MacroScope

UK recovery, can you feel it?

Third quarter UK GDP data are likely to show robust growth – 0.8 percent or more, following 0.7 percent in Q2 – more kudos to a resurgent finance minister George Osborne who only a year ago was buried in brickbats.

We can argue about the austerity versus growth debate ‘til the cows come home – there is still a strong case that if the government hadn’t cut so sharply, growth would have returned earlier and debt would have fallen faster. But the fact that the economy is ticking along nicely 18 months before the next election means Osborne has won the argument politically.

And yet, and yet. The opposition Labour party has been nimble in switching its criticism from the government’s debt-cutting strategy to the fact that the economy might be recovering but the vast majority of Britons aren’t feeling it.

Wage growth is generally dwarfed by inflation and the cost of lighting and heating a home has rocketed. Labour has pedalled a utilities price freeze and even former Conservative premier John Major has suggested a windfall tax.

So expect a continued absence of crowing from the government, if it knows what’s good for it. “There’s a long way to go…” etc etc. It’s unlikely that the economy will continue to grow at this pace but the IMF’s forecast of 1.9 percent next year is achievable and would go a long way to winning the electoral economic argument.

Humdrum summit

A two-day EU summit kicks off in Brussels hamstrung by the lack of a German government.

Officials in Berlin say they want to reach a common position on a mechanism for restructuring or winding up failing banks by the end of the year but with an entire policy slate to be thrashed out and the centre-left SPD saying the aim is to form a new German administration with Angela Merkel’s CDU by Christmas, time is very tight.

On banking union, a senior German official said Berlin had no plans to present an alternative plan for how a resolution fund might work at the  summit and reiterated Berlin’s stance that national budget autonomy for winding up banks could not be outsourced.

Stress, stress, stress

The European Central Bank will announce the methodology which will underpin the stress tests of about 130 big European banks next year.

It is caught between the devil and the deep blue sea. Come up with a clean bill of health as previous discredited stress tests did and they will have no credibility. So it is likely to come down on the side of rigour but if in so doing it unearths serious financial gaps, fears about the euro zone would be rekindled and there is as yet no agreement on providing a common backstop for the financial sector.

France, Spain and Italy want a joint commitment by all 17 euro zone countries to stand by weak banks regardless of where they are. Germany, which fears it would end up picking up most of the bill, is worried about the euro zone’s rescue fund, the European Stability Mechanism, helping banks directly without making their home governments responsible for repaying the aid.

Slow motion coalition

Angela Merkel’s CDU and the centre-left SPD will begin formal coalition talks in Germany this week after a meeting of 230 senior SPD members gave the go-ahead on Sunday.

To win the vote, the SPD leadership pledged to secure 10 demands it called “non-negotiable”, including a minimum wage of 8.50 euros per hour, equal pay for men and women, greater investment in infrastructure and education, and a common strategy to boost euro zone growth.

That means thrashing out a policy slate with Merkel’s party is likely to take some time so the betting is an administration won’t be in place until late November at the earliest. SPD chairman Sigmar Gabriel said the aim was to have a functioning government by Christmas.

Can we have a German government please?

Angela Merkel’s CDU and the centre-left SPD have agreed to begin formal coalition talks conditional on securing support from a meeting of 200 senior SPD members scheduled for Sunday. The party is scarred by its experience of coalition in the last decade, when its support slumped, but it’s probably the lesser of two evils since a new vote would be quite likely to increase Merkel’s support. She only just missed out on a rare overall majority first time around.

Assuming Sunday’s vote gives assent, talks proper will start on Wednesday. Hold your horses though. An entire policy slate will have to be thrashed out so the betting is an administration won’t be in place until late November at the earliest. In the meantime, euro zone policy negotiations are pretty much on hold.

To prove that point, an EU leaders’ summit on Thursday and Friday is unlikely to break new ground although of course all the hot topics such as banking union will be discussed.

How many politicians does it take to change a government?

Talks between Angela Merkel’s CDU and the centre-left SPD will resume on forming a German grand coalition but any agreement is probably weeks away yet.

With the Greens having bowed out at least we now know it will be a joint administration of the big two parties or fresh elections. The former remains odds on.

The SPD is scarred by its experience of coalition in the last decade, when its support slumped, but it’s probably the lesser of two evils for the party since a new vote would be quite likely to increase Merkel’s support. She only just missed out on a rare overall majority first time around.

A jobless guide to interest rates

The Bank of England’s decision to peg any move in interest rates to the downward progress of unemployment has invested the monthly figures, due today, with huge importance.

In a nutshell, markets don’t believe the jobless rate will take the best part of three years to fall from 7.7 percent to below 7.0, the point at which the Bank said it could consider raising rates from a record low 0.5 percent. For what it’s worth, the consensus forecast is for the rate to be unbudged at 7.7 in August.

There are some reasons to think the Bank might be right – an ageing population working longer, slack within companies (such as part-time working) which can be ramped back up again before any new hiring takes place – but if markets continue to price in a rate rise early than the Bank expects, then it has de facto policy tightening to deal with.

A tale of two budgets

 

It’s deadline day for euro zone member states to submit their 2014 budget plans to the European Commission for inspection and we’re waiting on Italy and Ireland.

Having survived Silvio Berlusconi’s attempt to pull the government down, Prime Minister Enrico Letta’s coalition has to overcome differences on tax and spending policy.
The aim is to agree a 2014 budget that reduces labour taxes by some 5 billion euros but also undercuts the EU’s 3 percent of GDP deficit limit, so spending cuts will be required.

Rome has a chequered track record in that regard. The cabinet will meet at 1500 GMT to try and agree a comprehensive package. A Treasury source said the scale of tax cuts would be dictated by how much the various government ministries are prepared to forego.

Of euro budgets and banks

Euro zone finance ministers meet today and will have one eye on budgetary matters given a Tuesday deadline for member states to send their draft budgets to the European Commission for inspection, and with protracted German coalition talks keeping other meaningful euro zone reform measures on hold.

Most draft budgets are in but we’re still waiting on Italy and Ireland. Dublin will unveil its programme on deadline day. Italy’s situation is more fluid so we may get something today.

Over the weekend, Dublin said it may quit its bailout by the year-end without any backstop in the form of a precautionary credit line. That would rule it out for ECB bond-buying support, which it probably also doesn’t need. But it needs at least the 1.8 percent growth forecast for next year to keep bearing down on debt.

This little piggy went to market

Italy and Spain are both set to launch syndicated bond sales today, taking advantage of temporarily benign market conditions and maybe with a weather eye on the U.S. debt stalemate which could soon throw the world’s markets into turmoil with an Oct. 17 deadline fast approaching.

After Silvio Berlusconi’s failure to pull down the government, Italy’s political crisis is in abeyance for now and its bond yields have eased back. Spain has issued nearly all the debt it needs to this year already.

It’s not quite “crisis what crisis” but the news flow has been largely positive:
- Portugal (after its own self-inflicted  political crisis over the summer) has seen its borrowing costs fall to their lowest in more than a month after its EU/IMF lenders said it was meeting its bailout goals.
- Greece is predicting an end to six years of recession in 2014 and, just as importantly, a primary surplus.
- And the IMF yesterday predicted Italy, Spain, Portugal, Greece and Ireland (which will soon become the first euro zone member to exit its bailout programme) would all grow next year.