May 25, 2017

Southern Europe’s Recession Threatens to Spread North

German exporters like Daimler have been bastions of stability on a continent burdened with shaky banks, dysfunctional governments and legions of unemployed youth — not to mention the worst auto industry slump in two decades. But Daimler’s glum forecast for 2013 was the latest evidence that Germany, and other relatively healthy countries like Austria and Finland, risk falling into the recession that has long afflicted their southern neighbors.

The slowdown in Germany was foreshadowed by months of declining industrial output, said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. “The E.U. has made Europe a much more cohesive economy, which is good when things are going up,” he said. “But when things are going down the multiplier is very strong. An outgoing tide lowers all ships.”

The region’s overall economic weakness as well as slowing demand in China and other big markets for German exports of consumer products, cars and sophisticated machine tools, industrial robots and construction equipment are finally taking their toll.

Just one more consecutive quarter of shrinking economic output and Germany would officially enter a recession. The same is true of Belgium, France, Luxembourg, Austria, even Sweden and Finland. The Netherlands has already suffered two quarters of declining gross domestic product.

Further evidence of the spreading European recession came Thursday, first from Madrid, where the Spanish government reported that unemployment had reached a record level: 27.2 percent. Then new economic data from London indicated that Britain had barely avoided slipping back into recession for the third time since 2008.

“The reality is that Europe still faces severe vulnerabilities that — if unaddressed — could degenerate into a stagnation scenario,” David Lipton, first deputy managing director of the International Monetary Fund, said in London on Thursday.

If Germany slips into recession, much would slide down with it. Germany and the other 26 countries of the European Union together represent the world’s second-largest economy and as a bloc it is the single largest United States trading partner. The further delay in Europe’s recovery that a German recession would cause would seriously hamper growth in the United States, Asia and Latin America.

What growth remains in the region is coming mostly from countries in Eastern Europe. Poland is protected by its large domestic market and a healthy banking system. After a severe downturn that began in 2008, growth is rebounding in the Baltic nations of Estonia, Lithuania and Latvia. In that recession, wages fell, real estate prices dropped and banks worked through the painful process of improving their financial condition.

Unemployment there is by no means low, but those countries benefit by being the low-wage economies of Europe. They continue to attract investment of capital. It also helps that those economies, because they do not use the euro as their currency, can adjust their currency more easily to changing economic conditions in the rest of the world. Their economic planners have more policy tools than simply adjusting interest rates.

In Germany, there is little overt sign of crisis. Unemployment is 5.4 percent compared with an average of 10.9 percent in Europe. Nevertheless, polls show businesses are growing pessimistic. “The German market cannot decouple from this environment,” Bodo K. Uebber, the Daimler chief financial officer, told analysts Wednesday.

The problem for the rest of Europe is that any hope for recovery is pinned on a robust German economy. Companies in Spain and Italy have depended on German demand to compensate for a collapse in consumer spending in their own countries.

Article source: http://www.nytimes.com/2013/04/26/business/southern-europes-recession-threatens-to-spread-north.html?partner=rss&emc=rss

Rise in Chinese Currency Draws Attention

HONG KONG — China’s currency has staged a small but unexpected rally in currency markets this week, as the country’s central bank has allowed it to rise 0.72 percent against the dollar, with most of the move coming Wednesday and Thursday.

The State Administration of Foreign Exchange, which is part of the central bank, fixed the initial trading value Thursday morning below 6.4 renminbi to the dollar for the first time in the modern history of the currency.

Economists and traders interpreted the new trading value, 6.3991 to the dollar, as a signal that the central bank might be willing to tolerate a slightly faster rate of appreciation against the dollar, something the United States and other big industrial nations have long pressed China to do.

Daniel Hui, a senior foreign exchange strategist at HSBC, said in a research note that the recent movement in the daily fixing of the renminbi “indicates something has changed — the question is why, and if it will last.”

Allowing the renminbi to strengthen can help China fight inflation, by making imports cheaper. But a stronger renminbi can also hurt exports and employment at China’s many export-oriented factories by making Chinese goods more expensive in foreign markets.

The government’s National Bureau of Statistics announced Tuesday that inflation in consumer prices had reached 6.5 percent in July, the highest level in three years. At the same time, China’s exporters are showing unusual strength despite economic weakness in the West.

China’s General Administration of Customs announced Wednesday that exports were up 20.4 percent in July from a year earlier, more than most economists had expected, producing a trade surplus of $31.5 billion, the country’s largest in more than two years.

But any sustained acceleration in the appreciation of the renminbi could bring greater speculative inflows of money to China. As a result, many economists have been predicting that China may soon allow the currency to trade in a wider band each day around the initial fixing, which is done in Shanghai. Greater volatility makes it harder for speculators to borrow money to put bets on a rising renminbi.

The Administration of Foreign Exchange sets an initial trading value each day and then keeps the currency within a tight range around that value through the day by buying dollars, frequently on a large scale, and selling renminbi. In theory, the currency can vary during the day by as much as 0.5 percent, but the government has tended to keep the daily trading in a much tighter range, often less than 0.1 percent.

China’s foreign exchange reserves swelled by $350 billion in the first half of this year — equal to one-ninth of the country’s economic output in the period — mostly because of this currency market intervention. The Administration of Foreign Exchange also earns interest on its reserves, which totaled $3.2 trillion at the end of June.

Bettina Wassener contributed reporting from Hong Kong, and David Jolly from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=ca626d2d8bdea6feb3df3c20f21dbd18

Bernanke Says Fed Would Consider New Stimulus

Less than a month has passed since Mr. Bernanke said at a press conference that the central bank intended to stand back and take the measure of the nation’s sluggish recovery. Wednesday’s remarks amounted to acknowledgment that so far, the news has been almost uniformly bad.

“I think we have to keep all the options on the table,” Mr. Bernanke said in testimony before the House Financial Services Committee. “We don’t know where the economy is going to go.”

He described options, including a public commitment to maintain existing aid programs for a longer period, new asset purchases to drive down interest rates, or steps to encourage banks to withdraw money kept on reserve at the Fed and use it to make loans.

Republicans have criticized the Fed for its efforts to stimulate growth, fearing that it would lose control over inflation. But Representative Spencer Bachus, the Alabama Republican who is chairman of the committee, said on Wednesday that he agreed with Mr. Bernanke.

“I’m glad that you are going to maintain some flexibility, which may be needed, because we don’t know what tomorrow will bring,” Mr. Bachus said.

Mr. Bernanke made clear that a resumption of the central bank’s economic revival campaign faced a high hurdle. He said that the Fed would look for two conditions, economic weakness beyond current expectations, and a renewed threat of deflation.

The first seems obvious. The second, however, may be the more important factor. The Fed’s decision to resume asset purchases last summer was made in large part because the central bank feared that prices might begin to decline, a phenomenon that can undermine growth because it causes people to delay purchases, fueling a downward cycle.

Since then, the pace of price increases has rebounded toward levels that economists consider healthy. Indeed, earlier this year, concern shifted to the possibility that prices were rising too fast. While Mr. Bernanke and other Fed officials say they believe those increases will abate, there is little risk of deflation — and therefore little chance of additional efforts.

“In other words, it is a possibility next year if inflation drops back, but not in the short term,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note to clients.

Members of the Fed’s policy-making committee discussed the issue during their most recent meeting, at the end of June, but are divided regarding the costs and benefits, according to minutes of that meeting, which the Fed released on Tuesday.

The Fed released its most recent economic forecast after that meeting, predicting that the economy would expand at a moderate pace of 2.7 to 2.9 percent this year.

In the intervening weeks, the government has reported that employment increased by only 18,000 jobs in June, and that exports were weaker than expected. That has led a number of private forecasters to slash estimates of second-quarter growth. Mr. Bernanke did not update the Fed’s own projections, but his remarks reflected greater concern.

“Among the headwinds facing the economy are the slow growth of consumer spending, even after accounting for the effects of food and higher energy prices,” Mr. Bernanke said in his prepared testimony. “The ability and willingness of consumers to spend will be an important determinant of the pace of the recovery in coming quarters.”

Later, Mr. Bernanke described the Fed’s economic projection for the rest of this year — growth of about 3.5 percent — and said, “We’ll see if that’s the case.”

Despite the fragile health of the economy, most questions from the members of the committee focused on the political battle over the federal deficit — a long-term problem that, as Mr. Bernanke told the committee, does not pose an immediate danger to the economy, although he warned that the debt ceiling must be raised immediately.

When Mr. Bernanke was asked about the millions of Americans who cannot find jobs, he took the opportunity to gently chide the committee for its focus. “I think I’d like to make very clear that I think we have two crises in the economy,” he said in response. “One of them is the fiscal set of issues that you’re all paying a lot of attention to right now, but I think the job situation is another crisis.”

The Fed is charged by Congress with minimizing unemployment, and some of its critics say that current unemployment rate of 9.2 percent should be a sufficient reason by itself for the central bank to expand its roster of economic aid programs.

Mr. Bernanke noted that the scale of the Fed’s existing efforts was unprecedented. The central bank has kept short-term interest rates near zero for more than two years. It also owns more than $2 trillion in mortgage-backed securities and government debt, the legacy of its two asset-purchase programs to reduce long-term interest rates.

“We are prepared to take further steps if needed,” he said.

Mr. Bernanke’s account of the Fed’s efforts was challenged by Texas Republican Ron Paul, a longtime critic of the central bank. “Spending all this money hasn’t helped,” Mr. Paul said. The Fed’s aid programs benefitted financial companies, he said, while people “lost their job, and they lost their houses and mortgages, and they’re still in trouble.”

Mr. Paul, who recently announced that he would not run for re-election to focus instead on his presidential campaign, began on a lighter note, suggesting that news of his impending departure might have caused Mr. Bernanke to smile. Amidst the ensuing laughter, Mr. Bernanke was unable to resist.

Article source: http://feeds.nytimes.com/click.phdo?i=574f474a8a80d20e722ad4bc941de219

Economix: Podcast: Signs of Economic Weakness, Groupon’s Rise and Driverless Cars

Drawing an accurate picture of an entity as complex and changeable as the modern economy is no simple matter.

In the United States, it’s fairly clear that the growth rate of the economy slowed in the first quarter of the year. But what is the rate of growth now, and is the economy in danger of slipping further, perhaps even back into a recession, in the months ahead?

There are certainly some danger signs, and in the new Weekend Business podcast, I discuss some of them with David Leonhardt, a Times economics writer and a recent recipient of the Pulitzer Prize for commentary. He says a great deal of evidence suggests that the economy is weakening, yet officials in Washington do not seem to have taken much notice.

Meanwhile, in a separate conversation with Phyllis Korkki, I point out that the bond market does not seem to mind that the United States is bumping up against its debt ceiling. The Treasury Department has taken emergency measures to buy some time, but it estimates that the United States will default on its debt if Congress doesn’t raise the statutory limit by Aug. 2.

Despite this and other problems, the rally in United States Treasuries continues. As I write in the Strategies column in Sunday Business, compared with the rest of the world, the United States appears to many bond investors to be a very stable place to put their money. Whether that will continue, of course, remains to be seen.

The ability of the United States and other societies to innovate rapidly may depend on a rethinking of our attitudes toward technology, according to Tyler Cowen, the George Mason University economist. In a separate conversation in the podcast, drawing on arguments he makes in the Economic View column in Sunday Business, Mr. Cowen cites driverless cars as an example of an innovation for which our legal system is not yet ready.

Countless laws and regulations impede the testing of these vehicles on public roads, making it difficult to assess whether they will be able to speed traffic, cut down on pollution and energy waste, and save lives. Removing barriers to technological development ought to be a public preoccupation, he said, yet there is still relatively little debate about it.

And in another podcast conversation, David Streitfeld tells Phyllis Korkki of the rapid rise of Groupon, the marketing company that distributes discount offers online. Groupon is now estimated to be worth billions of dollars, an assessment that reflects the fascination — some say mania — that many investors have for hot Web companies and social networks. Mr. Streitfeld explains how Groupon works, in an article on the cover of Sunday Business.

You can find specific segments of the podcast at these junctures:

David Leonhardt: 29:40

News: 21:04

David Streitfeld: 18:31

Tyler Cowen: 12:12

Jeff on bonds: 6:05

The Week Ahead: 1:56

As articles discussed in the podcast are published during the weekend, links will be added to this posting.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Article source: http://feeds.nytimes.com/click.phdo?i=7e0dcc834c61d67aa0ec66ff2655ce07

Economix: Core Inflation Rises, but Is Still Low

Friday’s inflation report was mostly as economists expected it to be. Core inflation — which excludes food and energy prices and is a better guide to future inflation — rose slightly less than expected, but only slightly.

How worrisome is core inflation? The Federal Reserve certainly needs to watch it. If it continues to accelerate, that would suggest the Fed may need to raise interest rates sooner than it now plans. But core inflation remains very low historically. Here it is over the last three months, compared with historical trends:

Bureau of Labor Statistics, via Haver Analytics

And here it is over the last year, again compared historically:

Bureau of Labor Statistics, via Haver Analytics

The recent signs of economic weakness remain a much bigger risk than inflation.

Article source: http://feeds.nytimes.com/click.phdo?i=71934cb71b69d7247518c3e34f8a2b3f