Monday, February 18, 2013
61.7 %
The Greek statistics agency has released figures showing that youth unemployment at the end of 2012 had reached 61.7%. 61.7% ! How long before the country a) has to request more loans from the ECB or b) the fabric of society starts to fray ?
Monday, February 11, 2013
2013 . Better than expected ?
2013. Better than expected ?
2012 went out with more of a whimper than a bang. The eurozone didn't collapse. Greece didn't descend into anarchy. Spain kept its banking system functioning. The US hasn't ( yet ) rolled over the fiscal cliff into recession. China had a smooth and peaceful transfer of power within the governing Communist party. North Korea didn't invade the South.
Outlook
What about 2013 ? At this stage 2013 looks uneventful. A bridge year that will either transition into an accelerating recovery or lead us towards a protracted period of low growth and political volatility. If the world economy can stay on an even track then by mid- year a stronger than expected recovery should take hold leading to a more broadly based upside in early 2014. Expect extreme volatility in currency markets as Japan, Britain and the EU try to export their way to recovery. However, if the US economy slows because of heavy handed budget sequestration then global growth could stall. In this case 2013 may be looked back on as a year that led to further retrenchment, pain and uncertainty.
Eurozone
After a turbulent year the PIGS ( Portugal, Italy, Greece, Spain ) are heading towards current account surpluses in 2013. Ireland is already there and Spain is catching up. Italy might get there by the end of this year if Signor Berlusconi can avoid reversing recent tax increases on property. Overall, the slow , painful process of wage and employment adjustments is finally bearing fruit. Competitiveness is returning to southern Europe. Unit labour costs have fallen 7% from their peak in Spain and 18% in Eire. The first steps towards a trade agreement between the US and the EU would be a major boost to these early signs of recovery. Our worry is that it will take a long time, half a decade at least, probably more, before these economies return to levels of activity approaching those seen in 2008. No government has preparted its citizens for this extended era of austerity. The political implications of this have yet to be studied and considered by markets.
The US.
It ws no great surprise to anyone, other than Fox News and presumably Mitt Romney, that President Obama was re-elected. America is increasingly non-white and secular. The electorate reflects this change. The loss was a blow to the Republicans. It was also a blow to Democrats looking for a mandate for radical change. They didn't get it. The fiscal cliff may yet reappear. Defense will certainly be trimmed as America becomes less pro-active in foreign policy.
The EU
Barring a Greek exit the most challenging issue facing Brussels in the coming year is how to respond to the possibility of a British in/out referendum. The departure of the UK from the EU would lead to a profound change in the composition and emphasis of the Council of Minsters. Germany, which is already the de facto head of the Eurozone and indeed the EU, would see its power further increased. France would on the surface welcome the departure of the UK. This would make it more likely that a program of standardizing taxes and working conditions would be implemented. The EU could then become more statist and protectionist. However, there are an ever increasing number of French Foreign Ministry advisors who are worried that the departure of the UK would serve to weaken Frances position. Could France alone prevent Germany from exercising its power ? Where Berlin leads most of the other 27 members would automatically follow. There are those in Paris who see this as a nightmare.
Most British Tory Prime Ministers of the 20th century have been able to balance the tribal insticts of their party against the greater national interest. This is not the case with David Cameron who is knowledgeable about tactics but woefully short on grand strategy. His expected call for a referendum will most likely split his party buy also leave a poisoned chalice for the next, Labour, PM .
Uncertainties.
Saudi Arabia - King Abdullah is old. The succession remains clouded.
Syria - A proxy war between Iran on one hand and the Gulf States and Saudi on the other. Western liberals cry out for intervention but what form of government could replace Assad ? Egypt and Tunisia don't auger well for a peaceful regime change . Don't assume the price of oil is on a straight line down because of increasing US output.
China - We all know that territorial disputes with Japan can't escalate. Don't we ?
North Korea - Bankrupt, beset by famine, yet with the spoused aim of building nuclear tipped missiles that can hit the US. Can China and the US work on a peaceful transition of power ?
India and Pakistan - An unresolved territorial dispute that's festered for two thirds of a century. Will the collapse of Pakistans civil society lead to heightened tension between these nuclear armed neighbours ?
South Africa - The Rand seems to be in free fall. What is it telling us about the economy and broader socierty ?
Italy, Greece and Spain - Political venality remains the order of the day. Will their populations continue to accept austerity ?
Conclusion
We remain optimistic that the global economy is slowly on the mend. The one overriding concern is the complacency that has settled over Europes decision makers. Bank deleveraging implies that credit contraction will continue to beset the EU for the rest of this year and beyond. The scope for a political accident in Greece, Portugal, Spain or Italy remains high and undiscounted. European banks mirror this complacency. France. Italy, Spain and Holland ( FISH ) all have much work to do to restore their financial sectors to health.
2012 went out with more of a whimper than a bang. The eurozone didn't collapse. Greece didn't descend into anarchy. Spain kept its banking system functioning. The US hasn't ( yet ) rolled over the fiscal cliff into recession. China had a smooth and peaceful transfer of power within the governing Communist party. North Korea didn't invade the South.
Outlook
What about 2013 ? At this stage 2013 looks uneventful. A bridge year that will either transition into an accelerating recovery or lead us towards a protracted period of low growth and political volatility. If the world economy can stay on an even track then by mid- year a stronger than expected recovery should take hold leading to a more broadly based upside in early 2014. Expect extreme volatility in currency markets as Japan, Britain and the EU try to export their way to recovery. However, if the US economy slows because of heavy handed budget sequestration then global growth could stall. In this case 2013 may be looked back on as a year that led to further retrenchment, pain and uncertainty.
Eurozone
After a turbulent year the PIGS ( Portugal, Italy, Greece, Spain ) are heading towards current account surpluses in 2013. Ireland is already there and Spain is catching up. Italy might get there by the end of this year if Signor Berlusconi can avoid reversing recent tax increases on property. Overall, the slow , painful process of wage and employment adjustments is finally bearing fruit. Competitiveness is returning to southern Europe. Unit labour costs have fallen 7% from their peak in Spain and 18% in Eire. The first steps towards a trade agreement between the US and the EU would be a major boost to these early signs of recovery. Our worry is that it will take a long time, half a decade at least, probably more, before these economies return to levels of activity approaching those seen in 2008. No government has preparted its citizens for this extended era of austerity. The political implications of this have yet to be studied and considered by markets.
The US.
It ws no great surprise to anyone, other than Fox News and presumably Mitt Romney, that President Obama was re-elected. America is increasingly non-white and secular. The electorate reflects this change. The loss was a blow to the Republicans. It was also a blow to Democrats looking for a mandate for radical change. They didn't get it. The fiscal cliff may yet reappear. Defense will certainly be trimmed as America becomes less pro-active in foreign policy.
The EU
Barring a Greek exit the most challenging issue facing Brussels in the coming year is how to respond to the possibility of a British in/out referendum. The departure of the UK from the EU would lead to a profound change in the composition and emphasis of the Council of Minsters. Germany, which is already the de facto head of the Eurozone and indeed the EU, would see its power further increased. France would on the surface welcome the departure of the UK. This would make it more likely that a program of standardizing taxes and working conditions would be implemented. The EU could then become more statist and protectionist. However, there are an ever increasing number of French Foreign Ministry advisors who are worried that the departure of the UK would serve to weaken Frances position. Could France alone prevent Germany from exercising its power ? Where Berlin leads most of the other 27 members would automatically follow. There are those in Paris who see this as a nightmare.
Most British Tory Prime Ministers of the 20th century have been able to balance the tribal insticts of their party against the greater national interest. This is not the case with David Cameron who is knowledgeable about tactics but woefully short on grand strategy. His expected call for a referendum will most likely split his party buy also leave a poisoned chalice for the next, Labour, PM .
Uncertainties.
Saudi Arabia - King Abdullah is old. The succession remains clouded.
Syria - A proxy war between Iran on one hand and the Gulf States and Saudi on the other. Western liberals cry out for intervention but what form of government could replace Assad ? Egypt and Tunisia don't auger well for a peaceful regime change . Don't assume the price of oil is on a straight line down because of increasing US output.
China - We all know that territorial disputes with Japan can't escalate. Don't we ?
North Korea - Bankrupt, beset by famine, yet with the spoused aim of building nuclear tipped missiles that can hit the US. Can China and the US work on a peaceful transition of power ?
India and Pakistan - An unresolved territorial dispute that's festered for two thirds of a century. Will the collapse of Pakistans civil society lead to heightened tension between these nuclear armed neighbours ?
South Africa - The Rand seems to be in free fall. What is it telling us about the economy and broader socierty ?
Italy, Greece and Spain - Political venality remains the order of the day. Will their populations continue to accept austerity ?
Conclusion
We remain optimistic that the global economy is slowly on the mend. The one overriding concern is the complacency that has settled over Europes decision makers. Bank deleveraging implies that credit contraction will continue to beset the EU for the rest of this year and beyond. The scope for a political accident in Greece, Portugal, Spain or Italy remains high and undiscounted. European banks mirror this complacency. France. Italy, Spain and Holland ( FISH ) all have much work to do to restore their financial sectors to health.
Sunday, February 10, 2013
What then ?
Just back from Spain. Signs of the downturn obvious. Restaurants empty, For Sale signs sprouting. Tax collection falling because official tax rates ( ie 85% inheritance tax ) are set at ridiculous levels. Most worrying thing is that most Spaniards I talk to, for the large part highly educated, assume that everything is going to return to the way it was in 1 or 2 years time.
What happens if structural youth unemployment of more than 50% continues past mid-decade. What is likely to make it fall ? The € crisis may not be over. It may simply be playing itself out at a less frentic pace.
What happens if structural youth unemployment of more than 50% continues past mid-decade. What is likely to make it fall ? The € crisis may not be over. It may simply be playing itself out at a less frentic pace.
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