“There are human beings involved” in austerity debate
The inventors of democracy and its greatest 18th century champions both go to the polls this weekend. Greek and French voters will try to elect governments they hope will help release their economies from the grips of the euro zone debt crisis.
While exercising their democratic vote, Europeans will also be contemplating another key issue: their basic economic survival.
That is why the debate about austerity versus growth has become so important.
Financial markets see fiscal discipline as crucial to get the euro zone’s debt burden back to sustainable levels. They are going into the Greek elections favoring triple-A rated bonds over peripheral counterparts.
The premium investors require to hold French debt over German Bunds has also risen in the run-up to the French vote as Francois Hollande became the favourite to win.
But as economies fall deeper into recession and double-digit unemployment hurts prospects for growth, the view that austerity alone will not solve the euro zone debt crisis, seems to be gradually winning over some investors in the bond market – the heart of the crisis.
Sanjay Joshi, head of fixed income at London and Capital, says:
Europe in recession – an interactive map
Spain has become the latest European country to slip into recession joining the Belgium, Cyprus, The Czech Republic, Denmark, Greece, Italy, The Netherlands, Ireland, Portugal, Slovenia and the United Kingdom.
Click here to view an interactive map.
*Updated to include Romania and Bulgaria
Thanks for comments – Will update with Romania and Bulgaria
More Americans find aging is a gateway to poverty
Over the last several years, more Americans have found that aging has left them in the clutch of poverty. Between 2005 and 2009, the rate of poverty among American seniors rose as they aged, as did the number of people entering poverty, according to a new report from the nonpartisan Employee Benefit Research Institute (EBRI).
Poverty rates fell in the first half of the last decade for almost all age groups of older Americans (defined as age 50 or older) but increased since 2005 for every age group. Says Sudipto Banerjee, EBRI research associate and author of the report:
As people age, personal savings and pension account balances are depleted, and as people age, their medical expenditures tend to increase.
Compounding the problem, the odds of suffering a health condition – acute or otherwise – goes up 45-55 percent for those below the poverty line, he said.
Poverty rates, as defined by U.S. Census poverty thresholds, were highest for the oldest of the elderly. Almost 15 percent of Americans older than age 85 were in poverty in 2009, compared with approximately 10.5 percent of those older than 65, EBRI found. Additionally, in 2009, 6 percent of those age 85 or older were new entrants in poverty. Banerjee adds:
The rising poverty rates also correspond to the two economic recessions that occurred during the last decade.
Poverty rates for women were nearly double that of men for almost all years in the survey period. For example, in 2009, poverty rates were 7 percent for men and 13 percent for women. More than 1 in 5 (20.9 percent) single women over age 65 lived in poverty in 2009. The EBRI report found that in 2009, the poverty rate for Hispanics was 21 percentage points higher than for whites. For blacks it was 17 percentage points higher than for whites.
UK recession in charts
Britain’s economy slid into its second recession since the financial crisis after official data unexpectedly showed a fall in output in the first three months of 2012:
Starting real GDP at 100 in 2003 for the UK, U.S. and euro zone shows UK GDP flat since mid-2010 and well below the 2007 peak.
Survey data had been suggesting a stronger GDP number and perhaps points to upwards revisions to come.
As this chart shows past revisions have been substantial.
Gimme a P, gimme an M, gimme an I
If you have ever wondered why financial markets and economists are interested in purchasing managers indexes, here is why:
A recovery in Europe? Really?
There’s a sense of relief among European policymakers that the worst of the euro zone’s crisis appears to have passed. Olli Rehn, the EU’s top economic officials, talked this week of a “turning of the tide in the coming months”. Mario Draghi, the president of the European Central Bank, speaks of “sizeable progress” and “a reassuring picture”.
At last week’s spring summit, EU leaders couldn’t say it enough: “This meeting is not a crisis meeting … it’s not crisis management,” according to Finnish Prime Minister Jyrki Katainen. All the talk is of how the euro zone’s economy will recover in the second half of this year.
But for the 330 million Europeans who make up the euro zone, the outlook has, if anything, darkened. As euro zone governments deepen their commitment to deficit-cutting, and rising oil prices mean higher-than-expected inflation, households can’t be counted on to drive growth. Not only did housing spending fall 0.4 percent in the October to December period from the third quarter, but unemployment rose to its highest since late 1997 in January.
Joblessness is reaching shameful levels in southern Europe. In Greece, unemployment rose to a new record high of 21 percent in December and to 23 percent in Spain in January. Even in wealthy, northern Europe, the number of people out of work has started to rise in France, the Netherlands and Germany.
Just over half of the euro zone‘s economic output is generated by domestic consumer spending, but demand for goods looks chronically weak and fiscal austerity is aggravating the situation. Euro zone governments, desperate to distinguish themselves from debt-stricken Greece, are completely unwilling to step in and spend. The European Commission, persuaded mainly by Germany that fiscal discipline will lift economic growth, is on their backs to get their deficits within the 3 percent level of GDP by the end of 2013.
“The case against Europe’s growth strategy is that it is all supply and no demand,” said Philip Whyte, a senior research fellow at the Centre for European Reform. “Fiscal policy is being tightened too rapidly. The more certain EU countries do to balance their budgets, the more output contracts,” he said in a recent paper.
So where will growth come from? The ECB’s Draghi said this week he is counting on foreign demand. Emerging Asia and a stronger recovery in the United States might help pull the euro zone out of its slump. But with Germany responsible for almost 40 percent of the euro zone’s exports, a wider tide of prosperity across the currency area looks unlikely.
A highly unequal U.S. recovery
No wonder most Americans feel like the recession never ended. A new paper from Emmanuel Saez, a Berkeley professor and expert on inequality, shows the overwhelming majority of income gains – 93 percent – accrued in 2010, the first full year of the U.S. recovery, went to the top 1 percent richest Americans. (Thanks to our friends at Counterparties for bringing the paper to our attention.)
The research suggests economic growth, even if it gathers speed, will not be nearly sufficient to close the income gap that has been the target of national Occupy protests. Instead, only drastic tax reforms of the sort seen during the 1930s might do the trick.
In 2010, average real income per family grew by 2.3% but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover.
National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly. Unemployment and non-employment have remained high in 2011. This suggests that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007.
Looking further ahead, based on the U.S. historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.
Europe’s wobbly economy
Things are looking a bit unsteady in the euro zone’s economy. Just ask Olli Rehn, the EU’s top economic official, who warned this week of “risky imbalances” in 12 of the European Union’s 27 members. And that’s doesn’t include Greece, which is too wobbly for words.
Rehn is looking longer term, trying to prevent the next crisis. But the here-and-now is just as wobbly. The euro zone’s economy, which generates 16 percent of world output, shrunk at the end of 2011 and most economists expect the 17-nation currency area to wallow in recession this year and contract around 0.4 percent overall. Few would have been able to see it coming at the start of last year, when Europe’s factories were driving a recovery from the 2008-2009 Great Recession. And it shows just how poisonous the sovereign debt saga has become.
Not everyone thinks things are so shaky. Unicredit’s chief euro zone economist, Marco Valli, is among the few who believe the euro zone will skirt a recession — defined by two consecutive quarters of contraction — in 2012. This year is “bound to witness a gradual but steady improvement in underlying growth momentum,” Valli said, saying the fourth quarter was the low point in the euro zone business cycle.
That could still happen. Business surveys support the idea that the worst is behind us, while European Central Bank President Mario Draghi agrees that last year’s collapse in confidence has now steadied, albeit at low levels. So far, the ECB has not given a strong signal on whether it will take interest rates below the 1 percent level for the first time, but the bigger risk is whether a disorderly Greek default or the threat of a severe credit freeze — which the ECB’s nearly 500 billion euros in loans has so far helped avoid – come back to crush the green shoots of growth.
The ECB’s latest lending survey showed for the last three months of 2011 reinforces the concerns of a credit crunch, as banks are still not passing the money on to the real economy. Thirty-five percent of banks reported they had tightened the standards they apply to loans to businesses, compared to only 16 percent in the third quarter. The ECB is set to make its second offer of three-year loans at the end of the month and that could ease credit risks, but may also discourage banks with bad loans on their books to reform.
So, in economist-speak, the risks are still on the downside and uncertainty remains high. Basically, things are still looking wobbly.
from Anooja Debnath:
When it comes to recessions, 40 is the new 50
If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.
Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.
After the brief recovery period from the Great Recession, Reuters once again started surveying economists several months ago on the chances of developed economies stumbling back into the muck.
As the data get nastier and euro zone politicians wrangle over the sovereign debt mess, the probability goes higher. Just not high enough or fast enough.
The probability that Britain slides back into recession hit 40 percent in the Reuters poll this week, up from one in three last month.
The last time that happened was in July 2008, a few months before U.S. investment bank Lehman Brothers collapsed. The British economy contracted by 2 percent that quarter, its second contraction of 2008. And we all know what happened next. If 40 is the new 50, we're in it.
"It is a very big thing to say we are going into recession ... it is one of those things people are cautious sticking their necks out about," said Alan Clarke, who said there’s a 75 percent chance of that happening.
The euro zone recovery is over
““The recovery has finished, we are now contracting. The forward looking indicators suggest that things will deteriorate further in the coming months,” – Chris Williamson, chief economist at PMI compiler Markit.
Thursday’s PMI surveys make very worrying reading. Not a single economist out of the 37 polled by Reuters predicted the euro zone services number would fall below the 50 level that divides growth from contraction. In the event, it fell from 51.5 last month to 49.1 in September – its lowest reading since July 2009.
Economists like the PMI surveys because they have a very good track record of predicting moves in the economy. Before the Great Recession hit in 2008, they were among the first indicators that hinted at a downturn to come.
The monthly Reuters economy poll of last week put only a roughly one-in-three chance of a recession happening in the euro zone over the next 12 months. Expect that to rise in the next survey.
