Germany slashes growth forecasts
DOW JONES NEWSWIRES WITH AMBER PLUM OCTOBER 15, 2014 12:00AM
Germany slashed its growth forecasts for this year and next, citing a weak global economy amid a series of international crises, in a step that follows a slew of poor data for Europe's biggest economy.
The economics ministry cut its forecast for economic growth this year to 1.2 per cent from an earlier forecast of 1.8 per cent, and to 1.3 per cent for 2015 from 2 per cent previously.
"The German economy is in choppy waters concerning foreign trade," Sigmar Gabriel, minister for economics and energy, said in a statement.
The cut for 2014 was broadly expected after the economics minister warned in a radio interview in late September that growth could come in below the earlier 1.8 per cent forecast, given the tensions between Russia and Ukraine. In Tuesday's statement, the ministry said achieving better growth next year will depend on international factors improving, but added that Germany's robust jobs market and domestic demand remain intact.
The government's latest forecast comes after the closely watched ZEW survey on Tuesday showed a sharp drop in economic sentiment and follows several weak German data releases, notably August's steepest on-the-month fall in exports since the 2009 recession.
ZEW President Clemens Fuest said he couldn't rule out an economic contraction in the third quarter.
"We are getting close," Mr Fuest said at a news conference following the release of the survey data, however he noted any recession would likely be short-lived given Germany's strong domestic fundamentals.
A sharp drop in the German ZEW economic-sentiment survey of financial analysts measuring sentiment slumped into negative territory, to minus 3.6, considerably weaker than the average forecast of 0.8 in a poll by the The Wall Street Journal, after September's 6.9 figure.
Sentiment on current conditions in the ZEW survey also tumbled more than 22 points to a reading of 3.2, compared with a reading of 25.4 in September.
Mr Gabriel, leader of the left-leaning Social Democrats, the junior partner in German Chancellor Angela Merkel's coalition, said Germany needs to invest "considerably more in its infrastructure" to generate growth.
Germany's leading economic think tanks last week also slashed their growth forecasts on the domestic economy for 2014 and 2015, citing weak demand at home and abroad, and a frail eurozone. The institutes said that Europe's largest economy will grow by only 1.3 per cent this year and 1.2 per cent next year, compared with April's forecasts of 1.9 per cent and 2.0 per cent, respectively.
Among a number of weak German data releases, August's export data showed the steepest on-the-month fall in exports since the 2009 recession. It was flanked by tepid figures on industrial output and manufacturing orders.
Last week, the International Monetary Fund revised its view of the eurozone, raising the likelihood of recession to nearly 40 per cent from just over 20 per cent in April. Last week, German economic institutes chopped their consensus growth forecast for this year to 1.3 per cent from a 1.9 per cent forecast in the spring.
http://www.cnbc.com/id/102087227?trknav=...:topnews:6
Pro: Downturn increases odds that EU falls apart
Lee Brodie | @LeeBrod
2 Hours Ago
CNBC.com
Global strategist Komal Sri-Kumar echoes what investors like Dennis Gartman have said for awhile: Every day it's growing more likely that the Eurozone will break up.
On CNBC's "Street Signs," Sri-Kumar of Sri-Kumar Global Strategies said he wouldn't be surprised if a few years down the line, we're talking about the new Deutsche Mark.
Komal Sri-Kumar
Danny Moloshok | Reuters
Komal Sri-Kumar
"Clearly there is a problem in Europe," he said. "France and Italy are the EU's second- and third-largest economies and they are refusing to make the necessary structural changes. Both need structural labor reforms."
Unless changes are implemented and implemented soon, Sri-Kumar thinks a breakup is the most likely outcome.
In the past strategic investor Dennis Gartman, author of The Gartman Letter, has cited cultural differences as a powerful force that could drive a split.
Read More German downturn casts shadow over world economy
It should be noted, both pros concede that a breakup is far from inevitable.
However, Sri-Kumar believes the economic downturn, may compel the various member nations to take action. As things stand now, "I think there's 30 percent change of a break up in 3 years," he said.
Lee Brodie
Lee Brodie
Producer
His prediction seems to coincide with gg's 2017 crash theory
via Xperia Z1 with Android 4.4.4 tapatalk.
Price plunge could see Europe saving US$80b in energy imports
Imports for oil, natural gas and thermal coal cost EU around US$500b in 2013
16 Oct5:50 AM
London
THE European Union could save up to US$80 billion in energy imports if oil prices remain low, providing some relief to households and companies in a region that has been laid low for the last five years.
The price of oil has dropped over a quarter since the summer to below US$85 per barrel, a level last seen in June 2010. Energy imports for oil, natural gas and thermal coal cost the European Union around US$500 billion in 2013, with three quarters of that being spent to buy oil, Reuters research shows.
This year's figure could fall by almost US$25 billion to around US$485 billion, and if oil prices average below US$90 a barrel next year, the overall import bill could fall as low as US$425 billion, over US$80 billion less than what was paid by the EU for imports in 2013.
Falling energy prices reflect a darkening world economic outlook but they could temper any new downturn. While headline inflation rates could be pushed lower, households and energy-intensive industries in countries that rely on oil imports will find their costs reduced, raising at the margin their ability to spend and invest.
"Global oil prices have fallen in almost every currency and that should lead to a boost in consumption," Bank of America Merrill Lynch said on Wednesday.
Oil is the world's most important fuel but coal is the most important for electricity generation. The price of coal has almost halved since 2011. Inflation is already noticeable by its absence in most of the world and the eurozone is battling to ward off deflation.
Figures from China on Wednesday showed inflation hit a near five-year low of 1.6 per cent despite economic growth which is expected to hold above 7 per cent this year. The British economy looks robust yet inflation has dropped to 1.2 per cent and US inflation was last reported at 1.7 per cent.
The euro has dropped nearly 10 per cent against the dollar since May. That will partly offset the fall in dollar-denominated oil but will push up inflation.
Analysts initially said that the oil price decline was largely due to greater supply from the North American shale boom, the tapping of new offshore reserves worldwide and greater output of coal.
But they have also begun pointing to a slowdown in demand, citing China's ebbing thirst for oil and what could be its first drop in demand for coal in over a decade as economic growth slows. REUTERS
ECB to offer more liquidity to Greek banks
DOW JONES NEWSWIRES OCTOBER 16, 2014 9:15PM
In an effort to shield Greek banks from the recent turmoil in financial markets, the European Central Bank has decided to boost the liquidity available to Greek lenders who still depend on the ECB for their cash needs.
According to a Greek central bank official, the decision was reached late on Wednesday between the ECB, the Greek central bank and the Greek government following a meeting in Frankfurt attended by Bank of Greece Governor Yannis Stournaras.
Specifically, the ECB has decided it would give Greek banks more cash in exchange for the collateral they now pledge to Europe's central bank. The decision could translate into an additional 12 billion euros ($US15.2 billion) for Greece's four big systemic lenders: National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AS.
Greece's banks have been hit especially hard in the last few days amid turmoil in European equity and bond markets, with the banks sub-index in Athens closing more than 7 per cent down on Wednesday. According to the latest data, Greek banks borrowed some EUR45 billion from the ECB last month.
Investors have grown particularly anxious about Greece in recent weeks as the country has moved to exit its bailout program ahead of schedule and amid growing speculation over snap elections early next year.
EU praises Greece for economic reforms
DOW JONES NEWSWIRES OCTOBER 17, 2014 12:00AM
Greece has made "immense progress" with its reform program and the European Union is ready to assist it further in its return to stability, EU Commission Vice-President Jyrki Katainen said in a statement on Thursday.
"While there is a clear need to maintain the momentum of reform, there is strong evidence that the country has now turned a corner," he said in the statement.
"There should be no doubt that Europe will continue to assist Greece in whatever way is necessary to ensure reasonable financing conditions for the Greek state and to smooth the path back to full and sustainable market access."
Since May 2010, Greece has been bailed out twice with a total of EUR240 billion ($US303.8 billion), from the European Commission, the International Monetary Fund and the European Central Bank.
The government in Athens wants to leave the program, or at least scale it back, 18 months earlier than planned at the end of this year. This, and the prospect that the anti-reform, radical-left Syriza party could come to power shortly after that, in elections scheduled early next year, has roiled markets this week.
"There are a multitude of factors at play... [and] it isn't my role to comment to provide analysis of market movements," Mr. Katainen's spokesman told reporters. "Over the last 18 months or so there has been a stabilization and a reduction in market volatility especially for vulnerable member states."
The commission said it would "cooperate very closely with the Greek authorities to complete the current review, which will require a comprehensive package of ambitious reforms to be agreed," and seek to ensure "a smooth evolution of European support for the country after the end of the current program."
Greek financial markets slumped Wednesday, extending steep losses from a day earlier amid growing fears of renewed political instability and worries that the country may leave its bailout program before it is ready.
Merkel stresses need to stick to stability pacts
DOW JONES NEWSWIRES OCTOBER 16, 2014 10:00PM
German Chancellor Angela Merkel on Thursday urged all European countries to stick to budget rules and continue with economic reforms and austerity as the region's crisis has yet to be overcome.
Ms Merkel's comments come one day after Italy unveiled a 2015 budget that potentially puts Rome along with France on a collision course with the European Commission because of plans to run deficits both bigger and longer than previously pledged.
"One of the most important lessons from the past years' crisis is how we can boost competitiveness, growth and employment in Europe in a targeted and sustainable way," Ms Merkel told the lower house of parliament, adding that progress had been made in some debt-ridden countries.
"But we are still far away from the finishing line. We haven't yet overcome the crisis permanently and sustainably," she warned. "I want to stress this here again: All member states must fully respect the strengthened rules of the Stability and Growth Pact. These rules must be applied to all member states in a credible way."
Ms Merkel's comments highlight Germany's uncompromising line on those countries that try get more leeway in applying the European Union's budget rules, known as the Stability and Growth Pact. The rules require countries to keep budget deficits below 3 per cent of gross domestic product and national debt below 60 per cent of GDP.
On Wednesday, Italy unveiled a budget plan that included cuts to labor taxes and personal income taxes worth €18 billion ($US23 billion) in an attempt to jump-start the country's depressed economy.
France also wants more flexibility and Paris is reluctant to raise taxes to narrow a budget deficit that is expected to come in at 4.3 per cent of GDP next year.
Ms Merkel said she was certain that the present and the next European Commission, which is expected to take office later this year, "will be aware of the important responsibility that it carries for the credibility of the Stability and Growth Pact."
Ms Merkel defended Germany's mantra that focuses on the need for economic reforms and austerity to achieve sustainable growth.
She also reiterated that growth forces should be boosted mainly by private investment, instead of public stimulus, a view that puts her at odds with recommendations from the International Monetary Fund and some other European countries who called on Berlin to boost demand in Germany.
"I believe we, in Germany, can prove that growth and investment can be boosted without leaving the path of consolidation," Ms Merkel said. "Companies, most of all, create jobs and innovation. If we want growth in Europe, we must mainly focus at private capital. Too little gets done in this respect."
Monetary policy working: ECB's Nowotny
DOW JONES NEWSWIRES OCTOBER 17, 2014 9:30PM
The European Central Bank's monetary policy is effective in encouraging growth and there is no need to hit the panic button, a member of the bank's governing council said on Friday.
"We are not in a recession. We have positive growth rates, unfortunately low [growth rates]. It is not as if the ECB needs to open up the emergency toolbox," Ewald Nowotny told journalists on the sidelines of an investor trade show.
Falling energy prices are the most significant element of the eurozone's low inflation rates, Mr Nowotny said in a speech at the trade show, adding that this is actually positive for the economy. He also added that the weakness in the euro is positive for the economy as it drives exports.
Mr Nowotny also responded to criticism of one of the ECB's newest measures to fight off the spectre of deflation -- the purchase of asset-backed securities. The purchase of these packages of loans and securitised debt by the ECB have led some, especially in Germany and Austria, to worry that the central bank will be turned into a so-called bad bank.
Mr Nowotny dismissed these fears as populist and ridiculous, saying that asset-backed securities will make up a small part of the ECB's balance sheet.
However, he added that it is important to consider the quality of the asset-backed securities more than the quantity purchased and that the volumes purchased would be limited.
France, Italy's challenge to German austerity demands causing turmoil
Bankers, economists also pleading with the conservative Germans to let the ECB pump more money into the system
By
Neil Behrmann
London
THE big question facing the shaky eurozone populace is whether the French and Italian rebellion against German austerity demands will succeed.
Such is the uncertainty that the faltering region, which has had a two-year respite from crisis, is once again causing turmoil in markets and threatening global economic recovery. It is hoped that European leaders will be open to ideas from their Asian counterparts at a two-day summit in Milan.
Former US Treasury Secretary and Harvard economist Larry Summers stressed in a recent Washington debate with German Finance Minister Wolfgang Schäuble that a change in policy to avert a Japanese-type deflationary recession is urgently needed. Mr Summers said Europe, and Germany in particular, should invest in infrastructure, which would "pay for itself" by lowering sovereign debt burdens. Mr Schäuble, however, refuted comparisons with Japan, saying Europe was a "specific" case.
"You can't compare (Europe) with Japan, nor with the US, to be very frank," he said, adding that European social spending was double that of the US and Australia and that budgets needed to be cut.
France and Italy, however, are following Mr Summers' advice by pursuing Keynesian tax cuts and spending in their latest budgets at the expense of wide deficits, despite Germany's protests.
At the same time, bankers and economists are pleading with the Germans to allow the European Central Bank (ECB) to pump more money into the system via quantitative easing (QE) to counter deflation. The debate will continue in the months ahead, but in the meantime, the following bare statistics show the extent of the Eurozone's economic crisis:
In the second quarter, both Italy and Germany's Gross Domestic Product (GDP) fell 0.2 percent; Italy's economy has contracted in the previous four quarters. France has achieved zero growth and of the so called "Club Med" nations, Spain and Portugal are barely growing above stagnant levels; Greece remains in a deep downturn. The depressing trend is expected to be similar, if not worse, in the third quarter, as industrial production was down by 1.9 per cent in the 12 months ended August.
Several countries are experiencing deflation, others are on the brink. The Eurozone's inflation rate in September was only 0.3 per cent, with Greece's deflation at 1.1 per cent and Spanish and Italian price declines of 0.3 per cent and 0.1 per cent respectively. France's inflation was 0.4 per cent and Germany, a higher 0.8 per cent, illustrating why the inflation-conscious nation remains conservative. The "good deflation" which lowers the costs of businesses is the decline in oil, other energy and raw material prices. On the other hand the fear is that "bad deflation" will encourage consumers and businesses to delay spending, causing a negative multiplier cycle of lower output, income and employment.
Overall unemployment is down from the crisis levels of 2012 but is still high. The unemployment rate in August was 11.5 per cent in the eurozone or 18.3 million people; in Greece and Spain, it is 27 per cent and 24.4 per cent respectively.
Public and private debt continue to be a drag on the economies of both the eurozone and European Union economies. In the latest available data, Italy's government debt as a proportion of GDP is 133 per cent and private debt, 126 per cent; in France, it is 94 per cent and 141 per cent; Germany, 78 per cent and 107 per cent; Spain, government debt 94 per cent and private, 196 per cent, and Greece 175 per cent and 129 per cent.
The other major concern is the volatility of markets, notably asset-price inflation, followed by asset price deflation that curbs job-creating direct business investment in factories, plant and equipment, said Brendan Brown, the author of Euro Crash and London-based head of economic research at Mitsubishi UFJ Securities International.
He frets that wide-scale fund and corporate speculative purchases of Spanish, Italian and Greek sovereign and junk European private debt in the past two years are beginning to unravel. Yields on Spanish and Italian sovereign debt, for example, tumbled from over 7 per cent in early 2012 to under 2.5 per cent and prices soared.
The market in speculative European debt, however, is relatively illiquid, he warned. Prices have already begun to fall and yields have risen.
This asset-price deflation, including the negative knock-on impact on European equities and property, threatens to aggravate the downturn, he said.
On the positive side, euro weakness is expected to spur exports in the US and Asia. Market strategists are also hoping that the German government will allow ECB head Mario Draghi to boost QE money printing.
Mr Brown cautions, however, that at best, such a move would precipitate a market rally, but the policy in the US over the past five years has had very limited impact on the real economy.
Europe criticism 'unfounded'
Vesna Poljak
1046 words
20 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Global Principal Global Investors' chief economist sees plenty of positive developments.
One of the world's most senior economists disagrees that Europe has spent the years since the sovereign debt crisis sitting on its hands. Far from it.
Since the International Monetary Fund's downgrade of growth forecasts earlier this month and subsequent poor inflation readings supporting deflation fears, the euro zone has become every expert's foremost concern. But Bob Baur, chief economist of Principal Global Investors, said some of the criticisms are unfounded.
An accusation that policymakers have failed to act to make their economies more competitive and close output gaps during the bull market years has found airtime again as bond yields across the region surge.
"I'm a little more optimistic about Europe and I don't know if you can call them green shoots but there are a few things emerging," he said. "Even with all of the problems, retail sales across the euro zone aren't too bad. Auto sales are not strong, but they're a fair amount up off the bottom and they're rising. Banks, I think, are willing to lend. If you look at lending standards – they have eased."
He highlighted the emergence of growth in Spain, Ireland and even Greece and Portugal.
"The problems of course are in France and Italy. But when [French president François] Hollande came out with his budget he also included for the first time some slightly business-friendly parts of his budget and in Italy, [Prime Minister Matteo] Renzi has gotten a bill through both houses, the Senate and the chamber of deputies – a kind of a guideline to how to redo the labour market and give businesses more flexibility. I see some positive things there."Critics perhaps lack understanding
Recalling the discussions around a possible break-up of the economic union a few years ago, Mr Baur says some critics might not have fully understood the pull of the European Union within the electorate and its origins at the end of the Second World War. Bets on a break-up, albeit marginal, increased again last week as the bonds in the periphery sold off.
"What the people who were really concerned about the break-up maybe did not realise is the really long-term view of combining countries into a currency union and a trade union, the purpose of all that," Mr Baur said.
"Philosophically, if you think about it, for 1500 years all there was on the European continent was almost a continual state of war . . . and then people figured out we can't keep doing this."
He pointed to the mobility of labour within the European Union today, which was not possible without unification. "The purpose of all this was a political will to pull this together and keep Europe from the 1500 years of history which everybody knows too well.
"The real pessimists on the euro didn't really understand that history or the political will – at least with the politicians and a good share of the populace – to eliminate that potential and to stay together.
"I just feel that the people worried about break-up maybe haven't quite comprehended the history behind it or the political fortitude."
Mr Baur rattles off a list of policy adjustments, many of them painful, that EU members have accomplished including Ireland's cutting of wages for public servants and similar measures in Spain and Greece.Public believe in union
"And while there's been a lot of talk about the anti-euro parties in Greece and in Italy and other places, none of them are running the country.
"And I think the public in general still believes in the union and the advantages." he said.
"If you're an unemployed worker in Athens and you see in Munich there are all kinds of auto jobs available, you have the ability to go there and get a job."
Economists had more reasons to be bullish on the United States economy as the Federal Reserve contemplated the end to stimulus, possibly this month, and the timing of its first interest rate increase in six years.
Mr Baur is "pretty sanguine" about the impact of tightening on the world's largest economy because "a quarter of a per cent or half a per cent on Fed funds is still really, really cheap compared to anything anybody has seen in their lifetimes".
However, he had pushed out his forecast for the first rate hike to the third quarter of 2015, because of the mounting concerns around global growth. The Fed is also somewhat uncharacteristically concerned about the appreciation of the US dollar and its impact on trade.
The economist, who developed his passion for markets as a farmer in Iowa before he trained as an economist, argues that the rally in US equities is not merely a function of the almost $US4 trillion ($4.57 trillion) in stimulus pumped into the economy under the Fed's quantitative easing program. The reality is American companies are doing better.
"I think there are an awful lot of people that really do believe the only reason stock prices have rallied so much. as they have since the March 2009 low, has been the creation of dollars by the Federal Reserve through quantitative easing. I tend to disagree with that," he said.
"I think there's a great deal of fundamental support for the US economy."
Even though stock prices on the S&P 500 are up almost 200 per cent since the bear market, earnings are up around 150 per cent. And at the same time, the risk climate has changed dramatically.
"If you look at risk, if you remember in the middle of 2012, the doom and gloom crowd was really worried about a fiscal cliff in the United States; they were worried about the euro zone completely falling apart and the euro being no longer; and then a hard landing in China," Mr Baur said.
"By the first part of 2013, the fiscal cliff went away and then we had Draghi's famous 'I'll do whatever it takes' and then China stabilised. So the risk has come down fairly dramatically of those tail risks."
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