MacroScope

Fresh from winning a vote of confidence in parliament, new Italian Prime Minister Enrico Letta heads to Berlin to meet Angela Merkel, pledging to shift the euro zone’s focus on austerity in favour of a drive to create jobs. He may be pushing at a partially open door. Even the German economy is struggling at the moment and the top brass in Brussels have declared either that debt-cutting has reached its limits and/or that now is the time to exercise flexibility. Letta will move on from Berlin to Brussels and Paris later in the week.

France, Spain and others will next month be given more time to meet their deficit targets and Berlin does not seem to object. Don’t expect Merkel to join the anti-austerity chorus but there are some hints of a shift even in Europe’s paymaster. Yesterday, it launched a bilateral plan with Spain to boost lending to smaller companies and said it could be rolled out elsewhere too. Details were very sketchy but something may be afoot. The European Central Bank, expected to cut interest rates on Thursday, is considering something similar although that is far from a done deal.

Forgotten about Cyprus, which only last month had financial markets in a lather and threatened to reignite the euro zone debt crisis? Today, Cypriot politicians vote on the terms of the bailout offered by the euro zone. It should pass but it could be tight. No single party has a majority in the 56-member parliament, and the government is counting on support from members of its three party centre-right coalition which have 30 seats in total.

Spain puts out its GDP data significantly earlier than the rest of the euro zone. First quarter figures are due and will show no sign of its recession tailing off. The government has just revised its forecasts and now expects a 1.3 percent contraction this year (worse than the previously predicted 0.5 percent). As a result, the budget deficit will also be higher than previously forecast, hence the need for leeway from Brussels. Madrid’s measures to boost growth, trumpeted in advance, proved to be short on specifics on Friday.

There’s a lot of data besides with German unemployment, euro zone inflation, UK and German consumer confidence/retail sales and French consumer spending reports all due. The German confidence reading is out and is the most upbeat in more than five years. The survey was taken after Cyprus was sorted out and as prospects of rising wages (Germany’s contribution to much-needed euro zone rebalancing) boost a desire to spend. However, actual retail sales edged down in March.

It’s become an uncanny, almost seasonal pattern over the last few years: The economy perks up as a new year kicks into gear only to flail again by the time summer comes around.

It must be that time of year. A very weak U.S. retail sales report for June forced economists to again take an axe to their already meager forecasts for economic growth this year. Stephen Stanley at Pierpoint Securities, suggests the figures are beginning to dip dangerously close to contraction.

I have been near the bottom of the range of estimates on Q2 GDP for the last month or two and it seems like we are all chasing the data lower. Before today, I had about 1% for Q2 real GDP. The awful retail sales figures coupled with somewhat higher-than-expected inventories tally takes me down to +0.6%.

Jessica Wohl and Chris Reese contributed to this post.

For every penny rise in the price of gas at the pump, U.S. customers of Walmart take a collective $1 billion hit to their disposable income.

That astounding figure, from Wal-Mart Stores Inc’s U.S. division chief merchandising officer Duncan Mac Naughton, was largely overlooked when he disclosed it at a Barclays conference earlier this week. But the statistic is highly relevant to the macroeconomic outlook, and explains why Fed officials and economists start to worry every time the price of gasoline starts to rise.

With 140 million U.S. customers a week, Walmart –  the world’s biggest retailer – is the recipient of a good chunk of U.S. consumer spending, the biggest input to U.S. economic growth. Now that gas prices have stopped rising, the pressure is off. But the impact on Walmart customers may help explain a curious trend Credit Suisse economists have identified in U.S. jobless claims, which seem to go up every time gas prices rise and fall when pump prices slip.

I found myself at Selfridges this week, specifically in what the London retailer says is the world's largest shoe department.

Slightly dazed by cornucopia of women's shoes on slick display, I was roused only when the haze of muzak wafting over the PA system was suddenly dispersed by the jaunty strains of the Chinese New Year ditty 'Gongxi Gongxi'.

A 1946 composition from Shanghai, the song has gone from classic to kitsch, evolving to become the most popular festive song in the Chinese-speaking world. Its ubiquity rests on the many -- for me at least -- teeth-grindingly cloying versions played all over shops and markets in Asia. (Click here for example and don't say I didn't warn you)

Remember that old chestnut about how it’s a recession when your neighbour loses his job and it’s a depression when YOU lose yours?

Well, research carried out by Datamonitor suggests a similar divergence between British consumer perception and behaviour during the current economic downturn.

The survey found that 90 percent of UK consumers believed that the country was in the grip of recession but slightly over half of them (53 percent) said their household finances have either improved or stayed the same. Similarly, twice as many people feel their job is safe as those who have actually lost or fear they will lose their jobs.

Buy now, pay later was the mantra of U.S. consumers during a debt-fueled binge earlier this decade.

Banc of America Securities-Merrill Lynch economists think getting U.S. household debt-to-income back to the long-term trend will require eliminating $1.75 trillion in debt, assuming no change in disposable income. That will probably take years.

And that’s their more conservative forecast, just taking the ratio from its current level of 131 percent down to 115 percent. To get back to the average seen in the 1990s, $4.35 trillion in debt would have to be eliminated. 

Johns Hopkins University economist Christopher Carroll thinks U.S. consumers have finally got religion when it comes to saving, after years of free spending. For the sake of the broader economy, he is hoping they take to heart the prayer of Saint Augustine.

Carroll, a leading scholar on how housing wealth boosted U.S. consumer spending, has a new paper out on how the financial crisis of the past two years has affected attitudes toward spending and saving. It isn’t pretty.    

 

“Our view is that American consumers are not merely resting from their former role as the world’s champion consumers, they are permanently reforming their spending patterns, in response to the end of the period of ever-more-available credit that fueled the unsustainably high spending of recent years.”

An Ipsos/Reuters poll of 23 countries found that cuts in household spending have remained constant during the past six months with entertainment, vacations and luxury items the first to go for nearly three quarters of families, followed by clothing, energy consumption and gasoline/driving.

The 23 countries polled,  including the United States, Canada, Brazil, Germany, Britain, Sweden, China and Japan, make up 75 percent of the world’s gross domestic product.

Where are you cutting back on spending?

Getting the U.S. consumer spending again is simple. “The government should issue every household with a debit card with an expiration limit of 90 days, and if they don’t use it, they lose it,” says Paul Kasriel, chief economist of Chicago-based Northern Trust.

Kasriel has a reputation of being more pessimistic than the consensus, but given the programmes unveiled to date by the U.S. Treasury, he believes the U.S. economy will start to recover this year. “The Federal Reserve, like other central banks, is a legal counterfeiter, and they can create money out of thin air,” he says, pointing to the TALF, and son-of-TARP, the inelegantly named PPIP.

Under the terms of the Term Asset-Backed Securities Loan Facility, the Fed will provide financing for firms to purchase asset-backed securities of credit cards, auto loans and student loans, whilst accepting most of the credit risk. Kasriel says this $1 trillion programme has gotten off to a slow start, but he believes it will gain momentum over the next few months and will play a key role in kick-starting the credit markets.

Europe’s leaders can no longer rely on the argument that German resilience will cushion the blow to the continent from the worst global recession in just about anyone’s living memory.

Germany’s economy, Europe’s largest, is now officially confirmed as the basket case of Europe, thanks to a plunge in demand for high-tech goods, stagnant domestic demand, and a strong currency.

Having shrunk by 2.1 percent in the fourth quarter alone compared with 1.5 percent for the 16-member euro area, Germany will hold for a brief period over the weekend the dubious title of the fastest contracting economy in the developed world.