Euro on the mend

- Overview: Euro on the mend "The euro is recovering against the dollar. The former mirrors the EMU which is a dynamic and well balanced economy. The latter suffers from the US economic slowdown. Nonetheless the EU single currency has still some weak points."
- US: Second quarter flow of funds accounts "Household debt once again declined markedly in the second quarter, whilst non-financial companies’ debt remained stable. The value of assets held by households declined, reflecting a correction in financial markets. Profits of non-financial companies grew further and reached their highest level since 2007. Public sector debt continued to rise at a rapid rate, driven by the federal component."
- Japan: Second quarter flow of funds accounts "In Q2 2010, strong overseas demand and very accommodative policies resulted in a widening of the financial deficits of the rest of the world and the government. The appreciation of the yen has led to an increase in overseas investment. In the coming quarters, the government’s financial balance is expected to improve gradually, while the financial surplus of the private sector might decline modestly."

Inflation is sleeping

- Overview: Inflation is sleeping
- Focus 1: United States: A new context for monetary policy "The deterioration in economic data has changed the monetary policy situation. Now, the debate is over another easing of monetary policy and the most appropriate way of achieving it. During his speech at the Jackson Hold symposium, Ben Bernanke claimed the Federal Open Market Committee (FOMC) was prepared to act if prospects were to deteriorate further, thus indicating an accommodative bias. Expanding the Federal Reserve’s balance sheet via the purchase of Treasuries seems to be the preferred solution to make monetary policy more accommodative. Even though the FOMC seems to be divided, the camp that is more in favour of further intervention, led by Ben Bernanke, seems to be in a position to impose its views. Ongoing job creations in the private sector in August limit incentives to act as of September. In the months ahead, however, the slowdown in growth (estimated at a trend of 1.5% in the second half of this year, i.e. well below FOMC projections) and the fact that private sector job creations are likely to be insufficient to reduce unemployment might convince the FOMC to adopt a new programme of purchasing Treasuries."
- Focus 2: Basel III: Capital requirements not without impact "On 12 September, the Basel Committee unveiled the new capital ratios under the so-called Basel III prudential reforms plus the timetable for their application. The new regulatory thresholds are equivalent to at least a tripling of capital requirements between Basel II and Basel III due to the redefinition of both the numerator and the denominator. However, the recapitalisation efforts accomplished since the financial crisis and a relatively stretched-out timetable for application will allow most major European banks to comply with the new requirements without substantial capital increases. Even so, implied market demands could lead to the deadlines being brought forward. A number of elements of the reforms (additional capital buffer for systemically-important banks, definition of the long-term liquidity ratio) are yet to be defined and the economic impact based on the known elements should therefore be considered only partial."

UK: Worse lies ahead

- "The economic and financial crisis of 2007-2008 triggered a deep recession in the UK. In 2009, GDP contracted by 4.9%, its sharpest post-war decline (see Chart 1). The British economy is emerging only very slowly from this recession, and is lagging about three months behind its main trade partners, the euro zone and the USA (Chart 2). In the fourth quarter of 2009, GDP grew by 0.4% q/q, after six straight quarters of contraction. By way of comparison, the 1973-74 recession in the UK lasted “only” three quarters and those in 1980 and 1990 both lasted five quarters (see Chart 3). Moreover, the main reason for the recovery in activity in the fourth quarter of 2009 lay in the slowdown in the reduction in inventories, with change in inventory accounting for GDP growth of 0.5 of a percentage point in that period. The acceleration of economic activity in the first half of 2010 (+0.7% q/q) came mainly from the strength of the manufacturing sector, the inventory cycle and global demand. However, the scale of the recession in 2008 is holding back recovery. According to the latest forecasts from the Bank of England’s Monetary Policy Committee given in its May 2010 Inflation Report, over the next three years production is likely to remain below the level it would have been but for the recession. On this point, estimates of the loss of production vary according to the model used. Thus the IMF 1 puts the average loss of production relative to the average trend at 10%, whilst the OECD2 expects a smaller fall, at around 2%. Meanwhile the Institute for Fiscal Studies3 puts the figure at around 7.5%, with the Treasury making a more conservative estimate of -5%. It is true that the contraction of the economy tends to be deeper and longer when it is accompanied by a financial crisis. Thus the fall in production is about twice the size after a financial crisis than in a standard recession."

The International competitiveness of the Turkish economy: some stylised facts

- "In the first quarter of 2010, the scale of the recovery in the Turkish economy caused some surprise, with GDP growth of 12% year-on-year, against an average of just 2% for the four countries of Central Europe (Poland, Hungary, Czech Republic and Slovakia) and a further contraction in GDP in Eastern European countries (Bulgaria, Romania). In the second quarter, on the basis of trends in industrial production, the gap between Turkey and Central and Eastern European countries narrowed significantly. However, Turkey, which has emerged swiftly from recession, gives the impression of being an economy that whilst vulnerable to the international environment is more solid than its European neighbours."
- "The budget deficit is likely to be lower than in all Central and Eastern European countries apart from Bulgaria in 2010 and probably again in 2011, with the return to growth and the increase in the exchange rate helping reverse the snowball effect(1). Moreover, although unemployment is still higher than it was before the recession, it has eased since mid-2009 (which is not the case for other Central and Eastern European countries). Lastly, underlying inflation remains under control at below 5%."
- "Thus the Turkish economy displays satisfactory macroeconomic fundamentals. In addition, both the
banking system and businesses withstood the recession well. Lastly, the trade balance remains the economy’s Achilles’ heel, and it could worsen if the 2011 elections led to a relaxation of control over the budget."
- "In fact, in June 2010, the current account deficit was nearly $21bn, cumulatively over the first six months of the year, or nearly three times the Chart in the same period of 2009. As a percentage of GDP and over the full year, it remains modest at around 4% of GDP, compared to 5.6% on average between 2005 and 2008, but not far off the alert threshold, which is generally set at 5% of GDP. Does the Turkish economy suffer from competitiveness problems? The purpose of this article is to identify some of the factors that will help answer this question. In the first section we will examine the usual aggregate indicators: apparent and structural trade balances and price competitiveness indicators. We
complete our analysis by summarising the main trends in the structure of international trade in goods and in the country’s share of export markets (part II) before drawing our conclusions."

Public debt, money supply and inflation

- Overview: Public debt, money supply and inflation

- France: Is the decline in unemployment sustainable? "According to the French statistical office,  INSEE, the jobless rate in metropolitan France fell 0.2 percentage points to 9.3% in Q2 2010. INSEE also recently released detailed employment figures suggesting that the upturn in job creations is not yet strong enough to trigger a sustainable decline in the jobless rate. Whereas surveys suggest that economic growth remained relatively dynamic over the summer, we expect a slowdown towards the end of the year. Consequently, the unemployment rate is thus rather likely to level off in the quarters ahead."

East wind, west wind

- Overview - East wind, west wind
- Germany: Growth sets in "In Q2 2010, Germany reported the strongest growth since reunification, up 2.2% after 0.5% in Q1, buoyed not only by foreign trade but by other factors as well. Household consumption picked up again thanks notably to the decline in the unemployment rate to 7.6% in August. Companies have increase investment spending due to brighter growth prospects and the upturn in production capacity utilisation rates."
- Emerging countries: sustained growth without overheating "In Q2 2010, real GDP growth in emerging countries remained sustained at still around 7% qoq annualised despite the slowdown of exports in may Asian countries, notably China. Inflation has flattened out since February-March in most of countries. In contrast with what occurred in 2007-2008, strains on oil prices and commodity food prices in the first half have had a muted impact on headline inflation. Financing conditions have become more favourable than before the financial crisis for the best rated borrowers. However, the risks of stock market and real estate bubbles are lower than it was at end- 2009."

BNPParibas Eco Week 20100903

Australia: Political uncertainty, economic dynamism

- "The general elections held on Saturday 21 August have resulted in a hung parliament for the first time in seven decades."
- "In the coming weeks, both Labour and the Liberal-National coalition will try to woo the independent members of parliament. If both parties fail to form a stable government, new elections are likely to be held."
- "The economic prospects of the country look good. We expect the economy to grow by over 3% in the coming years, mainly due to the dynamism of the Asian emerging economies."

BNPParibas_Ecoweek_20100827

EcoWeek

- Overview "A slight improvement for the eurozone’s peripheral"
- Germany: Fiscal consolidation measures "The general deficit will continue to widen in 2010 and will likely rise to circa 4.5% of GDP from 3.1% in 2009. The government announced, in early June, measures aimed at cutting the structural deficit by nearly EUR 28 billion between 2010 and 2014, lowering it from 2.2% to 1.0% of GDP during the period. The general deficit could thus drop back to 3% of GDP by 2012 and 2% in 2013. It remains low in comparison with other euro-zone countries and Germany will benefit from the economic upturn in 2010 to a greater extent than many other euro-zone countries."
- United States: Never again? Financial reform is passed "Congress has passed the financial reform act promoted by the Obama administration. The bill is designed to reduce systemic risk, better regulate financial players and products and provide better protection for consumers and investors. Regulators will have to iron out many of the details of the mechanisms approved by Congress. Practical implementation of the reform will make it more or less drastic, and will inevitably take time."
BNPParibas_EcoWeek_20100716

Do not fear a weaker euro, but do not expect too much either - US growth: good news and bad…

- United States "Business surveys are signalling a slowdown in the US economic recovery as the second half of the year gets underway. We believe this is less a sign that a "double-dip” recession is imminent than it is of the inventory cycle's diminishing contribution to growth. The combination of slower growth, lower inflation and turmoil in financial markets in the wake of the sovereign debt crisis, will no doubt encourage the Federal Reserve to maintain its extremely accommodative monetary policy well into next year."
- Japan "Growth slowed significantly in Q2 to 0.5%, as exports and consumption lost some of their dynamism. Monetary policy is expected to remain extremely loose, while fiscal policy could be progressively tightened. The economy is expected to grow by around 3.5% in 2010 and 2% in 2011. Deflation is expected to end in the second half of 2011."
- Eurozone "Driven by the ongoing rebound in the industrial sector, GDP growth probably increased in Q2 after rising only 0.2% q/q in Q1. However the pace of economic activity could slow thereafter as persistently tough labour market conditions and fiscal consolidation measures adopted by several countries put a significant strain on domestic demand. Exports will remain the main growth engine. With low inflationary pressures and a fragile recovery, the ECB will be in no hurry to raise the refi rate before 2012."
- Germany "Exports will continue to support growth over the next few quarters, as Germany benefits from the recovery of investment spending in China and the United States. The euro's depreciation againstthe dollar is also increasing the country's price-competitiveness. The strength of exports shouldtherefore partially compensate for weak domestic demand."
- France "Activity very probably rebounded in the spring despite the ongoing contraction in household spending, particularly car purchases. The spike in inflation is nearly at and end and the stabilisation in the unemployment rate since the beginning of the year suggests that the labour market continues to improve. However, domestic demand remains weak against a backdrop of growing concern as to the scale of the fiscal consolidation scheduled for next year. The Finance Act for 2011, currently being drafted, aims to reduce the fiscal deficit to 6% of GDP next year."
- Italy "The recovery from recession continues to be quite moderate and export-led for Italy. From Q3 2009 to Q1 2010 the GDP has regained just one tenth of the previous fall. The implementation of austerity measures – decided in the wake of the Greek debt crisis- will further stress the priority of sound stability versus quicker economic expansion."
- Spain "After growing slightly in the first half of 2010, GDP is expected to contract again in the second half under the impact of the Spanish government’s new austerity measures. These will probably further depress domestic demand, already dampened by the slow elimination of the main imbalances - high indebtedness among private economic agents, exorbitant size of the
construction sector and bursting of the property market bubble. Spain could therefore slip back
into recession. Against this backdrop, investors will be focusing their attention on public finances
and the situation in the banking sector."
- United Kingdom "The acceleration of GDP growth in the second quarter is likely to be short lived. The new Cameron government's programme to consolidate public finances, the likes of which haven’t been seen since the second world war, is likely to weigh on economic activity as of next year. Sterling’s past depreciation and the likelihood of continued accommodative monetary policy from the Bank of England will not compensate for fiscal austerity’s negative impact on growth. We expect GDP growth to slow from 1.5% this year to around 1% in 2011."
- China "China’s economic growth is showing signs of deceleration driven by domestic investment. It is projected to slow gradually in 2Q-4Q10, down from +12% year-on-year in 1Q10, and reach 10% for the whole of this year. In recent months, the authorities have implemented quantitative and administrative measures aimed at curbing mortgage and total lending growth and limiting investment projects of state enterprises and local governments. This has succeeded in bringing credit growth apparently under control and reducing state investment growth. Moreover, a correction seems to begin in the property market and inflation expectations are moderating. Moreover, on June 19th, China ended its currency peg to the USD and returned to a managed float exchange rate regime. Due to renewed uncertainties over global prospects and slowing domestic demand growth, the authorities are unlikely to let the yuan appreciate much or tighten further their economic policy stance in the very short term."
BNPParibas Economic Market Monitor July2010

Russia: to build confidence

- "Of all the BRIC countries, Russia suffered most in the global recession and it seems to be seeing the slowest recovery. GDP fell by 7.9% in 2009, compared with a fall of 0.2% for Brazil and growth of 6.7% in India and 8.7% in China. In the first quarter of 2010, Russia’s GDP grew by 3% year-on-year, compared with charts of 9% in Brazil, 8.6% in India and 11.9% in China. Comparing Russia with other major oil producers in the Middle East and Africa leads to a similar conclusion."
- "This article seeks to identify the reason of this poor performance, particularly during the recovery phase. Recovery in domestic demand and a return to more ‘normal’ internal liquidity conditions both seem to be lagging relative to the improvement in the oil market and the recovery of the global economy. The crisis of confidence, with a lasting effect on consumers and businesses, appears to be playing a key role in this underperformance."
- "The first two sections of this article describe the trend in the real economy since 2008 and the effects of the financial crisis. The third section looks at the effects and limits of the fiscal stimulus policy, whilst the fourth examines monetary policy."
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France: decision time on public finances

- "The deterioration in French public finances since the end of 2008 will result in a general
government deficit amounting to around 8% of gross domestic product this year. While the impact of the 2009 recession should not be denied, this unprecedented situation also reflects the already weak budgetary position with which France started the crisis."
- "Although sovereign debt markets remain under pressure and the economic recovery is still very fragile, the euro zone countries most affected by debt refinancing problems (Greece, Ireland, Portugal and Spain) have lost no time in implementing severe budgetary consolidation programmes. France is going to have to follow suit next year, albeit in a less brutal fashion, if only because the credibility of the European stabilisation mechanism launched in the spring partly depends on sound finances among the euro zone’s major countries. And that means Germany and France, first and foremost."
- "Continually postponed when the economic situation was more favourable, the consolidation of French public finances will be all the more difficult for the fact that it will have to be achieved, for the most part, in a context of sluggish growth."
BNPParibas_Conjoncture_20100630

EcoWeek

- Overview "Testing for stress"
- Pensions: Doubts about the long-term sustainability of public pension schemes "This week, the European Commission has unveiled a Green Paper on pension reform. It should start a debate on ensuring the long-term sustainability of the pension systems. In the European Union, age-related government spending (as percentage of GDP) is expected to increase by 5.1 percentage points between 2010 and 2060. The countries most at risk are those that have earnings related schemes as part of the public pension systems. In particular citizens in these countries fear that their pension entitlement will be negatively affected by economic and financial events."
- US housing market: a long tunnel "Now that the tax credit scheme has come to an end, the residential real estate market is not showing signs of a solid recovery. In May new homes sales were at an all-time low, with sales of existing homes at a level similar to that in September 2009. Although the strong downward trend in real estate prices that prevailed until the beginning of 2009 is over, no real recovery is under way. However, there are some positive signs. Household real estate purchasing power is quite strong, due to the sharp correction that has already taken place in prices and the very low level of interest rates. And despite weak sales, stocks of new homes have continued to shrink over recent months."
BNPParibas_EcoWeek_20100709

European Financial Stability Facility: Q & A

- "The creation of the European Financial Stability Facility (the EFSF for short) was announced on 9 May. There is still considerable confusion as to how it will function. Below we tackle some of the key issues in ‘Q and A’ format, on the basis of the information available, beginning with the basics."
BNPParibas Daily Economic Spotlight 20100706

EcoWeek

- Overview: "If China falls asleep?"
- ECB: managing liquidity: "Despite the EUR442 bn 12-month LTRO matured on the 1st of July, liquidity in the Eurosystem isstill above needs by more than EUR 130bn. The ECB injected EUR 243bn through a 3-month LTRO and a 6-day FTO. While short-term interest rates, therefore, are expected to remain moderate, given the amount of liquidity present in the system, tensions could appear on maturities longer than 3 months. The Security Market Program (SMP), under which the ECB is buying debt securities in the secondary market, has not yet reached its end and, given persistent tension in financial markets will probably be expanded further over the coming months."
- Eurozone: Fragile recovery and low inflationary pressures: "Buoyed by a strong rebound in industrial output, GDP growth probably accelerated in Q2 2010. Yet growth could ease in the coming quarters as persistently tough labour market conditions and fiscal consolidation measures adopted by several countries put a significant strain on domestic demand. Rising commodity prices and a weaker euro are driving up inflation, but there is no inflationary threat on the horizon. Shaped mainly by domestic forces, core inflation is expected to continue easing in the quarters ahead. With low inflationary pressures and a fragile recovery, the ECB will be in no hurry to raise the refi rate before 2012."
BNPParibas_EcoWeek_20100702

EcoWeek

- Overview: "A G20 to cover up disagreements?"
- Japan-Q1 2010 Flow of Funds Accounts point to surge in private savings: "Strong overseas demand and very accommodative policies resulted in a widening of the financial deficit of both the rest of the world and the government to 3.2% and 6.1% of GDP, respectively, in Q1 2010. By contrast the surplus of the private sector widened to 9.3% of GDP. In the coming quarters, the government’s financial balance is expected to improve gradually due to higher tax receipts, while the financial surplus of the private sector might decline modestly. Recently, Prime Minister Naoto Kan unveiled a fiscal strategy to reduce government debt. The plan aims to take the primary balance in positive territory again by 2020.
- United Kingdom-Austerity: The new Chancellor presented his first budget on Tuesday, 22 June. He predicted that the budget would return to balance in five years. This target is expected to be achieved thanks to major cuts in spending, with tax increases making only a modest contribution to the fiscal consolidation effort. On the revenue side, the totemic measures include raising VAT from 17.5% to 20% and levying a tax on banks; on the spending side, public sector wages are to be frozen and there will be a 25% real-terms cut in current spending by ministries. However, the Chancellor seems to be minimising the effect of the austerity plan on domestic demand, and in particular on household consumption. The success of the British public finance consolidation plan is largely dependent on returning to sustained growth from 2011.
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