MacroScope

In his valedictory Quarterly Inflation Report, Bank of England Governor Mervyn King shone a ray of light on the British economy, saying it should grow 0.5 percent in the current quarter.

But according to the latest Reuters poll of more than 30 economists, published on Tuesday, that might be too optimistic.

The consensus showed gross domestic product would only expand 0.2 percent, weaker than the 0.3 percent expansion seen in the first quarter when the country missed sinking into an unprecedented triple-dip recession.

“I don’t know where he sees the growth coming from,” said economist Stephen Lewis at Monument Securities, whose forecast is in-line with the consensus.

“Perhaps he is hoping for some strong rebound after the improvement in the weather — although today it doesn’t seem all that improved,” he added from a cold and wet London.

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.

First quarter UK GDP figures will show whether Britain has succumbed to an unprecedented “triple dip” recession. Economically, the difference between 0.2 percent growth or contraction doesn’t amount to much, and the first GDP reading is nearly always revised at a later date. But politically it’s huge.

Finance minister George Osborne has already suffered the ignominy of downgrades by two ratings agencies – something he once vowed would not happen on his watch. And even more uncomfortably, he is looking increasingly isolated as the flag bearer for austerity. The IMF is urging a change of tack (and will deliver its annual report on the UK soon) and even euro zone policymakers are starting to talk that talk. It was very much the consensus at last week’s G20 meeting.

The government can argue that it hasn’t actually cut that hard – successive deficit targets have been missed – and that it does have pro-growth measures such as for the housing market and bank lending. But the inescapable political fact is that Osborne and his boss, David Cameron, have spent three years arguing that they would cut their way back to growth and that to borrow your way out of a debt crisis is madness. In fact, it’s arguably perfectly economically sane, given that if you get growth going, tax revenues rise and will eat away at the national debt pile.

Ask top Federal Reserve officials about adopting a target for non-inflation adjusted growth, or nominal GDP, and they will generally wince. Proponents of the awkwardly-named NGDP-targeting approach say it would be a more powerful weapon than the central bank’s current approach in getting the U.S.economy out of a prolonged rut.

This is what Fed Chairman Ben Bernanke had to say when asked about it at a press conference in November 2011:

So the Fed’s mandate is, of course, a dual mandate. We have a mandate for both employment and for price stability, and we have a framework in place that allows us to communicate and to think about the two sides of that mandate. We talked today – or yesterday, actually – about nominal GDP as an indicator, as an information variable, as something to add to the list of variables that we think about, and it was a very interesting discussion. However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy. So we are not contemplating at this date, at this time, any radical change in framework. We are going to stay within the dual mandate approach that we’ve been using until this point.

Three big events today which will tell us a lot about the euro zone and its struggle to pull out of economic malaise despite the European Central Bank having removed break-up risk from the table.

1. The European Commission will issue fresh economic forecasts which will presumably illuminate the lack of any sign of recovery outside Germany. Just as starkly, they will show how far off-track the likes of Spain, France and Portugal are from meeting their deficit targets this year. All three have, explicitly or implicitly, admitted as much and expect Brussels to give them more leeway. That looks inevitable (though not until April) but it would be interesting to hear the German view. We’ve already had Slovakia, Austria and Finland crying foul about France getting cut some slack. El Pais claims to have seen the Commission figures and says Spain’s deficit will will come in at 6.7 percent of GDP this year, way above a goal of 4.5 percent. The deficit will stay high at 7.2 percent in 2014, the point so far at which Madrid is supposed to reach the EU ceiling of three percent.

2. Banks get their first chance to repay early some of the second chunk of more than a trillion euros of ultra-cheap three-year money the ECB doled out last year. First time around about 140 billion was repaid, more than expected, indicating that at least parts of the euro zone banking system was returning to health. Another hefty 130 billion euros is forecast for Friday. That throws up some interesting implications. First there is a two-tier banking system in the currency bloc again with banks in the periphery still shut out. Secondly, it means the ECB’s balance sheet is tightening while those of the Federal Reserve and Bank of Japan continue to balloon thanks to furious money printing. The ECB insists there is plenty of excess liquidity left to stop money market rates rising much and a big rise in corporate euro-denominated bond sales helps too. But all else being equal, that should propel the euro yet higher, the last thing a struggling euro zone economy needs.

RBC economist Tom Porcelli is such a curmudgeon these days. Still, given that he was one of the few economists that accurately predicted the possibility of a negative reading on fourth quarter GDP, maybe it’s not a bad idea to listen to what he has to say.

This week, he expressed concern about a rapid decline in U.S. productivity – and that was before data showing U.S. nonfarm productivity fell in the fourth quarter by the most in nearly two years.

Productivity declined at a 2 percent annual rate, the sharpest drop since the first quarter of 2011 and a larger fall than the 1.3 percent forecast in a Reuters poll.

One of two stories will probably emerge from Friday’s first reading on how the British economy fared at the end of last year.

If it shrank 0.1 percent in the fourth quarter as the consensus of economists polled by Reuters expects, or worse, we will hear it raises the disastrous spectre of a third recession in four years, or a “triple-dip”.

If it defies expectations by growing slightly, that risk is averted and the government will say it shows the economy is getting back on its feet.

Is Italy about to add some bite to its bark as far as the euro zone is concerned? Quite possibly. An opinion poll last night showed Silvio Berlusconi’s centre-right coalition is charging up along the rails, increasing the chances of a messy election result with the front-running centre-left unable to form a stable government.

Although it retains a strong lead, the way votes are carved up in the Senate could easily rob it of a majority in the upper house. The huge media coverage Berlusconi can command via his empire may be starting to tell. Technocrat premier Mario Monti, who could yet play a key part in a centre-left administration if his centrist grouping is needed in a coalition, responded to the polling evidence by launching a stinging attack on Berlusconi.

Markets have so far been utterly sanguine about the late February election but if Berlusconi’s resurgence continues, that could change abruptly. The favoured outcome would be a PD (centre-left) government supported by Monti who would act as guarantor of economic reforms needed to increase Italian competitiveness and growth. But a chunk of the Democrat Party (PD) want a sharp change of course from Monti’s austerity path, and its main coalition partner on the left, the SEL, are implacably opposed to his policies. So nothing is certain.

An exercise in divination using the entrails of last week’s U.S. international trade report shows signs of a move with larger implications than just the gaping deficit that caught analysts wrong-footed: the possibility of a persistent burden on the American economy caused by Japanese and German imports, like in the 80s.

The U.S. trade deficit widened 16 percent in November to $48.7 billion, the Commerce Department said on Friday, above the $41.3 billion expected. The negative surprise prompted economists to cut hastily their U.S. gross domestic product estimates for the last quarter to a negligible rate. The stock market took a hit.

The disappointment was limited, however, as analysts attributed the bulky import bill behind the deficit increase to a resumption of merchandise flows into the U.S. after Hurricane Sandy paralyzed port activity in the East Coast the previous month. Some economists still on yuletide mode are, apparently, missing the big picture.

The “fiscal cliff” is widely seen as a massive threat looming over a fragile U.S. recovery. But with a little imagination, it is not difficult to see how the combination of expiring tax cuts and spending reductions actually presents an opportunity for tilting the budget backdrop in a pro-growth direction, even if political paralysis makes this scenario rather unlikely.

For Steve Blitz, chief economist at ITG in New York, the cliff presents a unique chance for the United States to avoid sinking deeper in the direction of Japan’s growth-challenged economy by shifting incentives away from consumption and towards investment:

If current negotiations end up simply turning the “cliff” into a 10-year slide an opportunity to help the economy regain a dynamic growth path and close the gap with pre-recession trend GDP would, in our view, be lost and raise the odds that, in the coming years, U.S. economic performance looks more like Japan’s. […]