Europe in recession – an interactive map
Spain has become the latest European country to slip into recession joining the Belgium, Cyprus, The Czech Republic, Denmark, Greece, Italy, The Netherlands, Ireland, Portugal, Slovenia and the United Kingdom.
Click here to view an interactive map.
*Updated to include Romania and Bulgaria
Euro zone hopes for funds from the Fund
Focus for the euro zone is firmly on Washington with G20 policymakers gathering ahead of the IMF spring meeting. The Fund is seeking an extra $400 billion-plus in crisis-fighting funds which, tallied with the $500 billion euro zone rescue fund about to be established, adds up to a meaningful firewall for the markets to ponder before they consider pushing Spain and Italy to the edge.
But as many sage minds are saying – U.S. Treasury Secretary Timothy Geithner among them – a firewall does not solve the root problems of the euro zone debt crisis. As our very own Alan Wheatley puts it, “It is not obvious why a stronger firewall should encourage anyone to enter a burning house”. Nonetheless, Reuters polling yesterday ascribed only a 25% and 13% chance respectively to Spain and Italy needing an international bailout.
If the IMF falls short, given the jittery mood in financial markets, that could be cue for a further sell-off. The IMF has pledges of $320 billion so far. The Chinese and British have yet to show their hands and the BRICS led by Brazil are demanding more power at the Fund before handing over extra cash. German Finance Minister Wolfgang Schaeuble told us earlier in the week that conflating those two issues was not acceptable so there is potential for a rift. The U.S. and Canada have already said they will provide no more funding. Finance ministers and central bankers from the Group of 20 advanced and emerging economies had dinner on Thursday night, ahead of a longer session on Friday.
Concerns about Spain in particular are well justified but it is not yet close to the precipice. The banks are at the heart of the country’s problems and data this week showed they are carrying the biggest burden of bad loans since 1994. They will almost certainly need more capital at some point. On the other hand, the central bank pointed out yesterday that thanks to the ECB’s three-year money offer, Spain’s banks have their funding needs covered for this year, and maybe next too. Add to that the fact that Spain has shifted half its government debt issuance for 2012 in the first third of the year and it is clear it has some time to turn around market sentiment, which soured sharply when Madrid reneged on an agreed deficit target back in March.
In the end, having lost confidence, Spain will have to do something to regain it. A strong agreement with its regions on where to cut spending might help. Ministers have met regional chiefs this week and a deal could be announced today. There is a weekly cabinet meeting today which could spell out health and education cuts, which are supposed to amount to 10 billion euros.
If the markets are onside, everything is easier. Italy showed this week that deficit targets can be loosened slightly without prompting an investor strike if they believe the direction of travel is sustainable. Spanish officials admit the communication surrounding the changed deficit target was “sub-optimal”.
A Very British Budget
Today we get the what could possibly be the most pre-spun British budget ever, though don’t rule out the traditional “rabbit from the hat” surprise so beloved of British finance ministers.
The important stuff for the markets is that with ratings agencies still threatening to rob Britain of its AAA status, it will be pretty much fiscally neutral – i.e. no serious economic stimulus on offer – borrowing will have come in a little lower than expected this year and the government’s independent forecasting body will predict the economy will eke out just enough growth this year to avoid a new recession.
In other words, don’t expect much market reaction, though the fact the slightly lower borrowing may allow slightly lower debt issuance in the coming year could give gilts a small fillip.
With precious little in the coffers this will be a deeply political budget, balancing the twin needs of a centre-right/centre-left coalition, despite U.S. Treasury Secretary Geithner’s warning this week about the futility of austerity for austerity’s sake.
So what does a chancellor of the exchequer do with little or nothing to spend? In economic terms, he tinkers. That is not to say that tinkering might not be politically explosive.
We’re told George Osborne will cut the 50 percent top rate of income tax, although maybe not immediately, balancing that by lifting more poor people out of the tax net altogether, slapping a higher purchase tax on houses worth more than 2 million pounds and pledging to crack down on the wealthy who avoid tax. Will the latter measures be enough to neuter the accusation that the Conservative party – the dominant one in the government – is not merely helping out its core constituency? I’d be amazed if that isn’t the tack taken by the opposition Labour party and even by some Liberal Democrats, the minority coalition partners.
Osborne’s gamble is presumably that with Labour not making much headway with its argument that austerity is wrecking the economy, now is the time to make bold decisions on tax which will delight his party’s base. The LibDems, already eviscerated in the polls, are probably in the most uncomfortable position; in a government cutting taxes at the top end, something many of their supporters will despair of. They’ll put a brave face on it. The last thing they need is to collapse the coalition and force an early election at which they could be all but wiped out in parliamentary terms.
from Anooja Debnath:
When it comes to recessions, 40 is the new 50
If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.
Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.
After the brief recovery period from the Great Recession, Reuters once again started surveying economists several months ago on the chances of developed economies stumbling back into the muck.
As the data get nastier and euro zone politicians wrangle over the sovereign debt mess, the probability goes higher. Just not high enough or fast enough.
The probability that Britain slides back into recession hit 40 percent in the Reuters poll this week, up from one in three last month.
The last time that happened was in July 2008, a few months before U.S. investment bank Lehman Brothers collapsed. The British economy contracted by 2 percent that quarter, its second contraction of 2008. And we all know what happened next. If 40 is the new 50, we're in it.
"It is a very big thing to say we are going into recession ... it is one of those things people are cautious sticking their necks out about," said Alan Clarke, who said there’s a 75 percent chance of that happening.
An even more British excuse
Britons have a reputation for endless talk about the weather, and the UK’s Office for National Statistics is no different.
We’ve already noted how the ONS cited the effect of the royal wedding and surrounding bank holidays as one reason why the economy only managed growth of 0.2 percent quarter-on-quarter between March and June.
While that’s taken up most of the talk, the ONS also pointed to the “record warm weather in April” as another “special event” that dented economic growth.
Back in the fourth quarter of last year, when the economy unexpectedly shrank 0.5 percent, the ONS said growth was “clearly affected by the extremely bad weather”.
Does the ONS have a particular temperature in mind that is conducive to economic growth? To paraphrase a British fairy tale: Something not too hot, not too cold, but just right?
A very British excuse
This time it was the royal wedding. When the economy shrank unexpectedly late last year, it was the bad weather. If Britain’s economy again struggles to generate growth in the current quarter, perhaps it will be blamed on the new series of ‘The Apprentice’.
Britain’s economy grew 0.2 percent quarter-on-quarter between March and June, exactly in-line with the Reuters poll consensus. Perhaps the most interesting part of the GDP release statement was the Office for National Statistics’ claim that without special factors, including the royal wedding, growth could have hit 0.7 percent.
That would have taken the GDP index at market prices back above 100 points – its 2006 base level – for the first time since the recession, but as it happened, it fell just short, at 99.8.
In a Reuters analysis last month explaining how economists have been much too optimistic about the strength of major Western economies, ex-Bank of England policymaker David Blanchflower pointed out a tendency for a sort of mental revisionism when it comes to GDP releases.
“This time around it’ll be the royal wedding. Every single time, you’ll say, ‘oh, it’s because the bank holiday fell on a Thursday’ or because the wind was blowing in the other direction,” he said.
This time, the ONS pointed out a negative effect on GDP from both the extra holiday made for the royal wedding and the royal wedding itself.
Next year is Queen Elizabeth’s Diamond Jubilee, which will see the creation of another one-off bank holiday on June 5th, as well as a series of celebrations. Not to mention the Olympics. Perhaps economists might want to lop a few points off their prediction for GDP in Q2 2012 while we’re on the subject of excuses.
Broadbent’s BoE appointment keeps hawks in health
Ben Broadbent’s appointment to the Monetary Policy Committee ought to dispel any notions that the Bank of England would be left short of hawks after the departure of Andrew Sentance.
A brief look at the history of Reuters polls shows that Goldman Sachs’ UK economists – led by Broadbent – were uber-hawkish in their outlook for British interest rates early last year.
In January 2010, Goldman predicted rates would rise to 1.5 percent by end of the second quarter of last year, and 2.5 percent going into 2011 — hugely out of step with both the consensus and as it turned out, reality. Rates went nowhere last year, and are still at a record low of 0.5 percent.
Towards the end of 2011, Broadbent’s team moderated their forecasts significantly, coming in line with the consensus for an interest rate hike coming deep into this year.
But his latest set of forecasts resumed a hawkish tone, with an expectation for three 25 basis point rate hikes this year, and a further four in 2012. The consensus view from a Reuters poll on March 3, by comparison, was more restrained: a quarter-point hike to 0.75 percent by the end of the third quarter, before finishing this year at 1.0 percent.
With thanks to Sumanta Dey and Sarmista Sen from the Bangalore Polling Unit
Darkening outlook for UK housing
The outlook for the UK housing market has darkened again. The usually optimistic bunch of property market watchers polled by Reuters, who have tended to predict ever-rising property prices no matter what the season or financial climate, now say the market will move sideways for the next two years.
They say that in the next few months, the small double-dip in prices that has begun will continue. Modest gains predicted less than three months ago for this year and next essentially have been wiped away.
No one should be surprised by this. It smacks of an awakening to reality more than a slight change to a few variables in the statistical model. What’s perhaps most striking about these new poll results is that economists think houses are even more overvalued now than they were in July even after a few straight months of falls.
The poll found the proportion of property market watchers who expect a double-dip in prices has swung to a three-quarters majority from about one in four minority in July. As polls go, that is a big shift in sentiment in a very short period of time. The consensus points to a 5 percent fall from here on top of the 1.4 percent fall over the last two months, but the forecast range goes as far down as 22.5 percent from here.
That tallies with anecdotal evidence. A friend who is heavily invested in London property says he’s having trouble selling and says a 15-20 percent fall in the market is likely.
Transaction volumes in Britain’s property market have slowed to a trickle, mortgage approvals are low, and banks are now asking for huge deposits and making rigorous income and credit checks before lending huge sums of money.
Rents are rising again after years of stagnation because people either can’t afford to buy or are scared to buy ahead of another potential fall in prices.
UK GDP: Should have gone to Specsavers?
Markets are getting used to volatile swings in economic data since the financial crisis set in three years ago. But UK GDP figures for Q2 were so eye-poppingly strong they caused confusion on trading floors.
“Should have gone to Specsavers??” wrote Philip Shaw, chief economist at Investec, referring to British television commercials lampooning myopic citizens who desperately need a new pair of corrective lenses.
“Perhaps critics will suggest that the ONS has got it wrong again, but traders’ initial suggestions, calling into question the accuracy of the newswire reports — and this author’s eyesight — proved to be misplaced,” wrote Shaw.
The 1.1 percent quarterly growth the Office for National Statistics reported for Q2 was nearly double the 0.6 percent Reuters consensus forecast and blew out the highest forecast polled, 0.8 percent, by a significant margin. The fact it came a half hour after news the German Ifo index saw its biggest one month surge since reunification in 1990 made it all the more shocking.
Slowing growth, MPC splits? That’s so 2008
Sixties nostalgia was all the rage in the late 90s, and towards the end of the last decade we looked back only 20 years or so for a massive 80s revival in electronic pop and fashion.
With the 2010s in full flow, the current vogue of choice derives from just two years ago – at least among those noted trendsetters, economists.
Back in mid-2008, the signs for the UK economy were confusing and ominous. Inflation was too high, forward-looking indicators pointed to a slowdown of some sort in the near future, and the July minutes of the Bank of England’s monetary policy committee showed they debated both easing and tightening interest rate policy.
Step forward into 2010. In Wednesday’s July MPC minutes they discussed both easing and tightening while digesting a puzzling picture of – yes – high inflation and forward-looking surveys pointing to a slowdown of some sort in the near future.
“Do we have a much clearer idea over where monetary policy is going in the rest of the year?” asked Investec economist Philip Shaw after seeing the latest minutes.
“No. It’s shrouded in confusion,” was the stark conclusion.
Reuters’ latest long-term UK economy poll underscored this familiar sense of doubt. It showed a range of some 2.7 percentage points separating the lowest and highest forecasts for UK economic growth next year, compared to a 2.4 percentage points gap in the corresponding forecasts from the July 2008 poll.
Thanks for comments – Will update with Romania and Bulgaria