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Analysis of the global economy
WASHINGTON (Reuters) — Manufacturing slowed in February and consumer spending was flat for a third straight month in January, new economic data showed on Thursday, suggesting the economy lost more momentum than expected early this year.
……the spending and factory data cut into the optimism generated by a recent decline in the unemployment rate, and suggested rising energy prices were taking a toll.
Marc Chandler: The new fiscal compact had just been signed last week, which includes somewhat more rigorous fiscal rule and enforcement, when Spain’s PM Rajoy revealed that this year’s deficit would come in around 5.8 percent of GDP rather the 4.4 percent target. This of course follows last year’s 8.5 percent overshoot of the 6 percent target.
The problem that for Spain is that the 4.4 percent target was based on forecasts for more than 2 percent growth this year. However, in late February, the EU cuts its forecast to a 1 percent contraction. This still seems optimistic. The IMF forecasts a 1.7 percent contraction, which the Spanish government now accepts.
This will be the third year in 5 that the Spanish economy contracts. Unemployment stands at an EU-high of 23.5 percent in February. The strong export growth seen in recent years, the best growth in the euro area, is stalling. Domestic demand has been hit by rising unemployment and government austerity…..
According to mortgage-data firm CoreLogic, 11.1 million of homeowners had an underwater mortgage in the fourth quarter, representing a large 22.8% of all residential properties with a mortgage. The share has not come down much since the recovery started in 2009. Of those underwater borrowers, 6.7 million have only a primary mortgage, with an average negative equity of $51,000. Of the 4.4 million with first and second liens, the average amount is $84,000. According to CoreLogic, an estimated $715.3 billion in negative equity is floating throughout the housing market.
via Housing Still Drowning in Underwater Mortgages – Real Time Economics – WSJ.
The five biggest banks in the United States are too powerful and should be broken up, Dallas Fed President Richard Fisher said on Wednesday.
The financial crisis has left the five biggest banks even more powerful than before, he said at an event in Mexico City……
“After the crisis, the five largest banks had a higher concentration of deposits than they did before the crisis,” he said. “I am of the belief personally that the power of the five largest banks is too concentrated.”
via Five Largest Banks ‘Should Be Broken Up’: Fed’s Fisher – US Business News – CNBC.
In the 12 months to June 2011, dollar purchases accounted for just 15% of additions to China’s reserves.
That confirms hints from Beijing and Europe over the past year that China has ramped up purchases of European debt
via Heard on the Street: China Shifts Out of Dollars, World Doesn’t End – WSJ.com.
ECRI’s Lakshman Achuthan says the economy is slowing:
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Despite the clear sense of despair and anger in Greece, politicians and members of the public continue to think that the alternative—default and EZ exit—would be even worse.
……Among the increasingly popular fringe left- and right-wing parties, the only party actually advocating a EZ exit is the communist party, or KKE. The KKE will have just over 10% of the vote in the election in April according to most estimates and refuses to cooperate with any other parties in a coalition. For now, the rest of the political establishment advocates doing whatever it takes to remain in the EZ.
….. most Greeks express desperation to stay in the EZ. This is reflected in recent opinion polls: according to a poll conducted in February for Skai TV and Kathimerini, 70% of respondents said a EZ exit and return to the drachma would make Greece’s situation worse and 61% said they viewed the euro favourably.
via EconoMonitor : RGE Analysts » Note from Athens: Feeling on the Ground Has Palpably Changed.
LONDON—The European Central Bank said it handed out €529.5 billion $712.7 billion in cheap, three-year loans to 800 lenders, the central bank’s latest effort to arrest a financial crisis now entering its third year. Wednesday’s loans were on top of the €489 billion of similar loans the ECB dispensed to 523 banks in late December. The ECB’s goal is both to avoid an escalating crisis as banks struggle to pay off maturing debts and to mitigate a sharp pullback in bank lending to customers across ailing European economies……about two-thirds of the loans went to banks in three euro-zone countries — two in the “periphery,” likely Spain and Italy, and one in the “core,” likely France or Germany.
via ECB Allots €529.5 Billion in Long-Term Refinancing Operation – WSJ.com.
New orders for durable goods fell 4.0% in January. And bookings for nondefense capital goods excluding aircraft — a measure of future business spending on equipment — dropped 4.5%. Although the declines were larger than expected, they shouldn’t raise alarm bells. That’s because much of the weakness traces to special factors.
The first is the end of a tax credit that allowed 100% deduction for equipment bought last year. Not surprisingly, businesses front-loaded their purchases early in 2011.
The second reason is a quirk in the very volatile orders series: New bookings tend to fall in the first month of a quarter, then rebound in the second or third months. The pattern is especially acute in the first quarter.
via Equipment Demand Hasn’t Dropped Out, Just Taking a Breather – Real Time Economics – WSJ.
Comment:~ Accelerated tax write-offs stimulate new capital investment by the private sector, as companies bring forward or initiate expenditure in order to take advantage of the tax deduction. But there is bound to be a (partial) offset when the accelerated write-offs are removed.
China’s capital controls have served it well. It was little harmed by the Asian financial crisis of 1997-98 and has been largely insulated from the global tumult of the past four years. That resilience in the face of external trouble has emboldened conservatives in Beijing who support the status quo.
But there are also problems in maintaining such rigid capital controls. Chinese savers have few investment outlets for their money and plough it into the property market instead. Perhaps most important from a political standpoint, plans to transform the renminbi into a rival to the dollar have run into difficulty – foreign companies do not want a currency that cannot be invested in its country of origin.
“Internationalisation of the renminbi is now a clear mandate, so resistance for capital account liberalisation has been diminishing,” said Liu Li-gang, an economist with ANZ. “The wind has shifted.”
China’s top leaders have given a series of signals in recent months that they want capital account reforms to get into gear.
via China outlines plan to loosen capital controls – FT.com.