MacroScope

Turkey poised to intervene?

Iraqi Shi'ite militia fighters stand atop destroyed vehicles belonging to Islamic State militants outside Bo Hassan village near Tikrit

Turkey’s parliament has voted to give the government a green light to order military action against Islamic State as the insurgents tightened their grip on a Syrian border town, sending thousands more Kurdish refugees into Turkey.

There is little sign of it being put into imminent use but the vote gives the government powers to order incursions into Syria and Iraq to counter the threat of attack “from all terrorist groups”. By common consent, western air strikes alone are unlikely to vanquish IS and there is a great deal of doubt that Syrian and Iraqi forces can best them on the ground.

Service sector PMI surveys for euro zone member states, Britain and others are forecast to show France and Italy languishing in contractionary territory while Spain achieves quite strong growth.

There is a health check with these figures. Germany’s PMI readings also look strong but Europe’s largest economy is expected to achieve little or no growth in the third quarter of the year, having contracted in the second.

The European Central Bank rolled out further measures to foster bank lending into a stagnant economy and admitted yesterday that “survey data available up to September confirm the weakening in the euro area’s growth momentum” though it predicted modest expansion in the second half of the year.

French budget to fire EU growth debate

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France is unveiling its 2015 budget right now and it’s not making pretty reading, confirming that Paris will not get its budget deficit down to the EU limit of three percent of GDP until 2017, years after it should have done.

The health minister has said the welfare deficit is expected to run nearly one billion euros over budget this year and data on Tuesday showed France’s national debt hit a record high in the second quarter, topping two trillion euros for the first time. It will near 100 percent of GDP next year.

All this is predicated on growth picking up and the proportion of national income going on public spending will fall only glacially.
French President Francois Hollande and Italy’s Matteo Renzi are leading a drive to use the maximum amount of flexibility within EU rules to allow a bit more spending or lower taxes to get growth going – French Finance Minister Michel Sapin has just said the pace of budget consolidation in the euro zone must be adapted to reflect the reality of a stagnant economy.

Middle East war takes another step

Shi'ite fighters from Mahde Army launch rockets during heavy fighting against Islamic state members at Bo Hassan village, near Tikrit

The United States and some Gulf allies have launched air strikes inside Syria against Islamic State militants.

A combination of fighter, bomber and Tomahawk attack missiles sounds like a formidable barrage so if intelligence about where the militants are is good, a significant blow could have been dealt.

Washington said Saudi Arabia, UAE, Jordan, Bahrain and Qatar were involved though their precise role is unclear. It made no mention of European involvement and Britain has said it was not part of it.

The Scottish question

First Minister of Scotland Alex Salmond smiles as he watches a diving event at the 2014 Commonwealth Games in Edinburgh

Scottish nationalist leader Alex Salmond and former British finance minister Alistair Darling, who is fronting the campaign to remain part of the United Kingdom, go head-to-head in the first and possibly only live television debate of the campaign. It is a bigger moment for Salmond, Scotland’s First Minister, who must garner a shift in the polls which consistently put his “Yes” campaign significantly behind with the referendum only six weeks away.

At the last British general election, Liberal Democrat leader Nick Clegg was widely perceived to have won the leaders’ debates yet it didn’t translate into votes. There are, however, a large number of “don’t knows” to play for in Scotland and Salmond is by common consent the more charismatic figure and slick orator.
During the two-hour debate, Darling is likely to highlight the uncertainty over whether an independent Scotland could retain the pound and automatically be part of the EU and how the nationalists would fund their public spending pledges.

The “No” campaign can also point to the greater devolved powers all the major parties are promising Edinburgh should the Scots vote no. Overnight, Britain’s three main national political parties all said they would seek further powers for Scotland in the event of a “No” vote, in the areas of fiscal responsibility and social security.

Q3 rebound but at cost of price cutting?

A woman walks past a shop in Madrid

Manufacturing PMI surveys across the euro zone and for Britain are due. The emerging pattern is of an improving third quarter after a generally poor second three months of the year.

The UK economy continues to romp ahead – growing by 0.8 percent in the second quarter – but on the continent there are signs of a new slowdown. The Bundesbank now forecasts no Q2 growth at all in Germany and though the euro zone flash PMI, released a week ago, showed the currency area rebounding in July, that largely came at the cost of companies cutting prices further, thereby pushing inflation lower still.

France continues to languish but Spain is one brightening spot, posting 0.6 percent quarterly growth in Q2, not stellar but healthy and adding to 0.4 percent growth in Q1.

Erdogan on the move

Turkey's PM Erdogan walks to his plane at Esenboga Airport in AnkaraTurkey’s ruling AK party is due to announce its presidential election candidate. Prime Minister Tayyip Erdogan is widely expected to announce his presidential bid, and then emerge victorious in the polls after a 40-day election campaign. Polls give Erdogan around 55 percent of the vote and a 20 point lead.

Under Erdogan, Turkey has made great strides economically and diplomatically but some if not much of that progress has been tarnished by a crackdown over the past year on anti-government protests and a purge of the judiciary and police in response to corruption charges against his acolytes which the premier says represent a plot by shadowy forces to oust him.

If he wins he is expected to exercise far more power than his presidential predecessor. Aides have said he would rule with a “council of wise men” made up partly of close allies and would oversee top government business, effectively sidelining some ministries and ministers.

Signs of European dash for growth

The ripples of EU election results are being felt, no more so than in France where the National Front topped the poll.

The day after the results, Prime Minister Manuel Valls promised further tax cuts for French households. The government is already committed to a 30 billion euros cut in labour taxes to help business but insists all this can be done while meeting its EU deficit commitments.

Brussels has already given Paris an extra two years to get its deficit down to three percent of GDP. Today, the European Commission will produce updated country recommendations.

PMIs next signpost for ECB

Following a mixed bag of euro zone GDP data last week which showed Germany charging on and Spain holding its own but France stagnating and Italy, Portugal and the Netherlands slipping back into contraction, flash PMI surveys for the euro zone, Germany and France certainly have the power to jolt the markets today.

As things stand, there seems little to dissuade the European Central Bank from loosening policy next month. Five senior sources told us it was  preparing a package of policy options for its early June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.

Bundesbank chief Jens Weidman speaks later. He told a German newspaper it was not yet certain that action would be taken in June. The three PMI readings are not expected to move much from April with the French numbers lagging those of the euro zone and Germany.

A question of gas

A Ukrainian soldier sits on top of an APC at a checkpoint outside the city of Slaviansk

German Chancellor Angela Merkel is in Washington for talks with Barack Obama after Europe and the United States imposed wider sanctions on Russia.

Obama is already looking ahead to a third round of measures and has hinted at impatience with Europe, saying there had to be a united front if future sanctions on sectors of the Russian economy were to have real bite. At home, the Republicans are accusing him of weakness so will he put pressure on Merkel to move ahead in a way that the European Union has shown it is entirely unready to, at least yet?

The east of Ukraine remains in turmoil with pro-Russian separatists, who have seized civic buildings and police stations in a number of cities and towns, saying Ukrainian forces had launched a big operation to retake the eastern town of Slaviansk. That would mark the first significant military response from the government in Kiev.

Will French numbers add up?

French President Francois Hollande’s cabinet meets to adopt a new debt reduction plan.

After outlining 50 billion euros of savings for 2015-2017 to help pay for consumer and business tax cuts, the government is due to sign off on already delayed deficit reductions to bring it, eventually, to three percent of output as demanded by Brussels.

The European Commission has taken a dim view of any further relaxation, having previously granted Paris two years extra leeway. The French government insists it will meet its targets but appears to be trying to deliver one message to Brussels and another to its electorate, with domestic politics likely to hold sway.