Euroland Economic News

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UK growth edges up in Q2
DOW JONES NEWSWIRES AUGUST 15, 2014 7:00PM

The UK economy expanded at a slightly faster annual rate in the second quarter than initially thought, according to official data released on Friday, boosted by a better performance from the construction sector.

The Office for National Statistics said the economy expanded 3.2 per cent in the second quarter compared with a year earlier, the fastest annual pace of growth since the final quarter of 2007. An earlier estimate put the rate of growth at 3.1 per cent.

The rise was driven by revisions to construction output, the ONS said. Construction output was 4.8 per cent higher than a year earlier, according to the latest data, compared with an earlier estimate of 4.2 per cent.

The UK is expected to be among the fastest-growing advanced economies this year. The Bank of England expects the economy to expand 3.5 per cent in 2014 as a whole.

The ONS said the economy grew 0.8 per cent in the three months to the end of June, an annualised rate of 3.4 per cent. An earlier estimate put the annualised rate at 3.2 per cent. The quarter-on-quarter growth rate was unchanged.

Unusually, Friday's report did not contain information on household consumption and other expenditure data because the ONS is in the midst of a major overhaul of how it calculates its figures to bring it into line with a new European standard. A new set of UK national accounts incorporating the changes will be published September 30.

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The euro-zone economy: Cyclical stagnation

672 words
16 Aug 2014
The Economist
EC
English
© The Economist Newspaper Limited, London 2014. All rights reserved
The recovery grinds to a halt

THIS week's figures for the euro-zone economy were dispiriting by any measure. An already feeble and faltering recovery has stumbled. Output across the euro area was flat in the second quarter (see chart). That followed a poor start to the year when the single-currency club managed to grow by just 0.2% (0.8% at an annual rate).

There were some bright spots in the bulletin of misery. Both the Dutch and Portuguese economies, which had contracted in the first quarter, rebounded, growing by 0.5% and 0.6% respectively. Spanish growth picked up from 0.4% in the first quarter to 0.6% in the second. But these perky performances were overshadowed by the poor figures recorded in the three biggest economies. Italy, the third largest, had already reported a decline of 0.2%, pushing it into a triple-dip recession. France, the second biggest, continued to stagnate. But the real blow came from Germany, the powerhouse of the euro zone, where output slipped by 0.2%.

The setback may reflect some temporary factors, as workers took extra time off after public holidays. German output was also depressed by a fall in construction, some of which had been brought forward to the first quarter thanks to warm weather. This effect should also be temporary. However, the tensions between Europe and Russia over Ukraine and the resulting sanctions may adversely affect German growth in the coming months.

The new GDP figures are yet more evidence that the euro-zone economy is in a bad way, not least since it has come to rely so heavily upon Germany, which had grown by 0.7% in the first quarter. It is not only that growth is evaporating; inflation is also extraordinarily low. In July it was only 0.4%, far below the target of just below 2% set by the European Central Bank (ECB). Consistently low inflation has prompted fears that Europe will soon slide into deflation. Prices are already falling in Spain and three other euro-zone countries.

Deflation would be particularly grave for the euro area because both private and public debt is so high in many of the 18 countries that share the single currency. Even if inflation is positive but stays low it hurts debtors, as their incomes rise more slowly than they expected when they borrowed. If deflation were to set in, the effects would be worse still: when prices and wages fall, debts, which do not shrink, become harder to repay.

The poor GDP figures will intensify pressure on the ECB to do more. Already in June it lowered its main borrowing rate to just 0.15% and became the first big central bank to introduce negative interest rates, in effect charging banks for deposits they leave with it. That has helped bring short-term, wholesale interest rates close to zero and has also weakened the euro. Both these effects will help to bolster the economy and restore growth.

As well as these interest-rate cuts, the ECB announced that it would lend copiously to banks for as long as four years, as long as they pledged to improve their own lending performance to the private sector. The plan, which resembles the Bank of England's "funding for lending" scheme, has some merit but may not boost lending as much as expected due to the feeble state of the banks. It will also take a long time to work its way through the economy.

The ECB's critics say that this is not enough and urge the central bank to introduce quantitative easing--creating money to buy financial assets. The ECB is likely to hold off; it seems to consider QE as a weapon of last resort. For his part Mario Draghi, the central bank's president, urges countries like Italy and France to get on with structural reforms that would improve their underlying growth potential. Patience on all sides is wearing thin.



The Economist Newspaper Limited (The Economist)

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Deflation sees Europe start turning Japanese
Maximilan Walsh
1050 words
14 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Maximilian Walsh

Euro zone The latest iteration of the European crisis has seen the rot spread to the big core economies. Now some in the US fear a secular slowing there. Maximilan Walsh

I have just returned from a European river cruise that took me from Amsterdam to Budapest. It's a voyage that's highly recommended.

It's the height of the summer season in the northern hemisphere and normally popular itineraries such as the one I sailed are full to capacity.

On this particular line, most of those travelling are Americans.

Their tourist dollars are the economic lifeline for the medieval villages along the route.

This year our boat – a boutique vessel compared with some of the others – carried only 93 passengers, well short of its 130 capacity, with Australians and New Zealanders well represented.

Drawing conclusions about the European economy in general from such a narrow and selective database is hardly scientific, but it served to point me in the direction of more pertinent data.

It's just over two years since Mario Draghi, the president of the European Central Bank, surprised the financial world with a pledge that he would do "whatever it takes" to protect the euro zone from collapse.

He was not setting up a straw man. The outlook for the euro zone was becoming increasingly bleak, as the solvency of banks in Greece, Portugal, Ireland and Spain was the subject of constant speculation that was feeding panic and raising the very real risk of systemic failure across the whole of the euro zone and beyond.

Just what Draghi had in mind was never spelt out – a wise move given the Bundesbank's scepticism and certain resistance about a wholesale bail-out.

Draghi's pledge was enough to stop the rot and to convince the markets that the politicians were not about to abandon the euro despite its now obvious flaws.

The financial crisis has been conducive in addressing these flaws but basic structural problems remain.

For example, the euro zone is not an optimal currency area.

Fixing this could involve creating uniformity across many policy areas such as industrial relations, welfare and health programs. Politically speaking, that's not on.A backdrop of low demand

There have been policy reforms in some areas, notably in Spain and Ireland. However, the principle strategy deployed in the financial sector has been a significant shift towards more conservative banking regulations and practices.

This has occurred against a backdrop of low demand for household consumption and corporate investment, low growth and low inflation.

These are the same economic drivers which we saw emerge after 1990 in Japan.

One consequence of this has been that where the crisis in 2012 was confined to economies on the periphery of the zone – Portugal, Spain, Ireland – the pain has now been spread to the core economies as well.

Recent economic data underscores just how fragile, even tenuous, recovery has been in the larger economies of the euro zone.

The data about to be quoted includes the impact, to some degree, of the "Putin factor".

However, it would not reflect anywhere near the full impact since the tit-for-tat sanctions have been imposed. Should these proceed as expected the strains on the euro zone economies will be increased.

Italy is the third largest of the euro zone economies. Data released last week by Istat, the national statistics institute, revealed that Italy has slipped into its third recession since 2008. Its economy contracted at an annualised rate of 0.8 per cent in the quarter ending June 30.

Triple-dip recessions are not common. Each new Italian recession has hit a new low in economic activity.

Italy's current level of production is actually 9.1 per cent below where it stood in September 2007.

In fact, Italy is producing less today than it was back in 2000.

France is the euro zone's second biggest economy. The Economist magazine recently reported: "After two flat years, French growth came to a standstill in the first quarter. The business-confidence index is down on nine months ago, according to Insee, France's statistics body, whose 'turning-point' indicator went negative in June for the first time in a year.

"Output in manufacturing and services also fell in June  . . . and firms cut jobs for an eighth consecutive month . Most worrying, investment has dropped or been flat in eight of the past nine quarters."

Then there is Germany, the euro zone's powerhouse.Too weak to pull southern Europe out of the doldrums

Commerzbank has warned that the German economy may have contracted by 0.2 per cent in the second quarter and is far too weak to pull southern Europe out of the doldrums. Industrial production fell by 1.5 per cent over the three months.

The outlook is worse. The economics ministry said new orders in manufacturing fell 3.2 per cent in June with orders from the rest of the euro zone collapsing by 10.4 per cent.

Steen Jakobsen, economist from Saxo bank, observed: "What this shows is that Europe is nowhere close to recovery. Monetary policy has run out of traction."

Ominously the debt markets are pricing in 0.5 per cent inflation in Germany and Italy over the next five years.

That's a very Japanese number and, should that figure become the anchor of inflationary expectations then deflation will be a real risk.

Stanley Fischer, the deputy chairman of the US Federal Reserve delivered an interesting paper in Sweden last week where he pointed to emerging problems in the US economy.

"We are also," he said, "seeing important signs of a slowdown of growth in the productive capacity of the economy – in the growth in labour supply, capital investment and productivity.

"How much of this weakness on the supply side will turn out to be structural – perhaps contributing to a secular slowdown – and how much is temporary but longer-than-usual-lasting remains a crucial and open question."

If it's the former – a secular slowdown – then the US could find itself a very unhappy candidate for Japanafication.

Maximilian Walsh is deputy chairman of Dixon Advisory and a former editor and managing editor of  The Australian Financial Review.


Fairfax Media Management Pty Limited

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UK recovery 'more than half way'
AFP AUGUST 18, 2014 1:00AM

Britain's economy is "more than half way" down the path to full recovery, but any interest rate rises will be "limited" and "gradual", Bank of England boss Mark Carney said Sunday.

In an interview with The Sunday Times, Mr Carney declared that the economy was now undergoing genuine expansion following the 2008 economic crisis.

"Wherever the finish line was in the depths of the crisis, we are much more than half way towards that finish line now," he said.

"The expansion is proceeding, momentum is more assured; the very fact we have had consistent quarters of growth in line with or slightly better than our forecasts shows that."

Mr Carney sought to reassure indebted householders that interest rates were not set to rise sharply any time soon.

"There are big pockets of households who will be very sensitive to interest rate increases when they begin, so it makes sense to be gradual," he said.

Britain's economy grew 0.8 per cent in the second quarter of 2014 compared with output in the first three months of the year, official data showed on Friday.

Gross domestic product also expanded 0.8 per cent during the first quarter of the year, the Office for National Statistics said in a statement, confirming initial estimates provided last month.

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PUBLISHED AUGUST 18, 2014
EU urges Germany to let workers' salaries increase

A helping hand: Brussels now appears to be taking a view long championed by France that a rise in German salaries would give the struggling eurozone a much-needed stimulus. - PHOTO: REUTERS
[BERLIN] Germany must increase workers' salaries to help its neighbours out of the economic slump, the European Union's (EU) employment commissioner Laszlo Andor said.
The Hungarian said on Saturday that Berlin's big foreign trade surplus was hurting its European partners, and urged it to stimulate domestic demand by increasing wages and public expenditure.
"The rise in salaries has fallen behind the rise in productivity in Germany" for more than a decade, Mr Andor told the German conservative daily Die Welt, in an interview due to be published yesterday.
Brussels was now urging Germany, the EU's economic powerhouse, to relax its iron grip on wages, which he said was "indispensable" for the recovery of the rest of the region.

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UK recovery 'more than half way'
AFP AUGUST 18, 2014 1:00AM

Britain's economy is "more than half way" down the path to full recovery, but any interest rate rises will be "limited" and "gradual", Bank of England boss Mark Carney said Sunday.

In an interview with The Sunday Times, Mr Carney declared that the economy was now undergoing genuine expansion following the 2008 economic crisis.

"Wherever the finish line was in the depths of the crisis, we are much more than half way towards that finish line now," he said.

"The expansion is proceeding, momentum is more assured; the very fact we have had consistent quarters of growth in line with or slightly better than our forecasts shows that."

Mr Carney sought to reassure indebted householders that interest rates were not set to rise sharply any time soon.

"There are big pockets of households who will be very sensitive to interest rate increases when they begin, so it makes sense to be gradual," he said.

Britain's economy grew 0.8 per cent in the second quarter of 2014 compared with output in the first three months of the year, official data showed on Friday.

Gross domestic product also expanded 0.8 per cent during the first quarter of the year, the Office for National Statistics said in a statement, confirming initial estimates provided last month.

If UK up interest rate, hot money will flow even more into UK assets

after decades, it astounds me why western policy makers never think of using structural reforms for eg LTV ratio etc, essentially what Sing govt did, to cushion future interest rate responses. Maybe because it is untenable as "free market"??

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Eurozone trade surplus lifts in June
DOW JONES NEWSWIRES AUGUST 18, 2014 9:45PM

The eurozone's trade surplus with the rest of the world rose in June, according to official figures Monday, as an increase in exports outpaced a pick-up in imports.

The data offer rare good news for the eurozone's struggling economy, after figures showed economic growth in the 18-nation currency union stalled in the second quarter.

The trade data also highlight the region's deteriorating relationship with Russia over Moscow's alleged interference in Ukraine, where the government in Kiev is battling pro-Russian forces in the country's eastern regions. Eurozone exports to Russia, which were slowing even before the European Union and US agreed tougher sanctions on Moscow last month, were lower in the year to May than they were a year earlier, data showed.

The eurozone's surplus in goods trade with the rest of the world swelled to €16.8 billion ($22.5 billion) in June, compared with a surplus of €15.4 billion in May and a surplus of €15.7 billion in June 2013, Eurostat, the EU's statistics agency, said in a report Monday.

Exports rose 3 per cent on the year, outpacing a 2 per cent rise in imports, the agency said.

The improvement in the region's trade balance was driven by a rise in exports to China, the US and the UK

Exports to Russia were 14 per cent lower in the year to May than they were in the same period a year earlier, data showed, while imports from Russia were down 7 per cent.

The decline largely reflects a slowdown in the Russian economy this year but trade with the EU's eastern neighbour is expected to slow further in 2014 as sanctions against Moscow bite.

In July, the EU and US agreed sweeping economic sanctions against Moscow in response to Russian President Vladimir Putin's alleged support for pro-Russian separatists in eastern Ukraine. The sanctions include restrictions on Russian banks' ability to raise money in European capital markets. Russia responded by banning imports of food from the US and EU.

The stand-off with Russia represents another headwind for the eurozone economy, where gross domestic product was flat in the second quarter compared with the first. That translated into just 0.2 per cent growth in annualised terms.

The European Central Bank in June unveiled a package of measures aimed at lifting growth in the region, including a new round of cheap cash for banks to finance lending to households and businesses.

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Global tensions threaten German outlook
DOWN JONES NEWSWIRES AUGUST 18, 2014 8:45PM

Germany's Bundesbank has warned that global tensions such as the crisis in Ukraine are weighing on the outlook for Europe's largest economy, putting earlier assumptions about the strength of the country's growth at risk.

Germany's central bank said on Monday that sanctions enacted by western countries against Russia, along with counter measures that Russia has put in place, hurt firms dependent on exports as well as parts of the domestic economy such as construction.

The comments come days after Germany's statistics office reported in a preliminary estimate that the country's economy contracted by 0.2 per cent in the second quarter of this year versus the first quarter.

The surprisingly strong decline has cemented concerns that global turmoil, notably the crisis in Ukraine and conflict in the Middle East, has jeopardised Germany's growth prospects this year as well as the rest of Europe's.

The eurozone economy stalled in the second quarter, indicating the region's meager recovery has lost momentum even though Spanish and other smaller economies continued to rebound.

While earlier in the year many forecasters had expected Germany to grow by around 2 per cent this year, many have recently lowered the forecast to closer to 1.5 per cent.

"A flurry of unfavorable news reports relating to the international environment have dampened Germany's economic outlook in the second half of the year," the Bundesbank said in its monthly bulletin.

"Current indicators cast doubt on the assumption on which the spring forecasts were based, namely that the underlying cyclical trend would strengthen further in the second half of 2014," the bank said.

"The fact that the order flow declined perceptibly over the course of the second quarter and export expectations have dropped suggests that the industrial economy will be especially hard hit by the disruptive external factors," the bank said.

The Bundesbank's warning is just the latest sign of rising concerns about the robustness of growth in German output.

The Ifo institute's lead indicator of business sentiment has fallen for three months in a row. The ZEW indicator of sentiment among investors has fallen for eight straight months and recently took its sharpest dive in more than two years.

The bank itself had warned last month that its forecast in June of growth of 1.9 per cent this year no longer looked realistic.

"Our current assessment is that the result for the year is likely to fall slightly short of what we expected in our June projection,'" Bundesbank President Jens Weidmann said at the time.

Still, the central bank said on Monday that Germany remains a fundamentally healthy economy that is set for future growth.

Earlier expectations had been high while domestic demand is growing which "speaks against a change in the cyclical direction," the Bundesbank said.

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PUBLISHED AUGUST 19, 2014
Further monetary easing seen helping EU nations
BYNEIL BEHRMANNIN LONDONPRINT |EMAIL THIS ARTICLE

THE European Central Bank is facing increasing calls from economists, the Financial Times, Bloomberg and other media to urgently boost liquidity to counter potential recession in Europe as growth falters in major European Union countries.
The calls for quantitative easing (QE) - bond and other asset purchases to flood bank reserves - followed worse than expected second quarter growth in Germany, France and Italy and a slide in production in Europe. ECB president, Mario Draghi has already announced interest rate cuts and attractive loans to banks to encourage them to lend more money to businesses. But economists and the media want full scale QE to regenerate contracting and stagnant economies.
In particular they are fretting that EU sanctions against Russia and its counter sanctions against EU agricultural products, will drag economies downwards. Poor second-quarter economic results illustrate that business sentiment and direct investment in job creating factories, plant and equipment have deteriorated. Germany's GDP contracted by 0.2 per cent in the second quarter this year, France has experienced zero growth in the first and second quarters and Italy has been in recession in the first half of the year . All three countries are especially vulnerable to Russian sanctions and counter sanctions. Germany, in particular, is highly dependent on oil and gas flows from Russia and prices may rise in the northern hemisphere winter.
"Europe now needs full-blown QE," trumpeted the Financial Times. "It is hard to imagine how much more evidence European policy makers need before conceding their eurozone growth plan is not working."

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UK retail growth disappoints in July
DOW JONES NEWSWIRES AUGUST 21, 2014 7:30PM

UK retailers sold less than expected in July, with annual growth in sales volumes slowing to the weakest rate since November last year in a sign that consumer demand softened at the start of the third quarter, official data showed Thursday.

Retail sales volumes rose 0.1 per cent from June and were 2.6 per cent higher than in July last year, compared with increases of 0.2 per cent and 3.4 per cent respectively in June, the Office for National Statistics said. Economists were expecting sales to rise 0.5 per cent on the month and 3.1 per cent on the year in July, according to a survey by The Wall Street Journal last week.

The data are likely to further ease concerns that the Bank of England will be in a hurry to hike interest rates after inflation data earlier in the week showed price pressures in the economy were subdued. The minutes of the last BOE Monetary Policy Committee showed two of its nine members favored an increase in interest rates but were outvoted by the other members who wanted rates to remain at ultra-low levels.

Other ONS data released Thursday showed a stronger-than-expected improvement in the public finances. Public sector net borrowing fell to 0.2 billion pounds ($0.3 billion) from £1.0 billion in the same month a year earlier. Economists were expecting net borrowing of £2.8 billion in July.