As suspected, signs that UK deficit spending is looking large enough to support a bit of growth. Now watch for the proclamations about how austerity works…
UK Headlines:
U.K. Manufacturing Demand Strengthened in June, CBI Report ShowsCML Says U.K. Gross Mortgage Lending Rose 24% in May From April
U.K. Retail Sales Rise More Than Forecast After April Slump
Getting there as previously discussed:
Germany signals shift on 2.3 trillion redemption fund for Europoe
By Ambrose Evans-Pritchard
June 13 (Telegraph) — The German government has begun opening the door to shared debts for the first time in a profound change of policy, agreeing to explore proposals for a €2.3 trillion (£1.9 trillion) stabilization fund in order to stop the eurozone’s crisis escalating out of control.
Mr Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse. Photo: Alamy
Officials in Berlin say privately that Chancellor Angela Merkel is willing to drop her vehement opposition to plans for a “European Redemption Pact”, a “sinking fund” that would pay down excess sovereign debt in the eurozone.
“It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office. The official warned that there would be no “master plan” or major break-through at the EU summit later this month.
Mr Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse.
Fast-moving events may have forced her hand. She is under immense pressure from the US, China, Britain, and Latin Europe to change course as the crisis engulfs Spain and Italy, threatening a global cataclysm.
Another hint the austerity induced deficit may have gotten large enough to stabilize things and promote a bit of growth.
U.K. Economy Barely Grew In Quarter Through May, Niesr Estimates
By Svenja O’Donnell
June 12 (Bloomberg) — The U.K. economy barely grew in the quarter through May after contracting in the previous three months, according to the National Institute of Economic and Social Research.
Gross domestic product grew 0.1 percent in the period, after declining at the same rate in the three months through April, Niesr, whose clients include the Bank of England and the U.K. Treasury, said in an e-mailed statement in London today.
Data today showed U.K. manufacturing fell more than economists forecast in April, while industrial production was unchanged, pointing to continued weakness in the economy at the start of the second quarter. Britain has slipped back into recession and Bank of England policy makers have warned of threats to the economy from the euro-area crisis.
“Economic activity remains very weak,” the institute said. “We expect the U.K. economy to remain broadly ‘flat’ over the next six months.”
The U.K. economy is forecast to recover in 2013, Niesr said, though “significant downside risks persist.”
Some hints the deficit may be large enough to sustain some growth.
No doubt this will be spun as ‘see, austerity works’, when the same deficit could have been achieved proactively with a tax cut and/or spending increase before the austerity increased the deficit the ugly way, via depressing GDP and elevating unemployment.
Headlines:
U.K. House Prices Rise as Halifax Sees Stagnation in Second Half
U.K. Retail Sales Increased in May on Warm Weather, BRC Says
U.K. Services Unexpectedly Sustains Pace of Expansion in May
Functionally, this would be the same as ‘ordinary’ govt deficit spending on the same goods and services, and likewise add to GDP and add to the economy’s savings of net financial assets, to the pence.
U.K. Plans ‘Growth Bonds’ to Tap Into Savings, Independent Says
June 6 (Bloomberg) — U.K. Chancellor of the Exchequer George Osborne hopes to persuade households to invest billions of pounds of savings in new government “growth bonds,” the Independent reported, citing unidentified people with knowledge of the matter.
Tax breaks would be offered and cash raised would be invested in projects such as toll roads, green energy and housebuilding, the newspaper said.
The government might lessen risks for small investors by underwriting a proportion of any potential losses, the Independent said.
A “senior government source” told the newspaper cash-rich households have nowhere secure to put their money and be guaranteed good returns because interest rates are low; growth bonds would provide them with an investment opportunity and boost the economy at the same time.
Thanks!
These are onetime events that tend to reverse after running their course.
Aka inventory liquidation
Big European funds dump euro assets
By David Oakley and Alice Ross
May 24 (FT) — Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil.
The euro’s sudden fall this month caught many investors by surprise. Europe’s single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514.
Amundi, Europe’s second-biggest private fund manager, and Threadneedle Investments, the big UK manager, have cut their exposure to the euro in recent days as frustration grows with political leaders’ efforts to resolve the crisis.
US-based Merk Investments, the currency specialists, has cut all of its euro holdings in its flagship fund this month.
“We sold our last euro on May 15,” said Axel Merk, chief investment officer. “We’re concerned about how dysfunctional the process is. No one is there to talk to in Greece.”
Amundi, which manages money for some of the continent’s biggest pension funds and companies, said the risk of the crisis spreading to the bigger economies of Spain and Italy was growing because policy makers had failed to convince investors it had built a sufficient firewall.
Other big fund managers fear the likelihood of a so-called “Grexit”, in the event of Athens leaving the euro, has risen sharply in the past week.
European leaders put off any decisions on shoring up the region’s banks at a late-night summit on Wednesday despite rising concerns that instability in Greece was undermining confidence in the eurozone’s financial sector. Citigroup says the euro could fall close to parity in the event of a disorderly exit.
Richard Batty, investment director at Standard Life Investments which has been underweight in European equities and bonds for the past two years, said: “This is a crisis that looks like worsening and that is why the euro has come under pressure.”
Neil Williams, chief economist at Hermes Fund Managers, which has reduced its exposure to European peripheral equities to close to zero, said: “There is a failure by the politicians to convince the markets they are tackling the problems in the eurozone.”
Trading desks at investment banks say that asset managers and pension funds in particular have been selling the euro in recent days.
Amundi, which was created through a merger of Crédit Agricole Asset Management and Société Générale Asset Management three years ago and has €659bn in assets under management, has switched some of its money out of euro-denominated bonds into dollar assets.
Eric Brard, global head of fixed income at Amundi, said: “Although we have reduced our exposure to the euro, a weaker euro could be good news for Europe and exporting companies in the region.”
He added: “Our baseline scenario is that the eurozone will not break up and Greece will remain in the monetary union. However, taking a pragmatic view, in recent weeks the market’s perception of risks of a eurozone break-up and Greece exiting have risen.”
Threadneedle, which has £73bn under management, has reduced its euro exposure through its absolute return fund in the belief the euro will fall further.
US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.
Lower crude prices should also help some.
I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.
But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.
So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.
But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.
It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.
Not to mention possible dislocations from the whale, which may or may not have run their course, etc.
And then there’s the news from Greece.
First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.
Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.
It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.
And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.
As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.
And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.
For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.
The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?
Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.
Not even a passing mainstream thought to look at currency users like France, Spain, Italy, California, and Illinois, that are facing severe market discipline via solvency/interest rate risk any differently from currency issuers like the UK, US, Japan, and Denmark where those types of market forces remain stubbornly inapplicable.
One would think something so obvious and ‘in their face’ year after year, decade after decade, might get their attention…
Hollande faces budget shortfall test
(FT) François Hollande has promised that he would take whatever measures necessary to rein in France’s heavy public debt, which is rising close to 90 per cent of gross domestic product. He knows that to win backing for his growth initiative from German chancellor Angela Merkel depends on assuring her that France will meet its obligations on its own public finances. The European Commission’s forecast projected a budget deficit next year of 4.2 per cent, compared to the target of 3 per cent set by Brussels and to which Mr Hollande is committed. That amounts to a gap of some €24bn. Mr Hollande is unlikely to give further details of his plans until he gets an independent report on the public finances at the end of June (after National Assembly elections).
Dutch austerity consensus unravels
(FT) Freedom party leader Geert Wilders brought down the country’s ruling coalition last month when he pulled out of talks over budget cuts needed to meet strict EU deficit limits, triggering elections scheduled for September 12. Mr Wilders is campaigning fiercely against what he calls the government’s “subservience” to Brussels’ demands for budget cuts. A poll released on Monday suggests voters are turning against the last-minute budget deal reached after the government fell between the ruling liberals and centre-left opposition parties. The April 26 deal pledged the Netherlands to meet an EU deadline to slash its 2013 budget deficit to below 3 per cent of gross domestic product, down from a projected 4.7 per cent.
Mosler Squad Win Much Interrupted BEC Snetterton Race
By James Broomhead
