MacroScope

Spanish sums

Spanish third quarter GDP figures tomorrow are likely to confirm the Bank of Spain’s prediction that the euro zone’s fourth largest economy has finally put nine quarters of contraction behind it, albeit with growth of just 0.1 percent.

Today, we get some appetizers that show just how far an economy with unemployment in excess of 25 percent has to go. Spanish retail sales, just out, have fallen every month for 39 months after posting a 2.2 percent year-on-year fall in September, showing domestic demand remains deeply depressed. All the progress so far has come on the export side of the balance sheet.

Spain’s public deficit figures, not including local governments and town halls, are also on the block. The deficit was 4.52 percent of GDP in the year to July and the government, which is aiming for a 6.5 percent year-end target, says it is on track.

Spanish borrowing costs have been falling and outperforming those of Italy but yesterday, Italian two-year yields hit a five-month low at an auction of zero coupon bonds, so there is no sign of debt-raising problems there either despite all the country’s economic and political troubles. Today, Rome is back with up to 8 billion euros of Treasury bills. On Thursday, it will auction up to 6 billion euros of five- and 10-year bonds.

It would be a mistake to take that as a sign of smooth running. After Silvio Berlusconi’s failure to pull down the government, Prime Minister Enrico Letta has some time to push through economic reforms, cut taxes and spending in an effort to galvanize activity. But already the politics look difficult.

Right time to pump up UK housing market?

The British government is poised to announce the extension of its “help to buy” scheme for potential home owners.

As of today, any buyer(s) of a property up to a value of 600,000 pounds ($960,000) who can put up a five percent deposit, will see the government guarantee to the lender a further 15 percent of the value so a bank or building society will only be lending on 80 percent of the property’s value. Until now, demands for cripplingly large deposits have shut many prospective buyers out of the market.

The big question is whether now – with property prices rising by around 3 percent nationally and by a heady 10 percent annually in London – is a sensible time to be doing this given Britain’s long history of housing bubbles.

If at first you don’t succeed… Fed’s Evans sticks to strong forecast despite misses

It’s nice to know Federal Reserve officials have a sense of humor about their own forecasting errors. Chicago Fed President Charles Evans was certainly humble enough to admit to some recent misses in a speech on Friday .

Still, he’s sticking to his guns, arguing that U.S. economic growth will finally break above 3 percent next year, allowing the Fed to gradually pull back on its bond-buying stimulus.

In 2009, I predicted that growth would pick up. I did the same in 2010, 2011 and 2012. And I was not alone – most FOMC participants and many outside analysts shared this overly optimistic view. Undaunted, I make my intrepid forecast: I anticipate growth to average about 2-1/2 percent in the second half of the year and to be in the neighborhood of 3 percent next year. I expect the unemployment rate to be somewhat below 7 percent by the end of 2014.

Euro zone rate cut prospects evaporate

The euro zone is growing again and while its weaker constituents face plenty of tough times yet, it seems less and less likely that the European Central Bank will cut interest rates from their record low 0.5 percent. That illustrates the problems of the new fad of forward guidance.

The ECB deliberately stayed vaguer than most – a product of ripping up its custom of “never precommitting” – saying that rates would stay at record lows or even go lower over an extended period.
Its monthly policy meeting falls next week and in a parallel transparent world Mario Draghi could consign the “or lower” part of the guidance to history after just two months. Don’t bet on that happening but it shows how quickly things can move.

If anyone in Europe, Britain or elsewhere is hoping for a cast iron guarantee that rates won’t rise for two, three or more years, forget it.
Exhibit A today will be Germany’s Ifo sentiment index which has been coming in strong in recent months and is not expected to buck that trend.
It must be only a matter of time before the government and Bundesbank upwardly adjust their forecasts for a significant slowdown in the second half of the year, following 0.7 percent growth in the second quarter.

Post-Jackson Hole, Fed Septaper still appears on track

With all the QE-bashing that went on at the Federal Reserve’s Jackson Hole conference this year, it was difficult not to get the sense that, barring a major economic disappointment before its September meeting, the central bank is on track to begin reducing the monthly size of its bond purchase program, or quantitative easing.

If anything, the fact that this expectation has become more or less embedded in financial markets means that the Fed might as well go ahead and test the waters with a small downward adjustment of say, $10 billion, from the current $85 billion monthly pace, while waiting to see how employment conditions develop in the remainder of the year.

Atlanta Fed President Dennis Lockhart, who is not a voter this year but tends to be a bellwether centrist on the Federal Open Market Committee, told Reuters on the sidelines of the meeting that he would be ‘comfortable’ with a September tapering “providing we don’t get any really worrisome signals out of the economy between now and the 18th of September.” (Does this count? Probably not.)

Amnesty for undocumented immigrants would not burden U.S. economy – Levy Economics Institute

The recently passed Senate bill – S. 744, or the Border Security, Economic Opportunity, and Immigration Modernization Act – that would take significant steps toward comprehensive reform, is being held up in the Republican-controlled House of Representatives, with a “path to citizenship” for undocumented immigrants the apparent sticking point.

A recent report from the Congressional Budget Office estimated the following:

All told, relative to the committee-approved bill, the Senate-passed legislation would boost direct spending by about $36 billion, reduce revenues by about $3 billion, and increase discretionary costs related to S. 744 by less than $1 billion over the 2014-2023 period.

Nathan Sheets and Robert Sockin at Citigroup are even more sweeping in their endorsement of immigration’s economic upside:

Regarding second quarter GDP, beware the benchmark revisions!

If there ever was a time to discount estimates of an advance GDP report, now is the time, says Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. That’s because the first snapshot of U.S. Q2 GDP growth, due out on July 31, will occur alongside the Bureau of Economic Analysis’ (BEA) comprehensive benchmark revisions.

These revisions occur about once every five years and go back to the beginning of GDP reporting in 1929. The BEA will also incorporate research and development and royalties from film, television, literature and music into the GDP accounts. The net effect could be a 3 percent upward revision to the level of output.

However, of greater significance will be the change in growth, rather than the outright level, LaVorgna said.

A change of tack

Today sees the release of the European Commission’s annual review of its members’ economic and debt-cutting policies. It’s a big moment.

This is the point at which we get confirmation that France, Spain, Slovenia and others will be given more time to get their budget deficits down to target. We already know that France will get an extra two years, while Spain will get another two extra years (to 2016) to bring back its deficit below 3 percent. That comes on top of the 1-year leeway given last year.

This is the austerity versus growth debate in action. But let’s be clear, whatever the rhetoric, this is anything but an end to austerity. What it is, is an invitation to cut more slowly for longer. And in return, there will be extra pressure to press ahead with structural reforms to make economies more competitive and help create jobs. Spain already has, France has barely started and it is there that a lot of the concern rests. If Europe’s second largest economy fails to revitalize itself it will be a big blow to the EU project and further erode France’s political ability to drive it in tandem with Germany.

It never rains…

The British government faces another potentially thorny day with the International Monetary Fund delivering its annual review of the UK economy. If David Cameron has a consistent policy, it’s that the only way to get Britain back on its feet is to cut spending and debt. Trouble is, we know the IMF doesn’t agree and advocates a more growth-fostering approach. Finance minister George Osborne has changed rhetorical tack in response but is walking a tightrope as a result.

This comes at a time when there are distinct signs that Cameron’s Conservative party is unraveling and not just over Europe. Unless he gets a grip soon, who knows what further concessions may be made on an EU referendum which could push Britain further towards the exit door. It remains unlikely that the coalition government will fall apart before 2015 elections, not least because the junior, pro-EU Liberal Democrat partners face electoral evisceration according to the polls. It’s even less likely that Cameron will be toppled by fractious members of his party. But it’s no longer impossible.

Britain’s LibDem deputy prime minister will take the unusual step of holding a news conference to say the coalition will hold together until 2015. Another big flashpoint looms this summer with the government’s spending review where hardline Conservatives will push for big welfare cuts and the LibDems will resist. Former foreign secretary Geoffrey Howe, the man who did more than anyone else to end Margaret Thatcher’s reign, says Cameron is losing control of his party. From the other side of the political divide, Peter Mandelson says he has to lead not follow. Hard to argue with either of them.

I’ll say it again…

 

European Central Bank chief Mario Draghi felt it necessary yesterday to depart from the script at a ceremony awarding an honorary degree to reiterate his message from last Thursday – that the ECB could cut interest rates again and was looking at pushing the deposit rate which it charges banks for holding their funds overnight into negative territory in an attempt to get them to lend again.

Nothing new in the message obviously but the fact he felt the need to repeat it at a forum at which nobody would expect him to could be telling. Draghi has form here. It was at a pre-Olympics conference in London last July that he delivered his “whatever it takes” to save the euro pledge that fundamentally shifted the terms of the currency bloc’s debt crisis.

That the recession-plagued euro zone economy could do with a shot in the arm is beyond question though Draghi insisted countries must not let up on their debt-cutting. Very different tone from the prime ministers of Italy and Spain who demanded action to cut unemployment though Italy’s Enrico Letta said growth could be boosted without increasing debt.