IMF says downturn will be long

  • World Economic Outlook projects only 3.6% global growth in 2013, after 3.3% this year;
  • slowdown is driven by advanced economies, notably eurozone;
  • eurozone projected to contract 0.75% in H2 2012, with 0% in H1 2013, and 1% in H2 2013;
  • forecasts are premised on assumption that the eurozone gets the debt crisis under control, and the US is not going to jump into the fiscal cliff;
  • IMF disputes eurozone’s optimistic assumption about the fiscal multiplier: says multiplier is very likely larger than one;
  • the forecast for Spain is a contraction of 1.3% in 2013, with unemployment higher than everywhere, except Greece and Serbia;
  • while the projections are falling, forward-looking sentiment indicators seem to have bottomed out, as the latest registered a slight upturn;
  • Olivier Blanchard said the EU must quickly adopt a banking union and an extend an ESM cover to the Spanish banking system;
  • 7000 Greek police officers have been deployed to protect Angela Merkel, as protests await her;
  • commentators says her visit is a high-risk gamble that could easily backfire, both in Greece and in Germany;
  • Antonis Samaras wants to secure Merke’l continued support for Greece, and a relaxation in conditions;
  • the eurozone approved the next aid tranche to Portugal;
  • the Portuguese government is to present its budget October 15, which includes the non-renewal of 40,000 fixed term contracts;
  • there were more denials of a Spanish rescue;
  • Italy hints it will not approve financial transactions tax until Germany approves banking union;
  • observers says the latest tactics where reminiscent of Mario Monti’s gamble at the June 28/29 European Council;
  • female employment in southern Italy has fallen back to the level of 2004 – reversing the small progress made since then;
  • Hans-Werner Sinn has now published what must be the first Target 2 book;
  • John McHale, meanwhile, says a policy of structural primary surpluses should normally work, even in the case of Greece, but confidence is now so low that the approach is failing.

Today’s news is dominated by the fresh release this morning of the IMF’s rather gloomy global economic outlook, gloomy especially for the eurozone.

Global growth is now forecast to be 3.6% in 2013, after 3.3% in 2012, both figures lower than the last forecast. The slowdown is driven by the advanced economies, whose growth is projected to a mere 1.3% this year, expected to recover to a mere 1.5% in 2013. The eurozone has a recession this year, with a 0.75% fall in growth in the second half of 2012, a projected 0% in the first half of 2013, and +1% in the second half.

The IMF is clearly not expecting a return to business as usual any time soon.

Here is the summary of the main forecasts.

What’s more, the forecasts are premised on both the eurozone getting its crisis under control, and the US avoiding major accidents, especially a solution to the fiscal cliff problem. So this is not some kind of worst case scenario.

The FT offered some interesting and important details in its coverage. The IMF disputes government’s use of the fiscal multiplier. While governments tend to use a multiplier of 0.5, the IMF’s now looks at multipliers in the range of 0.9-1.7. “This finding is consistent with research suggesting that in today’s environment of substantial economic slack, monetary policy constrained by the zero lower bound, and synchronised fiscal adjustment across numerous economies, multipliers may well be above 1.” That means each euro of savings depresses GDP by more than a euro.

El Pais highlights that the IMF’s growth forecast for Spain, of a 1.3% GDP drop, is second worst (to Greece), and the unemployment forecast is third worst to Greece and Serbia. The IMF adds to the consensus that the Spanish government’s forecast of 0.5% contraction too optimistic a basis for next year’s budget. Also, in its 2011 report the IMF was forecasting that 2013 would be the year of recovery for Spain, with a 1.8% growth forecast. The IMF also forecasts Spain’s 2013 deficit at 5.7%, missing the 4.5% deficit target.

The FT article also quoted Olivier Blanchard as saying that the ESM should start to recapitalise banks directly. (This is not going to happen anytime soon. The June 28/29 created exaggerated expectations in the financial markets, which the European Council failed to correct at the time. Germany has walked from the summit with the understanding that legacy assets, in other words our current debt crisis, shall not be covered by the regime. In other words, there was no agreement at the summit on anything of substance.)

… but sentiment indices are slowly beginning to turn around

Euro zone sentiment improved for the second consecutive month in October with investors’ expectations boosted by monetary easing from central banks and by the top German court’s approval for a new permanent bailout fund for the European currency bloc, Reuters reports. A separate index for Germany showed sentiment rising to 6.4 in October from 4.4 last month, underpinned by private investors’ increased optimism in belated response to the European Central Bank’s bond-buying plan announced last month.

Is Merkel’s visit to Athens heading for a PR disaster?

Angela Merkel’s visit to Athens is a gamble. She wants to demonstrate her commitment to Greece staying in the eurozone. But if the protests end in chaos with pictures of German flags burning, it will only reinforce the German public’s view that Greece is a lost cause. The visit is not helping to calm down the anger of the Greek public either.  For many Greeks she is seen as the main author or enforcer of drastic austerity measures. It is unlikely that Merkel will give any concessions, she already made this clear earlier. But a simple statement of commitment to Greece’s reform effort is hardly going to appease the angry crowd. For today’s visit 7000 police officers have been deployed to Athens, the biggest security operation in the Greek capital since 1999 when Bill Clinton visited as US president.

Kathimerini writes that Antonio Samaras aims to secure two things from Merkel — her support for Greece’s efforts and her approval for some “softer” counter-measures to the austerity package being negotiated between the government and the troika that would avert deeper cuts to salaries and pensions.

Eurozone approves €800m aid to Portugal

Eurozone finance ministers signed off on a further tranche of financial aid to Portugal on Monday and said the country was working hard to put in place the budget cuts and structural economic adjustments demanded of it. Reuters cites a statement following a meeting in Luxembourg, the Eurogroup said Lisbon was carrying out its reforms faster than expected and was broadly on track to meet its goals. It has been given an extra year to meet its deficit targets.

The Portuguese government is expected to present its 2013 budget on October 15. Jornal de Negocios reports that part of the plan is not to prolong fixed term contracts for about 40000 civil servants.

More denials on Spanish rescue

Asked by the press on his arrival to the Eurogroup meeting Monday, Wolfgang Schaeuble said Spain is not asking for help and does not need it, reports Reuters. Eurogroup Chairman Jean-Claude Juncker said there had been no discussion of a Spanish rescue beyond the already agreed bank plan.

Italy holds Eurogroup hostage again

The Wall Street Journal quoted Italian Finance minister Vittorio Grilli that Italy is not yet ready to support the financial transaction tax that France and Germany would like to see emerge out of the ongoing Eurogroup finance ministers’ meeting in Luxembourg. According to a story by Cinco Dias Italy is in fact taking the process hostage as Mario Monti did at the June European Council, to attempt to extract concessions from Germany on banking union. The story mentions “partners’ impatience at Berlins blockade”.  In this case, Italy is said to have the backing of Spain (which is said to support the tax on principle), Cyprus and Slovenia. All of these countries could potentially apply for ESM aid, but we have reported before on the view that Germany would prefer to bundle all rescue applications into a single vote in the Bundestag. The Cinco Dias story inteprets that Germany is wary of ECB support relieving pressure on these countries to “reform”. However, Schaeuble is said to be open to relaxing the pressure, unlike Angela Merkel’s “team”. The ESM was finally approved at the meeting, which is widely praised as “a milestone” in the Euro’s history.

Recession reverts progress on female employment in southern Italy

Il Fatto Quotidiano reports that the employment for women in Italy’s southern regions is at its lowest since 2004, according to an analysis published by the national statistics agency Istat. Working women are considered as an exception in the southern Italy, with only 16.9%, or less than two out of 10 women under 30 employed. Total unemployment for Italy remained at 10.7% in August, the same as in July and June, keeping it at the highest level since January 2004, Istat said last week. But according to an ECB paper, Italy unemployment should be at 12.5% if those not looking for work included.

Target 2 – now for the book

Hans-Werner Sinn has brought the Target 2 to its logical (for him) conclusion with a public of a book, whose title is translated as the Target Trap. In this book, Hans-Werner Sinn explains in great detail to a lay audience, why the Target 2 system ultimately allows Germany to be blackmailed into agreeing ever larger transfers. The FAZ article has a summary of the reactions, which include several German economics professors who share Sinn’s these. The Target balance is currently €700bn and expected to rise to €1 trillion relatively quickly. The Target 2 balances are a metric of intra-eurozone current account balances in the present of a broken banking sector.

John McHale’s take on Greece

Writing in the Irish economy blog, John McHale makes the point that austerity is not necessarily self-defeating. He says that all other things being equal, “changes to the structural primary balance do lower the actual primary balance. Moreover, this result holds for any size of deficit multiplier.” The trouble, he concedes, is that all else is not equal. What is holding Greece back is fear of a catastrophe, and the tougher the conditions, the greater the fear. This is what acts as a drag on the economy. McHale concludes that a better route would seem to be less demanding conditionality because this would reduce the pervasive fear about a catastrophe. Thus both sides would gain.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

sideways, mostly.
10-year spreads
Previous day Yesterday This Morning
France 0.671 0.693 0.710
Italy 3.537 3.679 3.666
Spain 4.191 4.259 4.323
Portugal 6.593 6.626 6.963
Greece 16.846 16.810 -1.49
Ireland 3.520 3.558 3.673
Belgium 0.960 0.987 1.007
Bund Yield 1.514 1.476 1.489
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.296 1.2986
Yen 101.290 101.75
Pound 0.806 0.8093
Swiss Franc 1.211 1.2125
ZC Inflation Swaps
  previous last close
1 yr 2.01 2
2 yr 1.8 1.79
5 yr 1.92 1.92
10 yr 2.16 2.16
Euribor-OIS Spread
previous last close
1 Week -7.957 0
1 Month -4.257 -5.757
3 Months 3.571 3.671
1 Year 54.343 54.143
Source: Reuters

Leave a Reply