latest confidence boost came from jobless figures on Wednesday. Not only did the unemployment rate fall to a five-year low of 6.9 percent but pay growth caught up with  inflation for the first time in nearly four years. That provides Prime Minister David Cameron’s government with another lift ahead of the 2015 elections, after it has come  under fire from the Labour opposition for overseeing a fall in living standards.

But a closer look at the data suggests a more nuanced picture.

Indeed, total pay growth in February reached 1.7 percent – matching the 1.7 percent rise in consumer prices in February and above their 1.6 percent increase in March.

Greeks bearing bonds

Greece will sell its first bond in four years.

We know it will aim to raise up to 2.5 billion euros of five-year paper via syndication and wants to pay less than 5.3 percent – remarkable since only two years ago it was tipped to crash out of the euro zone and yields on 10-year debt peaked above 40 percent on the secondary market. They dropped below six percent for the first time since 2010 on Wednesday.

Athens has no pressing funding needs but wants to test the waters as part of its strategy to cover all its financing from the market by 2016. It still has a mountain to climb and may well need more debt relief from its EU partners to corral a national debt that is not falling much from 175 percent of GDP. 

But for all that, it’s a propitious time to borrow. Peripheral euro zone bond yields have tumbled this year, benefiting from wobbles in emerging markets, and now European Central Bank consideration of printing money has given bond prices a further lift.

IMF stumps up for Ukraine

The International Monetary Fund has announced a $14-18 billion bailout of Ukraine with the aim of luring in a total of $27 billion from the international community over the next two years.

Ukrainian officials say they need money to start flowing in April. The U.S., EU and others in the G7 would row in behind an IMF package, helping Ukraine meet its debt obligations and begin the process of rebuilding. In total, Kiev has talked about needing $35 billion over two years so they are pretty close.

A comprehensive slate of economic, energy and financial reforms have been attached and the Fund appears to be content that whatever hue of government is in charge after May elections will adhere to the programme.