Posts tagged ‘IMF’

The Forecast Also Rises

“We are seeing light recovery blowing in a spring wind.”

That was how the IMF’s Christine Lagarde – clearly more of a poet than her predecessor – described the Fund’s latest World Economic Outlook report, out this week. The big news was that its growth forecasts have been revised – gasp! – up.

Of course, the report is laden with the usual caveats, and understandably so. After all, the commentariat tells us solemnly that when it comes to bond yields, 6% is the new 7%, and that borrowing in Spain has thus become unaffordable. (This is moot. But having failed to bankrupt a country with no deficit problem – Italy – perhaps the market will succeed in respect of a country with no debt problem instead.)

Nonetheless, seeing an important economic forecast revised up is encouraging. Unsurprisingly, given the strong data, one of the key revisions was in the case of the US, where projected growth of 2.1% for this year is 0.3% higher than the IMF was forecasting in January. And that brings us on to another type of prediction.

Amid the gloom and woe of the second half last year, Wall Street analysts slashed their expectations for stock market earnings. At one point, reported earnings for the season that has just begun were expected to fall.

The consensus as reports began was less bearish, with average EPS growth across the S&P 500 anticipated to reach about 1%. But with a quarter of the index’s constituent companies having announced their results, the outturn so far is running at 7.2% (6.2% excluding financials – some of the big banks have been doing especially well).

Over 80% of reports have beaten expectations. Forecast earnings growth for the index as a whole this quarter has now risen to over 3%.

Mindless optimism is of no more use to the careful investor than the hysterical pessimism that has dominated of late. But it is surely not imprudent to observe that, even with renewed panic over Europe, proper gloom is becoming harder to sustain.

20/04/2012 at 6:05 pm 1 comment

Two Futures

Inevitably, all the talk is of Europe – again. The top five worldwide stories on the Bloomberg terminal this morning all concerned the latest summit proposals, pushing a dull tale about the Chinese economy into sixth place. To summarise the headlines:

  • The European Stability Mechanism (the eurozone-only bailout fund originally planned to succeed the current EU-wide European Financial Stability Facility in 2013) will begin operations in tandem with the EFSF subject to a €500bn ceiling next summer.
  • EU Central banks will commit to lending €200bn to the IMF in the event that it needs to be lent back to the eurozone, of which €150bn will come from the eurozone itself.
  • Private sector bondholders will not take losses in future bailouts (i.e. after agreement of the Greek restructuring).
  • Last, and most important: eurozone governments will enact a budgetary agreement which will restrict borrowing and be subject to supranational oversight.

There was a key disappointment in that sizeable government bond purchases by the ECB did not explicitly form part of the package, so market reaction has been muted. European equity markets made a positive start; peripheral bond markets yields are a touch higher, but only a touch and remain kilometres away from their recent highs; and currency markets are unchanged.

Short term developments could transform the picture, of course. The commitment to extend the IMF’s firepower might entice reserve-rich countries (read: “China”) to make similar commitments. On the other hand, the ratings companies are seeking ever more creative ways to compete for credibility while worsening the panic. S&P has threatened to cement its US rating debacle with a raft of eurozone sovereign downgrades. In reply, Moody’s zeroed in on the financial sector and downgraded some French banks this morning. Even Fitch played a clever oblique stroke last week by warning over the solvency of the UK (who’d have thought it?)

Ultimately, however, the only short term variable of real significance remains the bond market. It will determine whether EFSF, ESM or IMF firepower is sufficient. It will determine whether or not ratings companies have the power to upset the apple cart. And it will determine whether or not the eurozone states can muddle through to the key element of the summit: the prospective agreement of a new eurozone treaty by March 2012.

In the words of Daniel Hannan MEP, Conservative eurosceptic and blogger for the eurosceptic Telegraph:

A rival treaty organisation, predicated on common economic government, would become de facto the new forum for integration. One by one, political powers would pass from the EU to the eurozone until the EU became a shell, an amplified free trade area, a kind of EFTA-plus. Which, of course, would suit Britain very well indeed.

The sovereign debt crisis would have transformed the political landscape in Europe – arguably for the better, if you are a Continental believer in the euro (i.e. in the majority) or a British opponent of it (ditto). Economically, the eurozone could come to resemble Germany: a defensive, low-inflationary and low-deficit power with an unexciting trend rate of growth and a high level of regulation. The UK would have the freedom to resemble this picture rather less, for better or for worse.

In the context of the current drama this may seem small beer but at least it would be palatable. Consider a second future: closure of the euro periphery’s bond markets, Italian and Spanish distress, and global panic culminating in a wave of sovereign defaults and an economic contraction that would be especially pronounced in debtor (western) countries. In this case the political consequences could be chilling.

This fifth EU emergency summit will have failed to bring the crisis to a sudden halt. The next few months could be just as interesting as the last. But what it has done – assuming that we get there – is give us a glimpse of what the sunlit uplands will look like.

09/12/2011 at 10:31 am

Thrilling Budget Showdown

No, not the one between Mr Osborne and Mr Balls on Wednesday – the one between Portuguese prime minister Jose Socrates and the country’s opposition parties the same day. Portugal’s government saw its latest package of austerity measures defeated, Socrates resigned, the country is heading for an election and (so the consensus believes) a Greco-Irish bailout courtesy of the EU / IMF.

The consensus view finds support in recent bond market movements – specifically in the widening of the spread of Portuguese government debt over that of Germany. (Similar moves preceded the Irish bailout last November.) In fact, ten year Portuguese paper yields 4.3% more than Germany’s at time of writing – this remains well short of Greece and Ireland, at +9.1% and +6.4%, but well clear of Spain and Italy too (+1.9% and +1.5%).

Furthermore, Mr Socrates’ likely successor as Portugese PM, Pedro Passos Coelho, has been a bit cagey about his commitment to fiscal discipline and the avoidance of bailouts.

Before we treat the bailout as a foregone conclusion, however, let’s look at the numbers.

Portugal’s budget deficit on a Maastricht basis peaked in calendar ’09 at 9.3% – bigger than the eurozone average but much lower than equivalent figures for Greece, Ireland and Spain. The deficit for 2010 is estimated at 7%, and on the proposed measures was targeted to reach 4.6% this year. In the Greek and Irish cases, a large part of the problem was that deficits into 2010 were continuing to widen.

Taking a thoroughly non-random example to compare: the UK’s 2009 fiscal deficit on the same basis came in at 11.4%, is estimated at 9.8% for last year and forecast to come in at 7.9% in 2011.

Now Portugal has other problems. Its growth rate for the last ten years averaged a miserly 0.7% p.a., and unemployment, though stable, is rather high for comfort at some 11%. But it is clearly in a stronger fiscal position than the countries which have already been bailed out.

One view of Portugal’s vote this week is that it was about politics rather than economics. That Mr Coelho and his supporters are happy to continue on the path of deficit reduction – albeit by different means – but that they also want to overhaul a sclerotic economy viewed as increasingly corrupt. They must also understand that a bailout would come with austerity measures attached that would be harsher than those they have just voted down.

Ultimately, as one senior European politician put it, “Portugal won’t be left alone by the other Europeans.” We have already noted that such an attitude augurs well for the euro’s long term survival. But evidence that the eurozone’s less responsible borrowers are capable of getting their houses in order independently would bode even better.

25/03/2011 at 1:49 pm

Delivering Austerity

As we have already mentioned in passing, there seems to have been little debate as to the consequences of the possible failure of the austerity measures that several countries are now proposing or trying to adopt to deal with their budget deficits. The impact of budget cuts on growth has received a lot of attention; the importance of those cuts, not so much.

There are two items in the news this week that suggest it should.

First is the latest from Greece, where striking lorry drivers are defying the prime minister’s emergency order, signed yesterday, to return to work. This has led to fuel shortages in Athens, and together with other strikes and rioting, a fall in tourist numbers. (There are echoes here of Britain’s haulage strikes over the price of fuel ten years ago: for a few days they were an inconvenience – then high street chemists started to run out of insulin, among other serious problems.)

The second item concerns the funding of Trident. The chancellor is insisting that the cost of renewing Britain’s nuclear deterrent should be met out of the defence ministry’s budget (of which it would account for about half), rather than being provided for separately. The ministry is not best pleased. It looks as though the British cabinet is split – and not even along party lines at that, as the chancellor and defence minister are both Conservatives.

Britain’s coalition is holding up reasonably well for the moment. But over the next few months we will be enacting austerity measures of our own. British people haven’t had a sovereign crisis and IMF intervention to convince them of these measures, and they are likely to prove unpopular. Should the coalition face Greek-style resistance to its plans, together with siren voices from the Labour opposition denying that they are necessary, might it fall apart? Or seek to preserve itself by watering down its commitment to reduce borrowing?

Both of these are risks that seem remote at present, but events at home and abroad suggest that they are real. A broken (rather than merely Brokeback) coalition, or a failure to stave off a debt crisis … What price sterling under those conditions?

30/07/2010 at 2:19 pm 2 comments

A Mug’s Game

Or “economic forecasting”, as it’s also known.

Last week saw the publication of the latest quarterly survey from the IMF, which has made headlines around the world. (Who would have thought that a brief time ago this organisation was being written off as obsolete?) For the world the major news was that the Fund’s growth forecast for 2010 has been revised up, from 4.2% to 4.6%. For Britain, the news was not so good: our growth for this year has been revised down a little (from 1.3% to 1.2%), and for next year by a fair old chunk (2.1% plays the 2.5% the Bretton Woods relic was predicting three months ago).

This seems odd. Yes, Britain’s coalition government recently added some numbers to its commitment to fiscal tightening. Yes, if one inputs lower government spending numbers into a growth forecasting model, said model could well produce a lower aggregate number. But why single Britain out .. ?

As the IMF say in their own report:

the overarching policy challenge is to restore financial market confidence without choking the recovery.

Much of the world is scrambling to do this. Even in Japan, which hasn’t run a budget surplus since 1992 and which hasn’t been demonstrably harmed by its sumo-sized debt burden, they’ve started to consider the possibility of thinking about paying some borrowing back. Opinion is at best divided on the impact of fiscal “austerity” / realism on aggregate demand in economies whose private sectors have returned to positive growth.

So for the IMF to turn all pessimistic on Britain while acknowledging that their previous global forecast for growth was too tight seems a little churlish while most other countries are either trying to tighten spending – or actually doing it – too.

If you want to be really pessimistic about the future, forget about the impact of government austerity. Consider what might happen should austerity measures fail, through being too politically difficult to implement.

The debate doesn’t seem to have moved on that far yet. Predicting that countries with clear deficit reduction targets might choke off a bit of growth, well – that might be contentious, but .. Trying to predict which countries – out of almost all of them – will fail to deliver on deficit reduction and precipitate worries of another sovereign crisis? That, frankly, is a mission for the real IMF.

11/07/2010 at 10:42 pm 3 comments


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