March 29, 2024

Debt Crisis Threatens to Taint Broader Economy

Most of Europe’s main stock indexes lost ground after the data suggested that the debt and economic problems in countries like Greece and Italy were infecting the rest of the 17-country euro zone. The debt crisis has led a number of governments to sharply cut spending while weathering market turmoil that has damaged business and consumer confidence.

Gross domestic product in the euro zone rose a mere 0.2 percent in the second quarter of 2011 from the first quarter, when growth had advanced by a healthy 0.8 percent, according to Eurostat, the European Union statistics agency. Quarterly economic growth across the 17-nation euro zone was the slowest since mid-2009.

G.D.P. growth in Germany, which has been the tractor hauling the rest of Europe, barely budged, rising only 0.1 percent from the first quarter, when the economy had expanded a robust 1.3 percent, the German Federal Statistical Office said. Quarter-on-quarter growth in the three months through June was well below forecasts of 0.5 percent.

The German figures come after data released on Friday showed that the French economy was at a standstill in the second quarter, leaving Europe’s two largest economies barely growing.

Because government revenue is directly tied to economic growth, the two pillars of the European economy may be less able — and less willing — to prop up the weaker members of the European monetary union. President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany met on Tuesday in Paris to discuss how to deal with the debt crisis.

“It’s the biggest potential risk,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt. “I don’t worry so much about a moderation of growth two years after a recession. What is different this time is the potential escalation of the sovereign debt crisis.”

Economists said the data could simply reflect a pause after two years of brisk expansion. But the numbers could also signal that the sovereign debt crisis is undercutting growth outside the countries like Spain that are most directly affected.

“The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy,” Lloyd Barton, an economist who advised the consulting firm Ernst Young, said in a note Tuesday.

If there was any silver lining in the report, it was the hope that slower growth would lead to less inflation, giving the European Central Bank more leeway to keep interest rates low and intervene in bond markets. Since last week, the bank has been buying Italian and Spanish debt on the open market to hold down yields so that the two countries do not face ruinous borrowing costs.

“Today’s G.D.P. release points to slightly lower second-quarter growth than the E.C.B. was expecting and lends support to the dovish voices on the E.C.B. governing council,” Jens Sondergaard, an analyst at Nomura, said in a note. He was referring to members of the council who are less concerned about inflation than hard-line “hawks.”

What impetus remains in the European economy came from countries like Austria and Finland. Even Italy, with growth of 0.3 percent compared with the first quarter, outperformed Germany in the second quarter. A whiff of hope came from Portugal, one of the countries at the heart of the debt crisis, as the economy stopped shrinking for the first time since October 2010.

European stocks initially fell sharply on Tuesday, but recovered late in the day. The benchmark indexes in Germany and France all closed down less than 1 percent.

The euro fell to $1.4404, from $1.4444.

The German economic rebound since the recession of 2009, driven by exports of cars, machinery and other goods to China and other emerging markets, has helped counterbalance weak economies in southern Europe. But if Germany slows for an extended period, the challenges posed by the European sovereign debt crisis will become that much more daunting.

Despite signs that austerity programs were hurting growth, debt-ridden governments probably have little choice but to continue to cut spending to persuade their creditors that they can meet their debt obligations. Equally important, the European Central Bank has made it clear that it would support Italy and Spain by buying their bonds only if they continued to cut reduce their deficits.

The slowdown in Germany was caused by lower household consumption and construction investment, the German statistics office said. In addition, imports rose faster than exports and led to a buildup of inventories.

Mr. Krämer of Commerzbank said that a warm spring meant that construction projects in Germany had begun earlier than usual, subtracting some activity from the second quarter.

Germany had been enjoying a period of unusually high growth, during which the number of people employed rose 1.4 percent, to 41 million people from a year earlier, the German statistics office said Tuesday. Even with the slowdown in the second quarter, the economy still grew 2.7 percent from a year earlier.

The Federal Statistical Office revised its figures for previous quarters, which meant that, contrary to earlier data, German output remained below its peak in late 2008, just before the severe global recession struck.

The slowdown was foreshadowed by earnings from companies like Siemens and Deutsche Bank that fell short of analysts’ expectations, reinforcing the feeling that the pace of German economic growth was flattening. Surveys of business sentiment have also pointed to slower growth, though they are not yet signaling a recession.

Greece is already in recession, while growth in Spain slowed to 0.2 percent from 0.3 percent in the previous quarter.

Trade data from Eurostat contributed to the gloomy picture. Seasonally adjusted figures showed that both exports and imports in the euro area slowed in June, while the trade deficit widened to 1.6 billion euros ($2.3 billion), from 800 million euros in May.

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June Sales Reports Show Shoppers Opened Wallets

Despite worries that a drop in consumer confidence and high gas prices would damp results, every sector that is tracked by Thomson Reuters — from discount to luxury — on Thursday reported increases at stores open at least a year, a measure known as same-store sales.

At the 25 retailers followed by Thomson Reuters, same-store sales rose 6.5 percent. Analysts had expected an increase of 4.9 percent.

Though the comparable-store increase in April was higher, at 9.0 percent, those numbers were misleading because Easter can fall in March or April, affecting results in those months. Excluding the Easter months, June’s results were the biggest increase since February 2004, when sales rose 7.0 percent, Thomson Reuters said.

That meant that, instead of complaining about gas prices or a too-hot, too-cold or too-wet June, retailers in some sectors reported good news.

“It reflects that despite all the bad news, the consumer still basically feels like they’ve got money in their wallet,” said Al Sambar, a retail strategist at the consulting firm Kurt Salmon.

While discount stores turned in the strongest performance as a sector, with sales rising 9 percent, every sector had positive comparable sales. And the companies with the best results and that beat analyst expectations by the widest margins cater to all sorts of shoppers.

Costco, up 14 percent, goes after value-minded shoppers, but also those who have enough to spend on flat-screen TVs and vats of mayonnaise. Saks, where sales rose 11.9 percent, is all about high-price luxury. Kohl’s and Dillard’s, where sales rose 7.5 percent and 6 percent respectively, go after a midrange shopper with lots of promotions and coupons. Zumiez and Wet Seal, which rose 9.8 percent and 7.3 percent respectively, aim for teenagers with mall shops.

June is not a make-or-break month for retailers, which are generally clearing out inventory in anticipation of the back-to-school season. Retailers often mark down leftovers to make room on the floor during June, and promotions were intense at a few stores. Still, many retailers have said that they will be increasing prices later this summer, and some have been testing slightly higher price tags.

“June is somewhat of a transition month for retail,” said Michael McNamara, vice president for research and analysis for MasterCard Advisors SpendingPulse, which tracks overall sales. “Some categories are ending one season and getting ready for the next, such as apparel. Other categories are depending more on the summer travel season.”

Discretionary spending seemed to be strong. The SpendingPulse numbers suggested that luxury, jewelry and apparel spending all continued at a brisk pace, and the retailers’ results reflected that.

Kohl’s said that sales of watches and handbags were quite good, for instance, while Saks said that women’s shoes, designer apparel and jewelry were among its best performers, and J.C. Penney also said jewelry had sold well.

Because the shopper seemed to be buoyant, the differences among competitors were getting more pronounced as retailers could no longer blame the economy.

Penney had one of the biggest misses, with its comparable sales results up 2 percent versus analyst expectations of 2.3 percent. The company said that was because of a “softer than anticipated selling environment for J. C. Penney’s moderate customer and the resulting higher level of promotional activity during the quarter.” The company noted that online sales rose 2.2 percent for the month.

Competitors like Macy’s and Kohl’s, though, turned in much stronger results. Kohl’s said home, women’s and children’s products all had big increases. At Macy’s, same-store sales rose 6.7 percent, and Internet sales were up 45 percent in June compared with a year ago, the company said. (The results include both Macy’s and Bloomingdale’s.)

In terms of same-store sales increases, Costco had the biggest jump, with 14 percent. Analysts had expected a 12.7 percent increase. Limited, driven by Victoria’s Secret, continued to shine, with a 12 percent increase, versus analysts’ estimates of 3.8 percent. Saks placed third in the comparable-sales horse race, with sales rising 11.9 percent, versus analysts’ estimates of 7 percent.

Analysts said that the back-to-school picture was still hazy. While the strong results in June indicated consumers were happy to shop, many retailers have said they will raise prices around the back-to-school season because of more expensive goods. “The customer, regardless of all this stuff we’re talking about, is price sensitive,” Mr. Sambar said, and retailers did not yet know whether the shoppers would accept higher prices.

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European Central Banks Hold Rates Steady

FRANKFURT — The European Central Bank left its benchmark interest rate unchanged Thursday, but was expected to signal that markets should expect a move next month — despite the euro area’s uneven economic recovery.

The Bank of England, meanwhile, kept its main interest rate at a record low amid concerns that the country’s economy is still too weak to cope with higher borrowing costs. It did not issue a statement.

Jean-Claude Trichet, the E.C.B. president, was to hold his regular news conference at 2:30 p.m. Frankfurt time.

Analysts and economists predicted he would say that the bank is “strongly vigilant” toward inflation. That language would indicate a rate increase in July is probable, though the bank always leaves its options open.

On Thursday, the E.C.B. left its rate at 1.25 percent, after raising it in April from 1 percent, the first increase in two years. The benchmark rate in Britain was left at 0.5 percent and the central bank also kept the size of its asset purchase plan unchanged at £200 billion, or about $328 billion.

With Germany, the euro-zone’s largest economy, growing so quickly that some economists fear overheating, the E.C.B. has been trying to nudge interest rates back to levels that would be normal in an upturn.

But the bank faces a policymaking dilemma because the Greek debt crisis still threatens growth in the 17-member euro area as a whole. Economies in Spain, Ireland and other so-called peripheral countries remain sluggish. Higher rates could make it that much harder for those countries to recover.

The economy also remains fragile in Britain. Consumer confidence took a hit in April as more people claimed unemployment benefits and real wage increases lag inflation, weighing on living standards. Spending cuts and tax increases that are part of the government’s austerity program made households even more reluctant to spend.

“The story of weak growth is still going to continue for a while,” James Knightley, a senior economist at ING Financial Markets in London, said.

Some economists had predicted rates would rise in May this year, but as the economic outlook deteriorated have pushed that back to next February. Mr. Knightley expects an increase as early as November this year.

The British economy stagnated in the six months until the end of March. The Bank of England governor Mervyn King has warned that inflation could accelerate to about 5 percent in the short term before falling again. Higher consumer prices, partly a result of higher commodity prices, have started to dampen household spending as companies remain reluctant to hire and banks continue to hold back on lending.

Paul Fisher, a Bank of England official, argued last week that raising interest rates should be delayed until the economy was stronger. The International Monetary Fund on Monday backed Prime Minister David Cameron’s plan to cut the budget deficit, which had been criticized by the opposition Labor Party as too strict and harming the economic recovery.

Julia Werdigier reported from London.

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You’re the Boss: This Week in Small Business: Putting POM Wonderful on the Map

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What’s affecting me, my clients and other small-business owners this week.

BERNANKE MEETS THE PRESS In his first regular news conference, Ben Bernanke, chairman of the Federal Reserve,  said the central bank is ending round two of its quantitative easing (QE2) and projects slower growth and a modest uptick in inflation. Paul Krugman thinks Bernanke wimped out: “He has been intimidated by the inflationistas and is looking for excuses not to act.” Moneywatch.com’s John Keefe says, “The massive push of monetary policy through QE1 and QE2 did not make it through the system to provide additional credit to businesses.” Forbes’ Neil Weinberg thinks Bernanke is the Manny Ramirez of monetary policy. Some economists think QE2 was a flop.

HAS THE AGE OF THE ORC BEGUN? The International Monetary Fund says the Age of America is near its end. Wal-Mart’s chief executive says consumers are running out of money. A survey of small-business owners finds that Americans feel their economic dominance waning. A new Wells Fargo survey finds small-business confidence slipping.

A BIGGER WORRY: Why does Joe Biden have an economic adviser?

REAL ESTATE IS STILL LOUSY Calculated Risk reports more bad news for the real estate industry. Housing prices edge toward 2009 lows. Renters are facing record affordability problems. But new home sales are up (thanks to Tiger Woods). And the ports of Galveston, Charleston and Savannah are busy. Consumer confidence increases slightly. An Associated Press survey finds that only an oil shock can stop us now. The Wall Street Journal’s Justin Lahart reports that high gas prices can affect our buying choices. And last week’s S.P. downgrade could actually wind up making our bonds more attractive.

CONGRESS RETURNS THIS WEEK Business Pundit lists 10 big lobbies in Washington. A congressman says, “If the E.P.A. continues on its crusade of destruction and over-regulation, manufacturing and energy companies will take their business to friendlier lands overseas, jobs will be destroyed, and the environment will not be any better off.” A Democrat goes after oil speculators. The birther movement takes a hit and now Trump must defend himself against serious allegations.

THIS PARAGRAPH BROUGHT TO YOU BY POM WONDERFUL The Greater Dallas Hispanic Chamber of Commerce and Citibank plan to open a small-business “center of excellence.” San Francisco prepares for its small-business week. A Senate bill that would create a visa to make it easier for immigrants to start businesses in the United States could be a boon to Silicon Valley. A Pennsylvania town changes its name to promote a movie (and a certain pomegranate-based antioxidant). Missouri cuts a tax. And can you guess which state is tops in puppy sales (hint: it’s not Pennsylvania)?

WHERE’S YOUR ELEVATOR PITCH? A winery is offering $20,000 in grants to entrepreneurs. The New York Enterprise Report offers a webinar on entrepreneurship. The Massachusetts Institute of Technology introduces a $100,000 elevator-pitch contest. The world’s last typewriter factory closes. New airlines keep popping up. The royal wedding spurred lots of small-business opportunities. A few smart cookies won the 2011 Harvard Business Plan contest.

MONEY IN THE MACHINES A group coupon-buying site offers a new approach: “Unlike other group coupon sites, we charge only a small, monthly membership fee — and the first six months are free to try out. We don’t even ask for a credit card to sign up.” Noobpreneur.com thinks a vending-machine business can make an excellent start-up: “As a vending-machine business owner, an entrepreneur can expect rather lax hours, low start-up costs, and a fairly easy daily routine.” The O’Donnells launch a new Web site to help entrepreneurs market on the Internet. A start-up takes advantage of a mistake by Google. Chase commits to lending $12 billion to small businesses in 2011.

IT’S LESS RISKY IN RUSSIA? China’s policies may be hurting American businesses. The weak dollar makes American exports more attractive. Entrepreneur Serge Faguet explains why it’s less risky to build a start-up in Russia than in Silicon Valley: “Russia has many markets that are not dominated by anyone, while in other countries similar markets have companies that are already worth billions. There is a lot of buzz, but there are very few companies that are doing the right thing successfully.” A little advice for your Russian start-up: bring this guy along for the ride.

THE HEALTH CARE DEBATE CONTINUES John Taylor says last year’s legislation provides a disincentive to work. American Public Radio reports that small-business owners continue to tussle with the bill. The Supreme Court isn’t ready to hear a case on health care reform. A patient emits a potentially harmful gas.

PROBLEMS IN THE CLOUD Amazon’s apologies for its cloud service outage last week. CRN’s Robert Faletra discloses a big problem with the cloud: there’s no one to call for support. Mark Rushing isn’t impressed: “Despite all the effort and cleverness a systems engineer will devote to maintaining up time, the fact is, we are returning to a single point of failure every time we put something on the cloud, unless we are using the cloud as merely a supplementary or backup mechanism or have those mechanisms ourselves as backup.” Sony’s customers find their confidential data disappears in the … well, you guessed it.

YEAH, BUT DOES IT CALCULATE MILEAGE? Steve Jobs invents the HumancentiPad on South Park. John Brandon describes four geeked out cars for business, including the 2011 Audi A4, which “uses a new 3D mapping technology (Google Earth) and links to a server using a T-Mobile connection in the car. This means you can explore your surroundings and even see a rendering of what the office building across town looks like before you get there.” Netflix has more subscribers than the largest cable operator in the United States. Research in Motion buys scheduling-application maker Tungle. Meryl the Content Maven offers 10 steps for fixing common tech problems.

IS THE WEB DYING? Mobile payments company Square gets a boost from Visa and then its chief operating officer says the Web is dying: “Smartphone and tablet users prefer using native apps whenever possible, and only visit the browser as a last resort.” Memeburn’s Jennifer Kling wonders if Facebook is still right for small businesses: “Evidently, the ‘free’ platform that was Facebook is slowly becoming more and more unfree as we speak.” Karen Klein offers advice for improving your search engine optimization skills: “S.E.O. experts are basically self-taught, so your investment in upgrading your skills is likely to be more time-oriented than financial.”

WINNING/NOT WINNING Winning: a Seattle small-business owner gives a lift to cancer patients. Winning: Raj Thakkar, founder and chief executive of Charter School Business Management, is New York City’s Small Business Person of the Year. Winning: a start-up arrives in January and is sold to Yahoo for $13 million in April. Losing: Bree dumps Charlie.

ACTUALLY, IT’S THE AGE OF WOMAN More working women than men have college degrees. N.P.R. reports that sitting all day is worse for you than you think.

COMING THIS WEEK: Keep an eye out for the release of April’s manufacturing numbers (Monday), construction spending (Monday), auto sales (Tuesday), retail results (Thursday) and  job numbers (Friday).

THIS WEEK’S AWARDS

BEST REASON TO LOVE COMPETITION Josh Liu says not to be afraid of competitors: “Good competitors challenge you and force you to think hard about your business. If you are not any better, or cheaper, why should people buy from you? Your competitors can help you to examine your business, identify your competitive advantage, or further differentiate yourself in the market.”

BEST APPROACH TO SOLVING YOUR PROBLEMS Lifehacker’s Adam Dachis gives us a systematic approach to solving just about any problem: “You not only need to make your plans flexible, but you want to try and plan for surprises as well. You won’t always know what they are, but you can make educated guesses and be a little more prepared to deal with issues when they arise. This will help keep you motivated when solving problems that take more time, as these surprises won’t be so devastating if you’re ready for them.”

BEST EXCUSE TO YELL AT YOUR EMPLOYEES Terry Starbucker recommends 10 ways to freshen up our leadership. Example: “Find a fault, and make a big deal out of it. This is one of my favorites, because there’s always something that you can improve. Always. Just find it, and then, at a staff meeting, make a point to let everyone know you are not pleased. A little table-pounding is helpful too, but not too forcefully. You don’t want your staff to think you are going ‘Network’ on them.”

THIS WEEK’S QUESTION: Do you think yelling is ever justified in the office? I’m not sure I would do that.

Gene Marks owns the Marks Group, a Bala Cynwyd, Pa., consulting firm that helps clients with customer relationship management. You can follow him on Twitter.

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