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The Euro in Intensive Care - Economics Weekly

Euro in Intensive Care
Global Economics Weekly Brief

Governments in the Eurozone again looked over the precipice last week before taking two steps back. In Greece and Italy, the price of multilateral and market support, respectively, was the replacement of elected prime ministers by technocrats.


Lucas Papademos and Mario Monti are regarded as the independent minds and steady hands to deal with the crisis. They are also seen as more likely than elected leaders to push through the austerity packages and economic reforms, which creditors and other governments have demanded. Alongside this, pressure is rising on the European Central Bank (ECB) to act as a lender of last resort, as other central banks do, although that contravenes the Treaty of Maastricht. All of this reflects the considerable costs that would flow from, either a disorderly default or, worse still, a country exiting the euro. The worse is yet to come! The debt crisis has toppled the Italian government and threatens the heart of Europe. Only very bold action will contain this massive issue.

The euro is still alive (just about), but in intensive care. The Eurozone crisis is still dominating the economic headlines and until there is greater certainty about what will happen, it’s difficult to see where the global economy will go next. It’s clear that we are in a very dangerous phase, but things are still not moving quickly enough to quell fears about the collapse of the currency. This void is now causing worries about the stability of the banking system, which has even greater implications for the health of the global economy. EURIBOR spreads above policy rates, an indicator of the risk the market sees in the banking system, have risen very sharply, reflecting increasing concerns about bank exposures to sovereign debt. The banks in Europe have massive exposure, what is the answer? In the first place stop paying adsorbent salaries and bonuses right now, plus, cut back on expensive cars and refurbishments of properties.

The European Commission warned of recession and downgraded its GDP forecasts. The path out of the current crisis depends on growth, as much, if not more than austerity. But the prospects for this recovering rapidly are evaporating. The European Commission downgraded its forecast for 2012 GDP growth from 1.8% to just 0.5% and warned of the risks of anew recession. This doesn’t come as good news and simply highlights the difficult road ahead for Eurozone policymakers. Also, the European Government should lead by example and stop wasting money paying adsorbent salaries and bonuses right now, plus, cut back on expensive cars and travel expenses and refurbishments of properties.

No change to UK monetary policy in November. The Monetary Policy Committee left UK monetary policy unchanged atits November meeting. The Inflation Report this week will shed more light on the Bank's interpretation of the situation. Butthere is no doubt that the monetary authorities will be considering their policy options given the depleting arsenal of ammunition at their disposal, particularly in the face of the ongoing Eurozone crisis.

UK trade deficit worsened again in September. Rebalancing the UK economy towards exports is proving difficult to sustain. The UK's trade balance widened by £1.2bn in September as growth in imports outstripped exports once again. After five months of deterioration the overall trade deficit reached £3.9bn - its highest since December 2010. The value of exports increased a little (0.2%m/m), but volumes fell (1.6%m/m). Meanwhile import volumes and value rose by 1.6%m/mand 3.8%m/m respectively, leaving the balance of trade in goods with a £9.8bn deficit.

UK industrial production disappointed in September.
Overall industrial production dropped for the third consecutive month in September. Manufacturing production actually rose by 2%y/y, but this was outweighed by a 14.7%y/y drop in mining and quarrying. Factory output was encouraging. It rose for the first time in four months between August and September. But this is probably not strong enough to dispel concerns from the Purchasing Managers’ Index which shows the sector struggling amid poor domestic and external demand. More unemployment on its way, big time!

UK mortgage arrears fell in the third quarter while repossessions were stable. Even though UK economic conditions are worsening, mortgage arrears and repossessions have remained low. The number of repossessions per quarter has been virtually unchanged since the start of the year at 9,200. But arrears have improved. The number of mortgages with arrears of 2.5% or more of the total balance fell by 2%q/q and 8%y/y to 161,600, or 1.61% of all loans. But 17% of these have arrears of 10% or more. This proportion has increased steadily for the last eighteen months and highlights the growing vulnerability of households (and the housing market) to further income squeezes.

The Japanese economy returns to growth. The Japanese economy grew by 1.5%q/q in the third quarter. This was welcome relief after three quarters of contraction from supply disruptions due to the earthquake. But there is a sting in the tail too. Weaker global growth will affect Japan’s ability to export and so will the strength of the yen. The appreciation since September has concerned the Japanese Government and caused it to intervene in the market to stem its rise.

GDP
The gross domestic product (GDP) or gross domestic income (GDI) is a basic measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year.



European Commission Slashes Eurozone 2012 GDP Forecast, Warns of Recession

The European Commission (EC) has sharply reduced its growth forecast for the Eurozone in 2012 to 0.5 percent from 1.8 percent -- suggesting that such tepid growth would make it even more difficult for the continent to alleviate its massive debt crisis. Do we believe the new growth forecasts?

"Growth has stalled in Europe and there is a risk of a new recession," EC commissioner Olli Rehn told reporters in Brussels. “The outlook is unfortunately gloomy. The forecast is in fact the last wake-up call. The recovery has now come to a standstill and there’s the risk of a new recession unless determined action is taken.” The crisis in Italy -- which is burdened with almost 2 trillion in debt and very weak economic growth -- appears to have taken center stage in Europe. "The slowdown which began at the end of 2010 now looks more like a prolonged soft patch," the Commission said.

"Risks from the euro area sovereign-debt markets and the banking sector heighten this uncertainty. As such a contraction in GDP in at least one of the next few quarters cannot be ruled out."

Dicing with Debt


Spain

An election next Sunday is expected to sweep socialists from power in favour of conservatives, who are under pressure to impose more austerity. The country is already suffering unemployment of 21.5% the highest in Europe. Social government fails again!

61% debt as % of GDP

0.7% real GDP growth forecast for 2011

Portugal

Social democrat government is imposing austerity measures in exchange for a £67 billion bailout from eurozone. Unemployment has reached 12.5%. Public protests include a demonstration planned by the military. Unemployment rising every day. Social government fails again!

93% debt as % of GDP

-1.9% real GDP growth forecast for 2011.

Ireland

Debate continues over whether Ireland will need a second bailout on top of the £73 billion it received late last year. Tough reforms have brought rising exports, but unemployment at 14% remains very high. Social government fails again!

94.9% debt as % of GDP

1.1% real GDP forecast for 2011

Greece

Latest EU bailout offers £112 billion plus a 50% reduction in debts, if lenders agree. But the caretaker government, in place until elections in February 2012, faces continuing protests with 17% unemployment and rising every day. Social government fails again!

144% debt % of GDP

-5.5% real GDP growth forecast for 2011

France

The government has announced two austerity packages in three months to shore up state coffers, but experts believe it is only a matter of time before the country`s much-covered triple A credit rating is downgraded. Unemployment very high and rising every day. Social government fails again!

82.3% debt as % of GDP

1.6% real GDP growth for 2011

Italy

Gross debt £1,600 billion. What do we believe! Italy will bring down the Euro, it is the zero hour for the Euro!

Growth Continues to Slow Down for 'All Major Economies'

The EC warned that in the absence of solid political changes, Italy’s public debt would likely remain at 120.5 percent of GDP next year (the same level as 2011), before slipping a bit to 118.7 percent in 2013.
The EC also estimated that Italy’s GDP will basically be flat next year, up just 0.1 percent (excluding the promises of reform recently made by Prime Minister Silvio Berlusconi).

Indeed, on Wednesday, yields on Italian 10-Year sovereign bonds climbed above 7 percent – an emergency level and considered unsustainable. On Thursday, that yield edged down to 6.98 percent.

Frederic Neumann, a senior economist with HSBC in Hong Kong, told BBC: "Europe has moved from a manageable crisis in Greece to a much bigger challenge in Italy. We need radical solutions at this point to backstop the markets."

Still, the EC warned that Greece’s debt level could surge to an astounding 198.3 percent of GDP next year up from an estimated 162.8 percent in 2011. Greek GDP is also expected to contract by 2.8 percent next year.

Rehn added: "Uncertainty at the current juncture is high and downside risks to the EU outlook remain particularly acute. Some elements of the downside risks to earlier forecasts – such as financial turmoil and a lower momentum of global growth - have materialized. However, new risks have emerged, and the risk balance for the EU growth outlook remains now tilted to the downside. Further financial turmoil may have more substantial spill-over effects to other market segments and the real economy. The forecast depends crucially on the assumption on current challenges being successfully addressed. Should the response to the challenges lack timeliness, clarity or ambition, a more negative development and a relapse into recession cannot be excluded."

In line with an expected weakening of the European economy, the International Energy Agency also reduced its forecast for oil demand.

"The ever-present threat of a far-reaching financial collapse from the worsening quagmire in Greece and Italy generated a raft of daily headlines that injected a high level of trading volatility," the group said.

"Market attention has shifted to Italy where a weak financial reform package has triggered a dangerous rise in 10-year government bonds [yields]. Oil markets are inextricably linked to the deterioration in the European debt situation given the impact on financial markets, the heightened risk of global recession, and the corresponding potential loss of oil demand."

Su-Lin Ong, a senior economist RBC Capital Markets, told media that a recession is likely in Europe.

"Whatever they [Eurozone officials come up with, it doesn't avoid a European recession," she said. "Increasingly, there is a risk that it spills into the banking system and becomes an issue of credit, and the lifeline of economies freezes up again.”

Britain’s GDP is expected to grow by an anemic 0.7 percent this year, followed by an even weaker 0.6 percent in 2012, the EC noted.

British Prime Minister David Cameron has expressed his alarm over the grim outlook.

"The longer they [Eurozone leaders] delay, the greater the danger," he told reporters.

Click on each header below for more information.


Japan Exits Recession as Quake Scars Heal; Outlook Dim

Japan's economy rebounded from an earthquake-triggered recession in the third quarter by expanding 1.5 percent, a pace that is likely to slow down though as a strong yen and weak global growth darken the outlook.

Russia WTO Accession: Success Could Spark Belated Economic Boom

The Russia World Trade Organization (WTO) accession took a big step forward on Thursday. The WTO Working Party on Russia’s accession approved the package detailing Russia’s entry into the international organization.

Growth Continues to Slow Down for 'All Major Economies'

The world's leading economies are all heading for a period of slower growth, the Organization for Economic Co-operation and Development said on Monday, highlighting signs of weakening economic activities across the board.

Caribbean Economic Outlook: Less U.S. Tourism and Remittance Hurt

The economic outlook of several Latin America and Caribbean economies has been hurt by the protracted U.S. economic recovery.

UK Economic Outlook 2012: Dark Clouds from Home and Abroad

The UK economic outlook for 2012 does not look bright.

Malaysia Economic Growth Forecast: the Rise of the Globalist Influence

Malaysia wants economic growth. It wants to catapult itself from a middle-income country to a high-income country.

India Economic Growth Forecast: Strong Demographics Vs. Weak Infrastructure

Economists Siddhartha Sanyal and Rahul Bajoria of Barclays Capital forecast India’s economic growth will be 7-8 percent per year during the next three to five years.

We have another global crisis that needs urgent attention by skilled and experienced people who can do the job right!

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Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

The Euro in Intensive Care - Economics Weekly

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