MacroScope

Davos Day Two — Rouhani, Lew and Lagarde

Day one in Davos showed the masters of the universe fretting about Sino-Japanese military tensions, the treacherous investment territory in some emerging markets and the risk of a lurch to the right in Europe at May’s parliamentary elections which could make reform of the bloc even harder.

Today, the focus will be on Iranian President Hassan Rouhani (and his main detractor, Israel’s Netanyahu). Presumably he’s there to woo the world of commerce now sanctions are to be relaxed in return for Tehran suspending enrichment of uranium beyond a certain level. Anything he says about Syria’s peace talks, which have so far been more hostile than conciliatory, will instantly be headline news.

Other big name speakers are U.S. Treasury Secretary Jack Lew, IMF chief Christine Lagarde, who is going around warning about the threat of European deflation, Australian premier Tony Abbott, who is running the G20 this year, and a session featuring the BRICS finance ministers.

There is clearly a pervading sense of caution, if not alarm, about emerging markets. That aside, with the U.S. recovering and the existential threat to the euro zone over, perhaps delegates will look most nervously to the east.

Japan has printed huge amounts of money but is still to follow through on promised structural reforms to counter the drag of an ageing and shrinking population and to reduce massive public debts. China’s ability to take excess credit out of the economy without causing a crash is perhaps of even greater importance.

The Italian Job

Italy has dropped out of the spotlight a little following the protracted political soap opera surrounding Silvio Berlusconi. But it remains perhaps the euro zone’s most dangerous flashpoint.

Prime Minister Enrico Letta now has some time to push through economic reforms, cut taxes and spending in an effort to galvanize activity. But already the politics look difficult.

Italy’s three main unions are to strike over the government’s 2014 budget plan. Former premier Mario Monti resigned as head of his centrist party after it supported the budget which he viewed as way too modest, lacking in meaningful tax cuts and deregulation.

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.

Back from the beach

Back from a two-week break, so what have I missed?

All the big and ghastly news has come from the Middle East but there have been interesting developments in the European economic sphere.
It seems safe to say that Britain’s economic recovery is on track, and maybe more broadly rooted than in just consumer spending and a housing market recovery (bubble?).

Slightly more surprisingly, the euro zone is back on the growth track too with some unexpectedly strong performances from Portugal and France in particular in the second quarter. Latest consumer morale data have been strong and as a result European Central Bank policymakers have begun downplaying thoughts of a further interest rate cut. However, it’s unlikely that all these countries will grow as strongly in the third quarter. Tuesday’s reading of German sentiment via the Ifo index will be key this week.

Perhaps the biggest surprise was Germany’s Wolfgang Schaeuble admitting what was widely known but hitherto unacknowledged – that Greece will need more financial help. The real shock was not the news but the source; the assumption had been that no one would whisper a word until the German elections are out of the way in four weeks’ time. Angela Merkel has been notably more circumspect about Greece than her finance minister.

An Italian in Greece

Italian Prime Minister Enrico Letta will be in Athens for talks with Greek premier Antonis Samaras today with (whisper it) the prospect of the euro zone enjoying its first summer lull for years, in fact all the way up to German elections on Sept. 22.

No major decisions are likely before that point and who knows what will come afterwards, though continuity is a better bet than a radical shift.

 The latest poll at the weekend showed Chancellor Angela Merkel’s centre-right coalition lost its lead over the three main opposition parties. Merkel’s conservatives held steady at 40 percent but her junior coalition partner, the Free Democrats, lost one point to 5 percent while support for the main opposition parties remained steady.

Central bank independence is a bit like marriage: Israel’s Fischer

For Bank of Israel governor Stanley Fischer, this week’s high-powered macroeconomics conference at the International Monetary Fund was a homecoming of sorts. After all, he was the IMF’s first deputy managing director from 1994 to 2001. The familiar nature of his surroundings may have helped inspire Fischer to use a household analogy to describe the vaunted but often ethereal principle of central bank independence.

Fischer, a vice chairman at Citigroup between 2002 and 2005, sought to answer a question posed by conference organizers: If central banks are in charge of monetary policy, financial supervision and macroprudential policy, should we rethink central bank independence?  His take: “The answer is yes.”

In particular, the veteran policymaker, who advised Fed Chairman Ben Bernanke on his PhD thesis at MIT, argued various degrees of independence should be afforded to different functions within a central bank.

Israel’s new-found jobless

Following on from Nigeria’s rebasing of its GDP numbers, giving it a huge growth boost on paper, it is Israel’s turn to tinker with the numbers.  This time, though, the end result was not positive.

The country’s Central Bureau of Statistics said on Monday that the first-quarter jobless rate was 6.7 percent. This a good 1.3 percentage points higher than the announced fourth-quarter figure.

It does not, however, signal a sudden cull of workers across Israel. It is the result, rather, of Israel adopting a new way of counting employment designed to bring it in line with the way leading Western economies do it. So the equivalent fourth-quarter number would have been 6. 8 percent, slightly higher.

Emerging markets: Soft patch or recession?

Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets.
One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries.
On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk.
Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies.
“The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting,” Goldman says, adding: “The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn.”