Germany the Key to Greece Troubles, Still!
Global Economics Weekly Brief
Troubles rumble on over the Greek crisis (still!). This time the pressure is from the IMF, where non-euro members have made it clear that they are unwilling to increase IMF funding without a more substantial increase in the Eurozone’s own rescue fund. Germany holds the key and will make a decision sometime during March, hopefully March 2012!
It’s likely that there will be some movement, but it will be reluctant given the disincentive this might give to other countries in difficulties. A stout message, in the form of an envoy of German tax collectors being sent to Athens, is indicative of German feelings that the Greeks have been ill-disciplined continuously. Further East, rising political tension, not least over Iran’s nuclear capability, has caused oil prices to move up. The timing couldn’t be much worse and could threaten fragile global growth. Global growth is very weak!
Good news on UK Government borrowing in January. George Osborne, the UK Chancellor, had reason to smile as government revenues exceeded spending by £7.8bn. Extra tax receipts from self assessment payments always give a seasonal boost in January, but the surplus was £2.5bn higher than in the same month last year. If current trends continue, the Government will beat its £124bn borrowing target. Even if it achieves this borrowing would be about 8.4% of GDP. This is much better than the 9.3% of GDP in 2010/11 and the 11.2% in 2009/10, but it would still be dangerously high. More action is needed to bring into line government pensions that the UK tax payers cannot afford.
Chancellor pours cold water on Budget giveaways. The second estimate of UK economic growth confirmed that the UK economy contracted by 0.2% in the fourth quarter of 2011, which means its economy grew by only 0.8% in 2011 as a whole. If government borrowing does come in under target, Mr Osborne will have the option to give away some fiscal stimulus in his March budget. Or he could save up the gains for later. He wants to stick with to Plan A and says that policy won’t be loosened. It’s a hard message and it means we’ll be giving things up, not only for Lent, but beyond Easter too.
Monetary Policy Committee voted unanimously for more quantitative easing. While fiscal stimulus is off the agenda, monetary easing clearly remains on it. The minutes of the last Monetary Policy Committee (MPC) meeting showed that each of the nine members voted for a third round of Quantitative Easing in February. The only disagreement was on how much. Seven voted for a further £50bn of asset purchases, but two, David Miles and Adam Posen, wanted £75bn. The European Central Bank’s liquidity operations and tentative signs of improvement in activity at home and abroad, swayed the MPC’s sentiment towards the smaller package.
Eurozone private sector activity contracted in February. Eurozone activity fell short of expectations in February, dashing hopes of a sustained improvement. The composite Purchasing Managers Index (PMI), which combines services and manufacturing, fell from 50.4 in January to 49.7 in February, indicating a slight contraction. This news, on top of the 0.3% fall in GDP in the final quarter of 2011, increases the risk that the Eurozone will fall into a technical recession. Indeed the European Commission is now forecasting that the economy of the 17 Eurozone countries will contract by 0.3%y/y in 2012 after previously forecasting growth of 0.5%y/y. Unemployment is a very serious issue in Europe as unemployment keeps rising!
Rising oil prices could threaten global growth – again. Rising tensions in the Middle East, not least concerns about Iran's nuclear programme, has caused the oil price to skyrocket. The price of Brent crude rose by almost 14% since the start of February, breaking through $126, to reach a ten-month high. It’s not good news and it’s a familiar story. There are some signs of recovery in global growth today, especially in the US, but this was also the case at the start of 2011. Back then uncertainty about oil supplies, because of the Arab Spring, caused oil prices to rise. And this hampered the pace of the global economic recovery. The risk is that oil could, once again, be grit rather than a lubricant to growth in 2012.
China’s manufacturing activity improved, but is still falling. The manufacturing PMI rose to a four-month high of 49.7 in February according to the flash estimate. But smoothing out the effect of the Chinese New Year suggests China's growth is slowing. New export orders are falling, highlighting the ongoing deterioration in external demand. And even domestic orders are falling. While a lower level of growth in China is expected and indeed welcome, it looks like it will take more monetary and fiscal easing to ensure it remains a gentle slowdown. China have big issues with inflation, social unrest, rising costs and manufacturing quality.
The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!
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Germany key to Greece Troubles!