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Strong Chinese Manufacturing Data Points to Turnaround

September 23, 2013 by

HSBC’s manufacturing purchasing managers index — a survey that takes the temperature of China’s important factory sector — rose to 51.2 in September, from 50.1, topping analysts’ expectations. The index HSBC released on Monday was based on a preliminary assessment of survey responses. A final reading will be published on Sept. 30. A separate index compiled by the authorities in Beijing, more focused on larger, state-owned enterprises of the kind that benefit from state-led investment, will be released on Oct. 1.

Readings above 50 indicate expansion, so the September figure provided more evidence that the Chinese manufacturing sector was growing again after several months of contraction, while the economy as a whole had stopped decelerating.

The firmer reading “was supported by simultaneous improvements of external and domestic demand conditions,” Qu Hongbin, chief China economist at HSBC, said in a note accompanying the data release.

Faced with slowing growth, the authorities in Beijing have in recent months announced a series of measures aimed at increasing economic activity.

Although China has avoided a repeat of the sweeping, large-scale stimulus of late 2008 and 2009, the smaller-scale, more targeted support measures of the last year or so have helped to put a floor under the economy, analysts have said.

Measures announced this year have included tax cuts for small businesses and measures aimed at speeding up railroad construction in inland and poor areas. In a bid to raise the economy’s efficiency, the authorities have also issued instructions to more than 1,400 companies in 19 industries to cut excess production capacity this year.

“We expect a more sustained recovery as the further filtering-through of fine-tuning measures should lift domestic demand. This will create more favorable conditions to push forward reforms, which should in turn boost mid- and long-term growth outlooks,” Mr. Qu wrote.

Improving demand in the beleaguered United States and European economies also is helping activity in China. New orders for exports picked up speed in September, the HSBC poll showed, echoing a trend seen in trade data for August, released this month.

“Looking ahead, we expect the cyclical pickup to be consolidated in the coming quarters, benefiting from the strengthening global demand outlook, which supports growth directly via stronger exports and by improving sentiment and profitability in industry and thus the willingness to invest,” wrote Louis Kuijs, a China economist at RBS in Hong Kong.

The latest signs of China’s resilience on Monday helped push Chinese stocks higher; the Shanghai composite rose 1.33 percent.

Still, many analysts continued to caution that the upturn may not last into next year, given that the leadership in Beijing will have to step up its efforts to combat issues — like overcapacity in some major industries, often poor allocation of capital, and a buildup in debt over the last few years — that haunt China’s economy.

“The third plenary session of the Central Committee, which is to be held this November, will lay out the agenda of economic reform going ahead,” said Zhu Haibin, chief China economist at JPMorgan Chase. “Addressing these problems in the coming years implies that the economic recovery tends to be limited.”

Article source: http://www.nytimes.com/2013/09/24/business/global/strong-chinese-manufacturing-data-point-to-turnaround.html?partner=rss&emc=rss

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Slowdowns in Emerging Markets, Well Ahead of Any Fed Action

September 18, 2013 by

JAKARTA — Higher long-term interest rates in the United States as the Federal Reserve signaled it might change its policies were already causing hardship for millions of businesses and workers in emerging markets from Indonesia and India to Turkey and Brazil.

But the economic slowdowns and falling currencies precipitated by capital flight back to the United States seem less severe so far than other recent downturns.

The impact may be further dampened because the Federal Reserve’s monetary policy-making committee concluded its meeting Wednesday saying it would not retreat from its long-running stimulus campaign of buying $85 billion a month in bonds.

Emerging markets around the globe had been feeling the effects of investors’ expectations that the American central bank would begin tightening monetary policy as the American economy improves. As long-term interest rates have risen this summer in the United States on bets that the Fed will begin tapering its bond purchases, institutions and rich individuals have shifted tens of billions of dollars out of emerging markets. They have been moving them into dollar-based investments that offer higher yields. The flight of dollars caused currencies to fall against the dollar.

But the Fed’s announcement Wednesday afternoon took currency traders by surprise and the dollar plunged against major currencies. The dollar fell a little more than 1 percent against the euro and the yen after the announcement giving companies in the developing economies a little more breathing room.At the IGP Group, Indonesia’s dominant manufacturer of car and truck axles, sales plummeted 95 percent and stayed down for six months when the Asian financial crisis hit in 1997. Four-fifths of the company’s workers lost their jobs.

When the global financial crisis began in 2008, IGP’s sales briefly dropped by nearly a third, and a quarter of the employees were put out of work as temporary workers’ contracts were not renewed.

The latest downturn, which began in early August, has been much more modest. IGP’s axle shipments are down 10 percent in the past month from a year ago. The company’s work force has barely shrunk, to 2,000 from 2,077 at the end of July, though it plans to reach 1,900 by the end of this year.

“These are challenging times, but I don’t think they will be the same as in 2008 or 1998,” Kusharijono, IGP’s operations director, who uses only one name, yelled over a clanking, cream-colored assembly line here for minivan rear axles.

Business leaders and economists across the developing world expect emerging markets to face tougher times in the months and maybe even years ahead. Emre Deliveli, a Turkish economic consultant and columnist, said, “Even if all goes well and emerging markets end up rallying, the era of easy money and abundant capital flows will officially be over on Sept. 18,” when the two-day Fed meeting ends.

But while previous exoduses by investors from volatile emerging markets have caused waves of bank failures, corporate bankruptcies and mass layoffs, the latest retrenchment has been much milder so far.

That partly reflects the belief that when the Fed does move, it will very gradually scale back its bond purchases, business leaders and economists around the world said in interviews this week. The effects have also been limited partly because banks and companies and their regulators in many emerging markets have become much more careful about borrowing in dollars over the past two decades, except when they expect dollar revenue with which to repay these debts.In 1997 and 1998, “the whole problem began with the banking sector. Now I think the banking sector is much better,” said Sofjan Wanandi, a tycoon who is the chairman of the Indonesian Employers’ Association and part owner of IGP.

Trading in currency and stock markets seems to suggest that some of the worst fears over the summer are starting to recede. The Brazilian real has recovered about 8 percent of its value against the dollar since Aug. 21 and a little over a third of its losses since the start of May, when worries began to spread in financial markets about the vulnerability of emerging markets to a tightening of monetary policy. Stock markets from India to South Africa have rallied from lows in late August, with Johannesburg’s market up 14.7 percent since late June after a swoon earlier than most emerging markets.

Article source: http://www.nytimes.com/2013/09/19/business/global/emerging-markets-bracing-as-fed-meets.html?partner=rss&emc=rss

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Wall Street Lackluster at the Open

September 12, 2013 by

Stocks on Wall Street opened broadly unchanged on Thursday after a seven-day winning streak and a jobless claims report that provided little insight into the Federal Reserve’s decisions about stimulus policy.

In early trading the Standard Poor’s 500-share index was 0.1 percent lower, the Dow Jones industrial average was flat and the Nasdaq composite 0.1 percent.

Initial claims for state unemployment benefits slipped 31,000 to a seasonally adjusted 292,000, the lowest level since 2006 and well below expectations of 330,000 new claims.

But the data was skewed due to technical problems in claims processing because two states were upgrading their computer systems and did not process all the claims they received during the week, muddying the last major reading on the labor market before the Federal Reserve’s next meeting.

The distorted data has made it hard for investors to reach any conclusions about the labor market, said Gordon Charlop, a managing director at Rosenblatt Securities in New York.

“But the fact of the matter remains, the direction is obviously towards tapering, which is really a good thing,” Mr. Charlop said. The question is, how measured the Fed will be in reducing stimulus, he added, “and you have to think they are going to err on the side of caution. They will be very measured in their approach and won’t do anything precipitous.”

The S. P. 500 has risen 3.4 percent over the past seven sessions, its longest winning streak in two months, as concerns about a Western military strike against Syria have faded and stocks have been buoyed by stronger-than-expected economic data from China.

The United States will insist Syria take rapid steps to show it is serious about abandoning its chemical arsenal, senior United States officials said, as Secretary of State John Kerry arrived in Geneva for talks with Foreign Minister Sergei Lavrov of Russia.

United States export prices fell 0.5 percent in August, its sixth straight monthly decline, while import prices remained flat. Expectations were for export prices to rise 0.1 percent and import prices to climb 0.4 percent.

Employment is a key component of the central bank’s planning for economic stimulus, known as quantitative easing.

The Fed will hold a two-day policy meeting ending next Wednesday when a decision is expected about whether to make changes to its current bond purchases of $85 billion a month to boost the economy.

The weakened dollar saw the euro push hold around $1.3309 as it recovers from the selloff seen last week last week following the European Central Bank’s commitment to maintain loose monetary policy despite signs of recovery in the euro area.

While the dollar bought 99.50 yen, down about 0.4 percent. It has moved away from Wednesday’s high of 100.60 yen, which was the highest since July 22, according to Reuters data.

European markets were mixed, with the FTSEurofirst 300 index up 0.1 percent. In Asia, markets were mainly higher, with the Shanghai composite ending the session up 0.6 percent.

Article source: http://www.nytimes.com/2013/09/13/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Markets Lower in Wake of Jobs Numbers

September 6, 2013 by

U.S. stocks had a mixed close after volatile trading on Friday, after job market data removed some uncertainty about Federal Reserve policy and after Russian President Vladimir Putin said he would maintain his long-standing support for Syria if the West were to attack.

The Standard Poor’s 500 index gained 0.09 points or 0.01 percent, closing at 1,655.17. The Dow Jones industrial average fell 14.98 points or 0.1 percent, to 14,922.50, and the Nasdaq Composite added 1.23 points or 0.03 percent, closing at 3,660.01.

For the week, the SP 500 is up 1.04 percent and the Nasdaq is up 1.1 percent. The Dow is up 0.6 percent after four weekly declines.

The U.S. August payrolls report showed about 169,000 jobs were added, fewer than the 180,000 that had been expected, and July’s figure was revised sharply lower. The unemployment rate fell to 7.3 percent, its lowest since December 2008, though the decline reflected a drop in the share of working-age Americans who either have a job or are looking for one.

Many analysts said despite the weak jobs report the U.S. central bank would not adjust plans to slow its stimulus, currently at $85 billion a month in bond purchases.

Kansas City Fed President Esther George, a consistent hawk who has argued for a tapering in bond purchases all year, said reducing purchases to $70 billion a month could be “an appropriate next step toward normalizing monetary policy.”

Such a reduction would be in line with expectations that have been falling in the last few months.

“Tapering is going to happen but there is a wide range of opinions in terms of how much the Fed is going to taper,” said Joseph Tanious, global market strategist at JPMorgan Asset Management in New York.

“The market is comfortable with the idea (of winding down stimulus) as it is justified by economic growth,” he said, pointing to recent data including an almost eight year high in the pace of growth in the U.S. services sector.

Investors are continuing to assess the possibility of a U.S.-led strike against Syria in retaliation for an alleged chemical weapons attack against its civilians.

Putin made clear on Friday that Russia did not want to be sucked into a war over Syria, signaling that Moscow would maintain ongoing support to Damascus in the event of foreign military intervention.

Tanious said, getting clarity on Russia’s point of view helps ease some concerns about the implications of an attack on Syria, but any U.S. intervention is likely to impact oil and other markets.

“The (equities) market is jittery and that is understandable,” he said.

Energy prices have been among the most volatile on the issue, with investors concerned that military action in the Middle East will weigh on oil supplies. U.S. crude oil has spiked almost 4 percent over the past two weeks and was up 1.7 percent on Friday.

Facebook shares rose 3 percent to $43.95 after hitting $44.56, its highest since the stock’s debut on Nasdaq more than a year ago.

American Tower Corp rose 4.6 percent to $71.91 after the company agreed to buy Global Tower Partners for $4.8 billion.

E*Trade Financial shares jumped 4.6 percent to $16.26 after Goldman Sachs upgraded the brokerage’s stock to “buy” from “neutral” two days after the company received approval to use capital from its bank subsidiary for broader corporate purposes.

Article source: http://www.nytimes.com/2013/09/07/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Carney Says Rates Pressure Might Trigger More Stimulus

August 28, 2013 by

In his first policy speech since taking over the bank, Mark Carney also announced a relaxation of rules for banks which could boost lending and help Britain’s “solid but not stellar” emergence from its deep recession.

Financial markets have challenged the BoE’s new plan to keep interest rates on hold for possibly three more years and Carney said the bank could provide more stimulus if premature rate hike expectations added to risks facing the recovery.

“The upward move in market expectations of where Bank Rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy,” Carney said, adding policymakers would watch those conditions closely.

“If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further.”

Sterling initially weakened but recovered its losses against the dollar and expectations that the BoE might have to raise interest rates in 2015, a year earlier than its plan implies, were little changed. British government bond prices fell, pushing up yields further, as investors worried that the new bank rules could lead to sales of gilts.

Carney sought to underscore his message that the BoE’s new forward guidance plan – something he deployed while running the Bank of Canada and helped land him the job in London – was not reliant on how financial markets responded.

“Hanging this on markets is to miss the point,” he told reporters after making his speech to business representatives in the city of Nottingham, far from London’s financial hub.

“What my colleagues and what I am hearing across the country is that there is appreciation for that greater degree of certainty that is being provided by the bank,” he said.

The BoE’s interest rates, not market rates, were most important to most households and businesses, Carney said.

Philip Rush, an economist with Nomura, said the comments on more stimulus did not appear to signal any imminent new move.

“Easing is not ruled out if higher rates start to impair recovery but that point does not seem upon us,” Rush said. “While higher rates reflect stronger growth, easing would constitute a negative confidence shock – i.e. the opposite of what the BoE is trying to achieve.”

The Bank of England spent 375 billion pounds ($580 billion) on government bonds between 2009 and last year to try to prop up Britain’s economy after the financial crisis.

Carney said the option of further stimulus was part of the forward guidance plan announced by the BoE this month. That plan mentioned the possibility of further asset purchases. Carney declined to go into detail on stimulus options on Wednesday.

Most of the bank’s nine top policymakers are opposed to a revival of the bond-buying program although it was supported by Carney’s predecessor Mervyn King.

And if it did want to do more to help growth, the bank would need to show it can keep its foot on the stimulus pedal without pushing up already above-target inflation.

That challenge was made greater after one of the BoE’s policymakers voted against the forward guidance earlier this month, voicing concerns about inflation.

UNEMPLOYMENT

Carney dedicated much of his speech to explaining why the central bank believed unemployment would fall only slowly, pointing to expected further job losses for public workers and large numbers of part-time workers who want to work full-time.

Markets appear to expect unemployment to fall to 7 percent by mid 2015 but Carney said the bank saw only a one in three chance of this happening.

He said the BoE remained committed to fighting inflation but it was right for it to allow it to come back down to its 2 percent target only slowly, given the weak state of the economy and temporary factors pushing up price growth.

Carney announced a widening of a planned relaxation of rules on banks and building societies, on condition they meet new requirements on capital buffers.

Under the change, eight major lenders in Britain would be allowed to reduce their required liquid asset holdings – cash and safe but low-yielding investments – by 90 billion pounds if they meet the minimum 7 percent capital requirement, freeing up more money for lending and in turn spurring growth.

That kind of increase in the potential supply of credit had the potential to provide “a significant jolt” towards getting lending back to normal although it remained to be seen if companies were confident enough to borrow more, said Simon Hayes, an economist with Barclays.

In a nod to concerns about the property market heating up again, Carney said the BoE was “acutely aware” of the risk of unsustainable credit and house price growth but said gauges of the housing market and household borrowing costs were not at historically high levels. ($1 = 0.6435 British pounds)

(Additional reporting by London markets and economics teams; Writing by William Schomberg; Editing by Jeremy Gaunt and Toby Chopra)

Article source: http://www.nytimes.com/reuters/2013/08/28/business/28reuters-britain-economy-carney.html?partner=rss&emc=rss

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Euro Zone Economy Shows Further Signs of Growth

August 22, 2013 by

A survey of purchasing managers conducted this month by Markit Economics, a data and analysis firm in London, pointed to a broad, though tentative, recovery in the 17 nations of the euro zone. Markit’s composite output index rose in August to 51.7 from 50.5 in July, the highest in 26 months and above market expectations for a reading of about 50.9. A number over 50.0 indicates growth.

The data comes just a week after official data showed Europe breaking out of recession in the second quarter of the year, helped by a rebound in French and German household spending.

Markít’s index of manufacturing sector purchasing managers rose to a 26-month high of 51.3, up from 50.3 in July. A comparable survey in the services sector showed a rise in activity to 51.0, up from 49.8 in July, the highest in 24 months.

The data “provide further evidence that the currency union continued to expand in the third quarter, albeit at a pretty modest pace,” Jonathan Loynes, an economist in London with Capital Economics, wrote in a research note. “On past form, the index is now consistent with quarterly growth in euro zone G.D.P. of about 0.2 percent,” equivalent to an annualized rate of about 0.8 percent.

The world economy could well use a European economic renaissance at a time when global markets have been unnerved by signs of a slowdown in emerging markets and anxiety about the timing and impact of the American Federal Reserve’s monetary stimulus policies.

Still, there is little sign that the tepid recovery will be enough to address the main problems weighing on the euro zone, an unemployment rate at record levels and a crisis of confidence in public sector finances.

Once again, the largest European economy, Germany, led the way, with output expanding at its fastest pace since January, with manufacturing at a 25-month high, according to data from Markit.

Carsten Brzeski, an economist in Brussels with ING Bank, said Germany was benefiting from a combination of strong domestic demand and improvements across the European economy.

“It looks as if new growth hopes for the rest of the euro zone are stimulating German confidence,” he wrote in a note to clients, “which in turn could lead to higher German economic growth and could eventually become growth-supportive for the euro zone.”

French purchasing managers reported a contraction, with the index coming in at 47.9 in August compared with 49.1 in July. That suggests that France’s second-quarter growth spurt of 0.5 percent, or about 2.0 percent at an annualized rate, might prove a one-off affair.

Jack Kennedy, a Markit economist, said that although the French index had been disappointing, there were “encouraging signs from some of the more forward-looking indicators,” including the first small increase in new manufacturing orders in more than two years.

Article source: http://www.nytimes.com/2013/08/23/business/global/euro-zone-economy-shows-further-signs-of-growth.html?partner=rss&emc=rss

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Stocks Fall as Traders Prepare for Fed Moves

August 19, 2013 by

Stocks lost ground on Monday, with each of the major indexes falling for a fourth straight session, as investors were hesitant to make new bets ahead of an expected shift in Federal Reserve policy that could lead to higher interest rates.

The Nasdaq was positive for most of the session, spurred by gains in technology shares, such as Apple and Google, before selling pressure in the last hour of trading turned the index negative. At the close of trading, Apple shares had gained 1.1 percent to $507.74 while Google advanced 1 percent to $865.65.

The Nasdaq composite ended the day down 0.4 percent. The Standard Poor’s 500-stock index closed down 0.6 percent and the Dow was down 0.5 percent.

The Fed’s policy of buying large amounts of bonds in an attempt to keep interest rates low has been credited with fueling the stock market’s solid gains in 2013. But many analysts expect that to change at the Fed’s September policy meeting.

With little expected this week in the way of economic indicators, market participants are focused on the minutes from the July Fed meeting, due to be released on Wednesday, for possible insights into policy makers’ thinking.

“The market is just sitting on its hands right now until Wednesday with the Fed,” said Terry Morris, senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania. “The market has made a big run year-to-date and now investors have to consider the possibility of rising interest rates that could be for real, because the economy is growing for real, as opposed to all the stimulus and there is the possibility of the stimulus tapering.”

Growing concerns about a pullback in the program contributed to the Dow’s largest weekly drop in more than a year last week. In the bond market, the United States benchmark 10-year note yield rose to a two-year high.

Trading volume has been light in recent sessions because of uncertainty over the Fed and few catalysts for investors, who have kept to the sidelines in most sessions.

European shares have outperformed over the last two months as the euro zone has pulled out of a recession, but on Monday indexes struggled. London’s FTSE ended the day down 0.5 percent, the DAX in Frankfurt fell 0.3 percent and CAC 40 in Paris closed 1 percent lower.

Rising debt yields in major economies make it harder for developing nations to finance growing current account deficits, and so emerging markets have taken a spill.

The Indian rupee slid as far as 62.73 to the dollar on Monday, emphatically breaching the previous low of 62.03. India’s central bank has tried to restrict how much Indian residents and companies can send offshore, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors.

Other Asian markets were mixed. The Nikkei in Japan ended the day up 0.8 percent, while Hong Kong’s Hang Seng was 0.24 percent lower.

With little expected this week in the way of economic indicators, market participants are focused on the minutes of the latest Fed meeting, expected on Wednesday.

A federal bribery investigation into whether JPMorgan Chase hired the children of prominent Chinese officials to help it win business is the latest in a series of legal and regulatory headaches for Jamie Dimon, the bank’s chief executive. JPMorgan shares closed down 2.7 percent.

Article source: http://www.nytimes.com/2013/08/20/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Wall Street Edges Down as Investors Take Breather From Rally

August 5, 2013 by

The SP 500 has risen for five of the past six weeks, gaining more than 7 percent over that period. The index closed at an all-time high on Friday despite a disappointing read on the labor market, which showed that hiring slowed in July.

Given that advance, further gains may be difficult to come by at these levels, especially with the corporate earnings season largely over.

In the latest read on the services sector, the Institute for Supply Management’s July non-manufacturing index came in at 56, above expectations of 53 and over the previous month’s read of 52.2. Stocks were little impacted by the data.

“Growth continues to be anemic, even as we’re at record levels in the market, suggesting we’re overbought on some levels,” said Mark Martiak, senior wealth strategist at Premier/First Allied Securities in New York.

While the recent payroll report was weaker than expected, some investors were encouraged that it meant the U.S. Federal Reserve was more likely to hold steady with its monetary stimulus, which has contributed to the SP’s gain of almost 20 percent this year.

Tyson Foods rose 3.5 percent to $29.50 before the bell after giving a full-year revenue outlook that was above expectations.

The Dow Jones industrial average was down 54.26 points, or 0.35 percent, at 15,604.10. The Standard Poor’s 500 Index was down 3.43 points, or 0.20 percent, at 1,706.24. The Nasdaq Composite Index was down 1.90 points, or 0.05 percent, at 3,687.69.

The SP 500 is about 1 percent above its 50-day moving average of 1,690.57, which could serve as a support level against further losses.

In the Nasdaq, losses were limited by Priceline.com Inc, which rose 1.6 percent to $922.73 after JPMorgan raised its price target on the stock from $830 to $1,040.

Qualcomm Inc fell 1.5 percent after Piper Jaffray downgraded the stock to “neutral” from “overweight.”

U.S. shares of HSBC Holdings Plc fell 5.3 percent to $54.90 after the company reported a drop in revenue, hurt by slower emerging markets.

Of the 391 companies in the SP 500 that have reported earnings for the second quarter, 67.8 percent have topped analyst expectations, in line with the average beat over the past four quarters, data from Thomson Reuters showed. About 55 percent have reported revenue above estimates, more than in the past four quarters but below the historical average.

In other company news, U.S.-listed shares of Compugen Ltd jumped 49 percent to $8.15 after the company announced it would enter a cancer research partnership with Bayer AG.

The New York Times Co agreed to sell The Boston Globe for $70 million in cash, less than a tenth of what the media company paid when it bought the newspaper for $1.1 billion in 1993. Shares dipped 0.4 percent to $11.88.

Analysts said that millions of Time Warner Cable subscribers in New York, Los Angeles and Dallas could be without CBS Corp programming for several weeks as the companies appear no closer to settling a fee dispute.

Shares of Time Warner Cable rose 0.6 percent to $117.78 while CBS was flat at $54.55.

(Editing by W Simon and Nick Zieminski)

Article source: http://www.nytimes.com/reuters/2013/08/05/business/05reuters-markets-stocks.html?partner=rss&emc=rss

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I.M.F. Cuts Global Growth Forecast

July 9, 2013 by Leave a Comment

In its mid-year health check of the world economy, the Washington-based lender also warned global growth could slow further if the pull-back from massive monetary stimulus in the United States triggers reversals in capital flows and crimps growth in developing countries.

The IMF shaved its 2013 forecast for global growth to 3.1 percent, as fast as the economy expanded last year and below the Fund’s 3.3 percent projection in April. It also lowered its forecast for 2014 to 3.8 percent after earlier predicting a 4 percent expansion.

The Fund has trimmed its growth forecast for 2013 in every major report since April 2012 after initially projecting the global economy would expand by as much as 4.1 percent this year, a sign of the unexpectedly bumpy recovery from the global financial crisis.

In an update of its World Economic Outlook report, the IMF said it underestimated the depth of the recession in Europe, and had not expected the United States to go ahead with growth-stunting spending cuts.

Emerging markets, which had previously been the engine of the global recovery, added to the overall subdued picture in the latest outlook, entitled “Growing Pains.” The IMF cut its 2013 growth forecast for developing countries to 5 percent, including a lower forecast for China, Brazil, Russia, India and South Africa, often called the BRICS.

The Fund said China’s slowdown was a particularly big risk, as the world’s second-largest economy navigates a shift to consumption-led growth. Any slowdown could hit commodity exporters, as China is one of the world’s biggest energy consumers.

“After years of strong growth, the BRICS are beginning to run into speed bumps,” said Olivier Blanchard, the IMF’s chief economist. And while growth in emerging countries has slowed, inflation has not fallen with it, suggesting the economies are already growing close to their potential, he said.

“This has an important implication: that growth in emerging markets will remain high, but maybe substantially lower than it was before the crisis.”

A top Goldman Sachs strategist last week said investors are set to pay a hefty price for betting too much on the developing world, where countries from China to Brazil are dealing with tamped-down growth expectations and the chance of social unrest.

“Risks of a longer growth slowdown in emerging market economies have now increased due to protracted effects of domestic capacity constraints, slowing credit growth, and weak external conditions,” the IMF said.

The Fund said it also assumed recent volatility in financial markets was a temporary reaction to lower growth in emerging countries and uncertainty about when the U.S. Federal Reserve would start to pull back from its bond-buying program.

“But one cannot rule out further acts of nerves along the way,” Blanchard said.

The IMF predicted the euro area would remain in recession this year, with the currency bloc’s economy contracting 0.6 percent, before recovering slightly to expand just under 1 percent next year.

In its annual health check of the euro zone economy on Monday, the IMF said the region must take coordinated action to revive economic growth.

The IMF also trimmed its forecasts for U.S. growth this year to 1.7 percent, a more pessimistic outlook than what the White House predicted on Monday, due to continued pain from deep government spending cuts.

However, it raised its forecast for Japan. It now expects Japan’s economy to grow 2 percent this year on the back of its monetary stimulus, which boosted confidence and private demand. It previously predicted Japan would grow 1.6 percent this year.

But the Fund said Japan’s new economic strategy, known as “Abenomics,” also poses risks for the world, as investors could lose confidence if Japan does not implement structural reforms.

The IMF also increased its projection for growth in Britain to 0.9 percent this year from its previous prediction of 0.7 percent, welcome news for British Chancellor George Osborne who clashed earlier this year with the Fund over its suggestion that it was time for him to ease up on austerity.

The Fund said it still remained concerned about Britain’s weak recovery.

(Reporting by Anna Yukhananov; Editing by Andrea Ricci and James Dalgleish)

Article source: http://www.nytimes.com/reuters/2013/07/09/business/09reuters-imf-economy.html?partner=rss&emc=rss

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Today’s Economist: Dispatch From Europe: Learning, or Not, From Policy Mistakes

July 8, 2013 by Leave a Comment

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

In contemplating American political gridlock, I’ve often written that one of the most disconcerting aspects of our current economic policy is an inability, or at least an unwillingness, to diagnose what’s wrong and prescribe solutions. Still, our economy is resilient and flexible, our central bank has been aggressively applying monetary stimulus (while fruitlessly importuning Congress to help), and our currency is our own and the one other countries hold in reserve.

Today’s Economist

Perspectives from expert contributors.

As a result, we do not face recessionary risks, as in Europe, where I’m enjoying a working vacation (a concept that gets you lots of eye-rolls in France). Yet we slog along at growth rates that are too slow to move the jobless rate down from its still elevated level of 7.6 percent, officially, and above 14 percent if you count the underemployed.

It’s worse in Europe. In France, growth is flat-lining if not slightly negative, and unemployment is creeping up on 11 percent. But at least among economic elites, many continue to defend the fiscal consolidation, or austerity measures, that have reduced the French budget deficit, e.g., from 7.5 percent of gross domestic product in 2009 to 4.8 percent last year (according to Eurostat).

These numbers came up in a discussion with one French economist who insisted the nation’s main economic problem was politicians’ refusal to lower the deficit. When these declining deficit values were pointed out, her response was, “It should be 3 percent.”

Another prominent economist argued that my criticisms of austerity measures must be wrong because the American budget cuts prescribed by sequestration don’t appear to be hurting our economy. Except for the fact that (a) they are, and (b) “not hurting” is not equal to “helping.” (Thanks in part to sequestration and other fiscal headwinds, the United States gross domestic product was only 1.8 percent in the first quarter, as government subtracted 0.9 percentage points from growth. See also Catherine Rampell’s review of sequestration’s significant employment impacts.)

In fact, the essential problem with the debate in Europe is the same as in the United States: reducing deficits and debt is seen as a solution in and of itself, not as the outcome of actual solutions. Let me explain.

While your spending must broadly align with your revenues over business cycles, it is a mistake to think that when you’re facing large output gaps, if you only make the “hard choices” to reduce your budget deficit, your fiscal rectitude will be rewarded with growth and jobs. Closing the budget deficit won’t close the jobs deficit.

This relates to the Reinhart-Rogoff mistake that gave policy makers a paper to wave around allegedly arguing that high debt levels slow growth. Again, the causality is reversed. Stronger growth right now would solve problems that debt reduction can only create.

In other words, they’re aiming at the wrong variables and yet adamantly defending results that quite plainly show their mistakes. And I’m not just talking about rising unemployment. Note that even as the French budget deficit has gone down since 2009, the debt-to-G.D.P. ratio has gone up, from 79 percent to 90 percent.

To be fair, American Keynesians too often suggest that if only European Union countries would increase government spending and backstop the banks, everything would fall into place. But as I’ve heard from even the occasional sympathetic policy makers and advisers over here, life is a lot more complicated than that in the currency union.

As one German asked me, “How do you think New Yorkers would feel about bailing out Texans or vice versa?” — an excellent question that we never have to think about. Another high-ranking German official told me, “Look, we know what we have to do … we just can’t let anyone see us doing it.” Good luck with that.

Yet when I say European policy makers aren’t learning from their mistakes, I mean that quite literally. Two economists for the International Monetary Fund recently published an important and rigorous analysis of austerity in action. Their work asks the following question: so far, have the results of fiscal consolidation come out the way what we expected? It’s a statistical exercise that asks how far off the mark the conventional European wisdom turned out to be by looking at what forecasters thought would happen to G.D.P. growth given fiscal consolidation plans versus what actually happened.

And the answer is off the mark by a factor of three. That is, they found the fiscal multiplier to be around three times as large as the consensus, meaning deficit reduction was that much more hurtful to growth than they expected.

But when you’re focused so intensely on the problem of public debt, the idea that reducing it is more damaging than you thought apparently creates too much cognitive dissonance. And it’s easy to dismiss a study that goes against your strongly held assumptions. Another economist said the I.M.F. analysis just proves that economists are poor forecasters, as if we didn’t already know that (in fact, their study shows systematic mistakes in the same direction — all underestimating the cost of premature consolidation).

So, if my short sojourn is any indication, Europe will continue to slog even more slowly than we will. It may well be a while until policy makers begin to learn from their mistakes. I’m sorry I can’t share happier news from abroad, but perhaps the smart thing to do at this point is to turn off the laptop, start the vacation part of the vacation, and be very thankful that I’m privileged enough to do so in such beautiful, historic places.

Article source: http://economix.blogs.nytimes.com/2013/07/08/dispatch-from-europe-learning-or-not-from-policy-mistakes/?partner=rss&emc=rss

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