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Forecasts for Growth Drop, Some Sharply

June 25, 2011 by Leave a Comment

Two months ago, Goldman Sachs projected that the economy would grow at a 4 percent annual rate in the quarter ending in June. The company now expects the government to report no more than 2 percent growth when data for the second quarter is released in a few weeks. Macroeconomic Advisers, a research firm, projected 3.5 percent growth back in April and is now down to just 2.1 percent for this quarter.

Both these firms, well respected in their analysis, have cut their forecasts for the second half of the year as well. Then this week, the Federal Reserve downgraded its projections for the full year, to under 3 percent growth. It started the year with guidance as high as 3.9 percent.

Two years into the official recovery, the economy is still behaving like a plane taxiing indefinitely on the runway. Few economists are predicting an out-and-out return to recession, but the risk has increased, with the health of the American economy depending in part on what is really “transitory.”

During the first press conference in the central bank’s history two months ago, Federal Reserve Chairman Ben S. Bernanke used the word to describe factors — including supply chain disruptions after the earthquake and tsunami in Japan and rising oil prices — that were restraining economic growth in the first half of the year. Earlier this week, Mr. Bernanke confessed that “some of these headwinds may be stronger and more persistent than we thought,” adding, “we don’t have a precise read on why this slower pace of growth is persisting.”

Economists say the unexpected shocks from Japan and the Middle East in the first half of the year go only partway toward explaining the deceleration. Many worries remain: housing prices have continued to fall, hiring is weak, wages are flat, growth in emerging economies like China and India is slowing and the debt crisis in Europe could have ripple effects.

What’s more, government stimulants like the payroll tax cut and the extension of unemployment benefits are scheduled to expire at the end of this year. With the underlying economy undeniably tepid, economists are concerned that further shocks to the system could knock the country off its slow upward trajectory.

“The likelihood of a negative surprise is bigger than the likelihood of a positive surprise,” said Jerry A. Webman, chief economist at OppenheimerFunds.

There was a glimmer of hope on Friday when the government reported that orders for appliances and other equipment from manufacturers were higher than expected in May. And the Commerce Department edged up its estimate of growth in the first three months of the year to 1.9 percent, from 1.8 percent.

The slow place of the economy’s expansion is not entirely surprising, though it is clearly painful for those who are out of work and whose homes are worth far less than a few years ago. Many economists, most prominently Kenneth S. Rogoff and Carmen M. Reinhart, have emphasized that recovering from a financial crisis takes much longer than from a normal cyclical recession.

Jan Hatzius, the chief United States economist at Goldman Sachs, said that in fact, households appeared to be paying down debt largely as expected. “Most of the things that looked like they were improving six months ago still look like they are improving,” he said.

Analysts generally expect the economy to pick up in the second half as supplies from Japan come back and car production resumes at some temporarily idled plants. “Parts producers are getting back online a lot quicker than anybody had thought,” said Ben Herzon, a senior economist at Macroeconomic Advisers. The firm is forecasting 3.5 percent overall economic growth in the second half of the year, though that is down from its projection at the beginning of the year of 4 to 4.5 percent.

Consumer spending has been lukewarm as people have cut back elsewhere to cover for higher prices at the pump. Although gas prices have eased in the wake of the International Energy Agency’s announcement that it would release some emergency stockpiles of oil, there is no guarantee prices won’t climb again as turmoil in the Middle East continues. In the meantime, customers remain wary.

“A lot of the factors that will give us a boost in the second half are largely temporary and will run their course at some point,” said David Greenlaw, chief United States economist at Morgan Stanley.

Article source: http://www.nytimes.com/2011/06/25/business/25econ.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

In Beijing, Lagarde Backs Bigger Say for China at I.M.F.

June 9, 2011 by Leave a Comment

BEIJING — Finance Minister Christine Lagarde of France, the top candidate to run the International Monetary Fund, said Thursday that she backed a bigger say for China at the organization while making it clear that the euro zone crisis would be a priority if she wins the job.

Ms. Lagarde made the comments in Beijing, the latest leg of her world tour to seek support for her I.M.F. bid. She is considered the favorite to replace the former I.M.F. chief, Dominique Strauss-Kahn, after he was arrested last month on attempted rape charges.

Ms. Lagarde said her talks with Chinese central bank and Finance Ministry officials about her candidacy were positive, but she stopped short of claiming Beijing’s outright support.

“I’m very positive about my trip to China, but the decision does not belong to me. It belongs to the Chinese authorities,” she said at a news conference at the French Embassy in Beijing.

“I’m confident; I’m very positive about the meetings I’ve had so far. Some governments and some countries have decided to go public early. My sense is that it’s too early to count your chickens, if I may say.”

China has not said whether it supports Ms. Lagarde, but it has joined other big emerging economies in demanding that the I.M.F. and other international financial institutions give greater heed to their demands.

And in Beijing, Ms. Lagarde indicated that she was listening to those demands. She said she backed the decision last fall to increase China’s voting rights at the I.M.F. from 3.65 percent to 6.4 percent, and also said the organization would help Beijing internationalize the renminbi.

An article published on Thursday in a Chinese central bank newspaper said Ms. Lagarde would be good for the I.M.F.’s top job because she is experienced in handling the euro sovereign debt crisis and could offer a fresh image to the agency as a woman.

The front-page story, citing a government researcher, does not necessarily reflect Beijing’s official position. But the prominent position given to the article suggests at least indirect support from the central bank.

After her talks with the Chinese vice premier, Wang Qishan, and the central bank chief, Zhou Xiaochuan, on Wednesday, Ms. Lagarde said that reforms at the I.M.F. should continue to benefit emerging economies.

“The second thing that we also agreed on was that the trends of reforms that has taken place must be continued and must be developed, both in relation to the governance of the fund, in relation to the appropriate representativeness of its members, particularly with those countries that are underrepresented, as is the case with China,” she said.

But Ms. Lagarde also made clear that her priority if she becomes managing director of the I.M.F. will be the euro zone crisis that continues to threaten Greece, Portugal and other European economies struggling to cut gaping fiscal deficits.

“Clearly, it is the immediate focus of the fund’s operations at the moment,” she said.

She urged Greece to emulate Portugal in seeking to form a broad political alliance to push through painful reforms.

Portugal’s prime minister in waiting, Pedro Passos Coelho, has begun formal coalition talks with the rightist CDS-PP party to seek a pact to form a majority government.

“One great strength of Portugal which I hope Greece will be able to emulate is that Portuguese political parties and authorities joined forces and formed an alliance. That was critical,” said Ms. Lagarde.

Ms. Lagarde will travel to Lisbon on Friday to attend the African Development Bank’s annual meeting.

The main obstacle in Ms. Lagarde’s bid is the possibility of a French inquiry into her role in a 2008 arbitration payout.

She also faces opposition from other emerging markets. Agustín Carstens, Mexico’s central bank chief, who is also competing for the I.M.F. post, is due to visit China next week.

Colombia became the first major Latin American nation to publicly endorse Mr. Carstens on Wednesday, calling on others to do the same.

The Colombian Foreign Ministry said in a statement a dozen other Latin American nations now backed Mr. Carstens. The Latin American group includes Venezuela, Bolivia, Peru, Panama, Uruguay, Mexico, Paraguay, Belize, Honduras, Guatemala, the Dominican Republic and Nicaragua, the statement said.

Costa Rica also endorsed Mr. Carstens on Wednesday.

“Colombia expresses support for the aspiration of Agustín Carstens and invites other governments of the Americas to join in backing this bid,” Foreign Minister Maria Angela Holguin said in the statement.

Finance Minister Pranab Mukherjee of India said on Tuesday that the country has not committed to support Ms. Lagarde’s bid despite her visit to the country, a sign that India may still be hopeful of nominating an alternative candidate.

Article source: http://www.nytimes.com/2011/06/10/business/global/10iht-fund10.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Fair Game: U.S. Has Binged. Soon It’ll Be Time to Pay the Tab.

May 29, 2011 by Leave a Comment

SAY this about all the bickering over the federal debt ceiling: at least people are talking openly about our nation’s growing debt load. This $14.3 trillion issue is front and center — exactly where it should be.

Into the fray comes a thoughtful new paper by Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics, which studies economic policy. Written with Marc Hinterschweiger, a research analyst there, the report states plainly: “That government debt will grow to dangerous and unsustainable levels in most advanced and many emerging economies over the next 25 years — if there are no changes in current tax rates or government benefit programs in retirement and health care — is virtually beyond dispute.”

The report then lays out a range of outcomes, some merely unsettling, others downright scary, that face us as a nation if we continue down the big-spending path we are on.

The report, “The Global Outlook for Government Debt Over the Next 25 Years: Implications for the Economy and Public Policy,” arrives when our debt as a percentage of gross domestic product is around 65 percent and rising fast. Much of the recent increase, up from 43 percent in 2007, is the result of the panic of 2008 and the ensuing recession, when the government stepped in to mitigate the damage.

The authors do not suggest that policy makers should hurry to raise taxes or cut spending right now. They acknowledge that the economic recovery is still fragile and propose that lawmakers wait to implement budget cuts currently under discussion until 2013 to 2015. Additional cuts would ideally go into effect in 2016.

What needs to be done now is to design a long-term plan to reduce fiscal deficits in the future. The authors contend that such a program would “reassure the markets, keep interest rates low and instill greater confidence and certainty about future tax and spending policies, thereby encouraging businesses to commit their resources to job-creating investment projects.”

An intriguing aspect of their analysis is how it views the rising tide of debt around the world from a historical perspective. For so many countries to be groaning under so much debt at the same time is unusual, the authors say. More typical are the somewhat contained debt crises, like in Latin America in the 1980s or in Russia in 1998. While both of those episodes reverberated beyond the countries from which they sprang, today’s debt problems are far more widespread. And, as a result, more worrisome. 

The simultaneous buildup of very large public deficits and debt positions in virtually all of the advanced high-income countries “is a new element at work in the global economy,” the report says.

“It is unique in peacetime for so many countries to have so much debt,” Mr. Gagnon said in an interview last week. But he added that global capital markets, and the access to lenders that these markets provide, probably mute the ill effects of this simultaneous borrowing binge. 

The paper assesses the potential consequences of a more pervasive debt crisis, one involving a number of countries in the same perilous position at the same time. The authors also consider the impact that future interest rate increases may have on these debt loads and provide separate estimates of how debt levels would grow under differing circumstances. They incorporate into these estimates expected growth rates in various regions as well as rising health care costs and retirement obligations. The analysis uses figures from the International Monetary Fund and the Organization for Economic Co-operation and Development.

Some of the results are surprising. For example, the study rebuts the commonly held notion that the outlook for Europe is worse than for the United States, as far as debt levels and obligations are concerned. This is because some euro zone countries have already begun to deal with their fiscal problems, Mr. Gagnon explained. “They’ve made some changes to long-run pensions, such as raising retirement ages,” he said, “and they’ve already made spending cuts and tax increases.”

Another surprise in the study: emerging markets are in much better shape, Mr. Gagnon said, than he had anticipated when he began the project.

Now, to the numbers, all of which are based on the status quo in tax rates and government obligations relating to health care and retirement.

You sitting down?

Article source: http://feeds.nytimes.com/click.phdo?i=67bbb00bf7a49fd936886d60fa065fe2

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High Unemployment ‘Most Pressing Legacy’ of Financial Crisis, Report Says

May 25, 2011 by Leave a Comment

PARIS — The world economy is moving into a self-sustaining recovery, but high unemployment remains a threat three years after the financial crisis, a prominent economic research organization said Wednesday.

“The global recovery is getting stronger, more broad-based, more self-sustained,” Pier Carlo Padoan, the chief economist at the Organization for Economic Cooperation and Development, said.

“The private sector is driving growth,” he added, “especially through a pick-up in trade,” while at the same time, support through government spending programs “is being withdrawn slowly.”

The O.E.C.D. represents 34 leading developed economies, including the United States and the other members of the Group of 7 industrialized nations. The Paris-based organization is marking its 50th anniversary this week, with the celebration timed to overlap with a Group of 8 summit meeting taking place in Deauville, France, on Thursday and Friday.

In its Economic Outlook report, the O.E.C.D. said global gross domestic product will likely grow by a healthy 4.2 percent this year and by 4.6 percent in 2012. But that figure reflects strong growth in emerging economies; O.E.C.D. members’ G.D.P. is expected to rise by a more modest 2.3 percent in 2011 and by 2.8 percent next year.

The organization forecast U.S. growth of 2.6 percent this year and 3.1 percent in 2012. It said it expected the euro-zone economy to expand by 2 percent in both 2011 and 2012. Japan’s economy, hurt by the March 11 earthquake and tsunami, will likely shrink by 0.9 percent this year before rebounding to 2.2 percent growth in 2012, the O.E.C.D. said.

Still, it noted, “high unemployment remains among the most pressing legacies of the crisis,” and that “should prompt countries to improve labor market policies that boost job creation and prevent today’s high joblessness from becoming permanent.”

Unemployment, which affects more than 50 million people in the O.E.C.D. area, is an important political consideration, as evidenced by recent demonstrations in Spain, which, with more than 20 percent of the population out of work, has the highest jobless rate in the European Union.

The O.E.C.D. called on governments to provide appropriate employment services and training programs and to encourage temporary work, while considering employment tax cuts and workshare arrangements.

Angel Gurria, the O.E.C.D.’s secretary general, called in a statement for governments to work toward fiscal consolidation, noting that government debt is expected to rise to an average of 96 percent of G.D.P. in the euro zone this year, and to just over 100 percent of G.D.P. in the overall O.E.C.D.

Mr. Padoan, the chief economist, warned that there remained a number of downside risks for the global economy, including high energy and commodity prices, a slowdown in China caused by the government’s efforts to fight high inflation, and the crisis among the euro states.

“There is a concern that these downside risks could accumulate and possibly prompt some stagflationary risks in some advanced economies,” he added.

Article source: http://feeds.nytimes.com/click.phdo?i=263b53f2f4b0e822bbcbb83f63b3a2f4

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I.M.F. Warns Europe’s Debt Crisis Could Still Spread

May 12, 2011 by Leave a Comment

FRANKFURT — Despite bailouts for Greece, Ireland and Portugal, Europe’s debt crisis could still spread to core euro zone countries and the emerging economies of eastern Europe, the International Monetary Fund warned on Thursday.

The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered the sovereign debt crisis in 2009 still had plenty of untapped options for raising extra cash itself though privatizations.

“Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” the global lender’s latest economic report on Europe said.

Finance ministers of the 17-nation single currency area are set to approve a €78 billion, or $111 billion, rescue plan for Portugal next Monday after Finland’s prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package.

But markets are increasingly concerned that Greece may never be able to pay back its €327 billion debt pile and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond.

Asked whether there could be new aid package to help Greece work through its fiscal recovery program, the I.M.F.’s European department director, Antonio Borges, said the fund was open to the possibility.

“The Greeks have to take the initiative, and so far they have not approached us. The I.M.F. stands ready” to provide additional support “as a matter of policy,” he told reporters.

However, Athens also had the potential to raise funds by selling state assets, with the €50 billion mentioned as a possible estimate of revenues from a privatization program “probably less than 20 percent of all the assets the Greeks could privatize.”

The semi-annual I.M.F. report said peripheral members of the euro zone needed to make “unrelenting” efforts to overcome the debt crisis and prevent it spreading further.

It also urged the European Central Bank to tread carefully on further rises in interest rates after last month’s first increase since 2007, saying euro zone monetary policy could “afford to remain relatively accommodative.”

Mr. Borges said the program of austerity measures and structural reforms agreed a year ago was “probably the best thing that can happen” to Greece, though there was always the question of whether it was too ambitious.

Greece has implemented harsh cuts in public spending, public sector wages and pensions but has struggled to raise revenue due to a deep recession and chronic tax evasion. The government faces growing resistance to austerity, highlighted by a general strike on Wednesday.

Greek sovereign bond yields soared to fresh euro-era highs on a growing belief that euro-zone finance ministers will not deliver fresh aid for Athens at their monthly meeting next week. The yield on two-year Greek bonds rose to an eye-watering 27 percent.

By contrast, Portuguese and Irish yields eased after the Finnish deal on Thursday removed one key political uncertainty.

The euro-skeptical True Finns party, which scored big gains in last month’s general election by vehemently opposing the Portuguese bailout, said it would not take part in talks to form the next Finnish government.

The Washington-based fund’s views about Greece are being closely watched ahead of next month’s decision on whether Athens receives the next €12 billion tranche of its €110 billion E.U./I.M.F. bailout.

Ireland and Greece are already dependent on €52.5 billion of I.M.F. aid while Portugal is awaiting a €26-billion, three-year lifeline from the fund.

Banks in the troubled countries are being kept above water by unlimited E.C.B. liquidity, and the I.M.F. said the central bank might need to extend that system again beyond June 12.

Financial markets and economists are overwhelmingly convinced that Greece will have to restructure its debt mountain and force investors to take losses.

But Mr. Borges said the I.M.F. believed Greece was not bankrupt despite its high debt.

“All I.M.F. programs are based on debt sustainability, so as long as a program is in place that means that the I.M.F. believes Greek debt is sustainable,” he said.

Article source: http://www.nytimes.com/2011/05/13/business/global/13iht-imf13.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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