January 2013

US jobless claims increased by 38,000 to 368,000 last week– more than forecasters expected and the largest rise since November. For tomorrow’s non-farm payrolls report, economists are predicting 150-170,000 new jobs, compared with 155,000 in December…

Powered by Guardian.co.ukThis article titled “Unemployment claims rise as fragile US jobs market takes hit” was written by Dominic Rushe in New York, for guardian.co.uk on Thursday 31st January 2013 15.31 UTC

The number of people filing their first claim for unemployment benefits in the US has risen by more than forecasters expected.

Initial jobless claims increased by 38,000 to a seasonally adjusted 368,000 in the week ended January 26, the Labor Department said Thursday. The rise was the largest since early November, when claims spiked in the wake of Hurricane Sandy.

The rise was higher than the 365,000 figure forecast by economists, but the jobs market still appears to be slowly recovering. Claims above 400,000 signal a deteriorating jobs market. The latest weekly figures come ahead of Friday’s monthly non-farm figures, which give a far more comprehensive picture of the US jobs market.

On Wednesday, the Commerce Department said the US economy went into reverse in the last quarter of 2012, the first decline since the recession of 2009. The fall was driven by deep cuts in government spending, including a 22.2% cut in defense expenditure, the largest since the end of the Vietnam war.

The US’s gross domestic product shrank 0.1% in the final months of 2013 as businesses cut back on inventories and Washington argued over the fiscal cliff.

Investors will be watching carefully on Friday to see how the contraction plays out in the still weak jobs market. More cuts to government spending are expected in March as the US attempts to tackle its budget problems.

Economists are predicting the US to have added 150-170,000 new jobs in January. The US added 155,000 in December.

Earlier this week, payroll processor ADP and forecaster Moody’s said the private sector added 192,000 new jobs in January, higher than expected. But the latest weekly figures and the GDP report suggest government cuts may affect the larger picture.

Dan Greenhaus, the chief global strategist at BTIG, said the latest weekly figures were in the “normal range” given the weak but positive growth in the jobs market.

“Over time, job growth and GDP tell the same story. The economy is in recovery; it’s not growing much, although it’s better than the GDP report would suggest. We are adding jobs, just not at the levels we are used to,” he said.

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In the broadcast today: How will the Fed’s Decision Impact the USD? Following the report of a surprising contraction of the U.S. economy in the fourth quarter of 2012, we focus on the upcoming FOMC announcement and examine the scenarios of how the Fed’s monetary policy decision could impact the markets and the U.S. dollar, we analyze the anticipated bullish breakout in the EUR/USD currency pair, we keep an eye on the continuation of the rally in USD/JPY pair, we highlight the market’s reaction to the Spanish GDP, and the U.S. ADP Employment and GDP estimate, we discuss new forecasts from Deutsche Bank, BNP Paribas and HSBC, and prepare for the trading session ahead.

Live Broadcast from 9:00 am to 10:00 am, Eastern Time, Monday – Friday.

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US GDP unexpectedly drops by 0.1% q/a in the final quarter of last year after growing by 3.1% q/a in the third quarter. Is it just a temporary setback? Spanish GDP also registers a larger decline by 0.7% in Q4. Spanish Prime Minister promises stimulus…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: US GDP in surprise fall, after Spain’s recession deepens” was written by Graeme Wearden, for guardian.co.uk on Wednesday 30th January 2013 15.50 UTC

3.50pm GMT

Here’s Dominic Rushe, our Wall Street correspondent, on the surprise drop in US GDP in the last quarter:

The US economic recovery juddered to a halt in the final months of 2012 as government slashed defense spending, businesses cut back, and Washington fought over the fiscal cliff budget crisis.

The nation’s gross domestic product (GDP) shrank for the first time in three and a half years during the fourth quarter, dropping at an annual rate of 0.1%, the Commerce Department said Wednesday. It was the US’s worst economic performance since October 2009, and came as economists had been expecting mild growth of around 1%.

More here.

3.27pm GMT

Photos: Riot police clash with protesters in Athens

I’ve now got hold of some photos from Athens, where union members broke into the office of the labor minister, and were then ejected by riot police.

According to those at the scene, the riot police used tear gas to force the demonstrators out of the building.

It also appears that at least one protestor was hurt – he’s shown lying on the ground being helped by another union member.

As explained at 11.22am, around 30 members of the communist-affiliated PAME union invaded Yiannis Vroutsis’s office after the minister made comments about “clientelism in the social security sector”

Updated at 3.48pm GMT

2.39pm GMT

And Wall Street opens all-but flat, with the Dow Jones up a bold 1.6 points in early trading….

2.33pm GMT

Inman: Look at the positives

It’s possible to put a positive spin on the dire-looking US GDP figure, says our economics correspondent Phillip Inman:

From the figures we can see that businesses, caught with an excess of stock in their warehouses in the third quarter, cut back on orders in the final three months of the year, slicing 1.27 percentage points from fourth-quarter GDP growth.

Excluding the cut in inventories, the economy grew at a healthier 1.1%.
Also, consumer and business spending were up, and household disposable incomes increased. Consumer spending, which accounts for more than two-thirds of economic activity, rose at a 2.2% , accelerating from the previous quarter’s 1.6% growth rate.

And as Reuters points out:

Business investment rebounded after its first drop in 1.5 years in the prior quarter. The housing market was another bright spot. Residential construction grew at a 15.3 percent rate after notching a 13.5 percent growth pace in the third quarter. Homebuilding added to growth last year for the first time since 2005.

Updated at 2.39pm GMT

2.18pm GMT

CEBR: US GDP just a setback

Tim Ohlenburg, senior economist at the Centre for Economics and Business Research, agrees that today’s unexpected fall in US GDP isn’t a disaster.

He called the 0.1% drop in output (annualised) a “manageable setback”, following a strong third quarter:

Falls in public spending at the national and local levels as well as a drop in export revenue driven by the Eurozone crisis were the main culprits. Despite a rise in household consumption, de-stocking by businesses pushed output into negative territory for the quarter after a strong inventory build-up in the previous three months.

With US house prices rising, the US economy appears to have started 2013 well. However, concerns remain:

Business and consumer confidence have dropped amid the fiscal stand-off between Democrats and Republicans. Uncertainty around the effects of fiscal consolidation are weighing on domestic demand already, evident in slowing retail sales and trade growth. Public spending cuts will add to the mix, suggesting that the year ahead is going to see limited growth.

2.09pm GMT

US GDP: Experts say ‘don’t panic’

After the immediate shock, the early reaction to the 0.1% drop in annualised US GDP is that it’s not as bad as it sounds. Not exactly great, but not a reason to panic.

Here’s an early round-up:

Updated at 2.10pm GMT

1.59pm GMT

US GDP – the details

The surprise fall in US GDP in the last quarter was due to several factors

1) a 5.7% drop in exports

2) a 6.6% decline in government spending, which included a 22.2% fall in defense spending

3) a big drop in private inventories, which knocked 1.3% off GDP

But more encouragingly, consumer spending rose by 2.2% and business investment was 8.8% higher. That doesn’t suggest a country in serious trouble….

1.40pm GMT

US GDP in shock (small) decline

And now a real shock – the US economy shrank in the last three months of 2012.

Annualised GDP* fell by 0.1%, much worse than analyst expectations of a 1.0% rise. This is the first time that US GDP has fallen since the second quarter of 2009.

More to follow.

* so on a quarter-on-quarter basis output was around 0.025% lower.

1.36pm GMT

Upbeat comments from the Portuguese prime minister, Pedro Passos Coelho, today. He told reporters in Lisbon that Portugal’s recession will slow this year, meaning a return to growth in 2014.

Passos Coelho said:

All forecasts point in one direction, that in 2014 the Portuguese economy will recover in terms of growth and that throughout 2013 a turnaround in the recessive trend will occur.

The key for Portugal’s economic future is whether it exits its IMF-led bailout and returns to the markets in 2014…

Updated at 1.57pm GMT

1.27pm GMT

US jobs data beats forecasts

Another day, and another piece of decent economic news from America. 192,000 private sector jobs were created across the US economy in January, according to the ADP index.

That’s more than economists expected, and suggests the US economy is growing well now that the fiscal cliff debacle is over.

12.40pm GMT

Poor GDP data hints at deficit miss for Spain

Here’s Tim Kirkham, director of risk advisory services at currency specialist HiFX, on the deepening Spanish recession:

Spain has been in the headlines since the beginning of the eurozone crisis. It suffers from record high unemployment, negative growth and a significant deficit shock could be just around the corner, which may reignite fears about the country’s fiscal situation and increase the risk of a ratings downgrade in the near term.

The release of the preliminary 2012 budget-deficit figures on February 22nd will be key. Spanish officials have already paved the way for slippage, as they did in 2011, so we can pretty much count on a bigger number than the 7.3% of GDP (including 1 percentage point for bank recapitalisation) the government estimated in November.

Updated at 12.41pm GMT

12.09pm GMT

Over in Brussels, David Cameron‘s plan for a referendum on Britain’s membership of the EU has been blasted by Hungary’s prime minister, Viktor Orban.

Orban called the pending in-out vote “the most dangerous thing I can imagine”. My colleague Ian Traynor was there, and reports:

Being criticised by Orban might irk Cameron – given the criticism of the Hungarian leader’s attempts to interfere with its central bank.

11.47am GMT

Italy gets another bond auction away

Italy has successfully auctioned 10-year government bonds at the lowest borrowing costs since October 2010.

The Italian treasury sold €3.5bn of 10-year bonds at average yields of 4.17%, down from 4.48% in December.

It also sold another €3bn of five-year bonds at yields of 2.94% (down from 3.26% last time) – meaning it hit the top of its target of raising €4.5bn to £6.5bn.

As Nicholas Spiro of Spiro Sovereign Strategy points out, Italian bond auctions are now routine, when once they were quite exciting:

Just over three weeks to go to a critical parliamentary election, and Italy’s government bond market shows no signs of nervousness. Quite the opposite – it’s increasingly resilient to domestic political and economic risks.

While demand at today’s auction was not particularly impressive, the Treasury still managed to get all its debt out the door at cheaper rates, reflecting the dramatic improvement in sentiment towards the eurozone periphery in the face of severe economic weakness.

Spiro adds, though, that next month’s general election could shake this cosy consensus:

If the outcome of the election is a deeply fragmented parliament, which is increasingly likely, the prospects for a stable, reform-minded and harmonious coalition government are slim.

11.22am GMT

Reports from Athens that 30 members of the communist-affiliated PAME union briefly invaded the office of employment minister Yiannis Vroutsis, before being evicted:

Via Kathimerini:

The unionists were protesting comments made by the minister on Tuesday regarding clientelism in the social security sector.

Riot police forces subsequently raided the ministry and removed the unionists.

No photos yet…..

11.01am GMT

Markets calm…

European stock markets are mostly treading water this morning, with no sign that the deepening Spanish recession is alarming the City.

FTSE 100: up 7 points at 6346, + 0.11%

German DAX: down 13 points at 7835, -0.17%

French CAC: down 4 points at 3781, -0.1%

Spanish IBEX: up 1 point at 8644, +0.02%

Traders say this could be the new normal…

Italy’s FTSE MIB is the big faller, though, down 344 points or 1.9% at 17548. That follows a shock profit warning from Italian oil services firm Saipem, which slashed earnings forecast by 80% last night.

Updated at 11.03am GMT

10.49am GMT

Nowotny optimistic for Germany and Austria

While Spain’s recession deepens, the head of Austria’s central bank has suggested that he may revise up his forecasts for Austrian and German growth this year.

Ewald Nowotny, who also serves on the European Central Bank’s governing council, said there were signs for optimism.

The confidence indicators such as the Ifo index that we are receiving show an upwards trend – admittedly, one must soberly say, with low growth rates as a whole.

And asked whether he saw ‘positive contagion’* flowing to the real economy from the financial markets, Nowotny replied:

To a certain, careful extent.

* – Mario Draghi coined this phrase at the ECB’s last monthly press conference

10.37am GMT

In better news, economic confidence across the eurozone rose in January, for the third month in a row.

The European commission found the confidence in all sectors rose, with consumers and the construction industry making the biggest gains. The top-line reading rose to 89.2, from 87.8 in December (I don’t have regional breakdowns, though).

Updated at 10.55am GMT

10.21am GMT

Spain’s PM pledges new stimulus package

Spain’s prime minister, Mariano Rajoy, has told MPs in Madrid that he will soon announce fresh measures to stimulate the deteriorating Spanish economy.

Reuters has the details:

Rajoy told Spain’s parliament that the measures would include help to entrepreneurs.

Tax breaks for young entrepreneurs are among a series of measures Spain’s government could announce in February, Reuters reported earlier this week.

Rajoy’s government has vowed, however, to stick to plans for budget cuts as it tries to slash a gaping deficit.

As mentioned yesterday, Olli Rehn has hinted that Spain’s fiscal targets for 2013 (to cut its deficit to 4.5% of GDP) could be relaxed. That could give Rajoy the wriggle room needed for a stimulus package…

Updated at 10.44am GMT

9.02am GMT

Analysts at UBS fear that Spanish GDP will keep falling through 2013:

9.01am GMT

The deepening Spanish recession hasn’t hit optimism in Europe’s financial markets.

The euro has hit $1.35 against the US dollar for the first time since December 2011. with traders seemingly happy to ignore the poor data coming out of Madrid:

8.38am GMT

This graph shows how Spain’s economy struggled out of recession in 2010, only to slide back last year:

8.29am GMT

The official statement

You can read the official announcement that Spain’s GDP fell by 0.7% in the last three months here, on the Instituto Nacional de Estadistica website.

It explained:

This result was basically caused by a more negative contribution in the domestic demand, which was compensated partially by a positive contribution of the external demand.

8.15am GMT

This morning’s poor GDP data comes just a day after we learned that Spanish retail sales had tumbled by over 10% in December (details here).

As my colleague Giles Tremlett wrote from Madrid:

With sales tax hikes biting, unemployment growing and many workers and pensioners watching the real values of their income fall, Spaniards kept their wallets tightly closed, helping to produce a 10.7% fall in sales in December compared with the same month in 2011.

And last week we learned that Spanish youth unemployment was now 60%.

Updated at 8.16am GMT

8.01am GMT

Spanish economy shrinks again

Good morning, and welcome to our rolling coverage of the latest economic and financial news across the eurozone and beyond, and other key developments.

Just in: the Spanish recession has deepened in the last three months, and by more than economists or Spain’s own central bank had expected.

Data just released showed that Spanish GDP fell by 0.7% in the last three months of 2012. We were expecting a 0.6% decline in economic output.

That means the country’s economy was 1.8% smaller than a year ago in the last quarter, as the country’s austerity package and the wider eurozone crisis hits output and consumer demand.

This follows a 0.3% contraction in the third quarter of 2012, and a 0.4% drop in the second quarter.

More to follow….

Updated at 8.18am GMT

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In the broadcast today: Is the EUR Ready for a Breakout vs. USD? As the EUR tests an important resistance level and reaches a new 13-month high vs. the USD, we explore the potential for a decisive bullish breakout that could open the door to further gains for the single currency against the greenback, we analyze the latest trend developments in the EUR/USD currency pair, we keep an eye on the weakness in GBP/USD pair, we note the range-bound fluctuations of the USD/JPY exchange rate, we highlight the market’s reaction to the Spanish Retail Sales, the German Consumer Climate, and the U.S. Consumer Confidence, we discuss new forecasts from Lloyds Banking Group and Bank of America, and prepare for the trading session ahead.

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Spanish retail sales down 10.7% in December. The Conference Board’s measure of US consumer confidence drops to 58.6 in January from 66.7, knocked by taxes and spats. Greek finance minister sees recovery. Euro hits 13-month high vs US dollar…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: Spanish retail sales slump, as US consumer confidence takes a knock” was written by Graeme Wearden, for guardian.co.uk on Tuesday 29th January 2013 14.58 UTC

3.30pm GMT

Payroll tax blamed for withering US consumer confidence

Here’s Capital Economics on this afternoon’s surprise slide in US consumer confidence (see 3.10pm):

The drop in the Conference Board measure of US consumer confidence to 58.6 in January, from 66.7, appears to have been driven by the recent payroll tax increase.

In contrast, equity prices have soared to multi-year highs, jobless claims have fallen to a five-year low and most of the fiscal cliff was averted. Nevertheless, the 2% payroll tax increase apparently dampened overall confidence as households saw a hit to their pay packets.

The 8.1 points drop in the headline index was driven by a drop in both the current conditions index, from 64.6 to 57.3, and the expectations sub-index, from 68.1 to 59.5. The latter is now consistent with a stagnation in consumption growth in the first quarter. Looking forward, confidence and consumer spending should improve as the year goes on.

3.10pm GMT

US consumer confidence in shock drop

Just in, confidence among America’s consumers has fallen alarmingly this month, following the clashes and deadlock on Capitol Hill over the country’s finances.

US consumer confidence came in at 58.6 (as measured by the Conference Board), down from 66.7 in December. That’s the lowest reading since November 2011.

One possible cause is that workers’ take-home pay fell in January because a temporary cut in social security payments has now expired (details here).

Another option is that consumers were spooked by the sight of their elected representatives squabbling over the debt ceiling.

Updated at 3.21pm GMT

2.57pm GMT

The euro continues to rally in the currency markets. It just hit a new 13-month high against the US dollar of $1.3490.

It’s now gained more than 11% since last summer, as this graph shows.

Another sign that the situation in the markets is changing (see 12.22pm for more on the Great Rotation).

Currency analysts are cautious, though, about the euro’s recent strengthening. at a time when the eurozone has fallen into recession. Jeremy Cook of World First commented:

Updated at 2.58pm GMT

2.25pm GMT

Fischer heads for port two years early

Stanley Fischer will step down as Bank of Israel governor at the end of June.

The plan, announced by the central bank, means Fischer’s term will end two years earlier than expected. The 69-year-old will outline his reasons at a press conference on Wednesday.

It means there are two central bank governorships up for grabs, while Ben Bernanke’s term at the Federal Reserve ends in 12 months, so get those CVs polished!

Updated at 3.20pm GMT

1.59pm GMT

Mapped: See Ireland’s legacy of derelict properties

Since the Celtic Tiger crashed the level of empty buildings in the Irish capital has soared.

Now, a new map has been created today which locates all of the major derelict properties and businesses in Dublin – all of them monuments to the Republic’s property market collapse.

  • Vacant sites=blue flags,
  • boarded up houses=green flag,
  • closed commercial=red flag,
  • closed commercial ground floor=yellow flag,
  • closed institutional or publicly owned=purple flag,
  • Unclassified= blue pin
  • Derelict properties list=red pin

Henry McDonald explains:

Property prices in the city fell dramatically by 56 per cent since its peak during the boom year of 2006.

The map also reveals the historic class divide in Dublin between the north and south sides of the river Liffey.

A majority of the empty houses, apartment complexes, shops and so on are found on the poorer north side of the river.

Visually, the city centre is almost obscured by the clusters of vacant property abandoned due to the recession.

1.43pm GMT

Peugeot job cuts thwarted, for now…

Over in France Peugeot’s attempts to cut thousands of jobs have been blocked, temporarily at least, by a court ruling.

Judges in Paris ordered that the car-maker suspends its plan to restructure its French operations, including closing a factory in the Parisian suburb of Aulnay, with the loss of 8,000 jobs.

Unions argued that Peugeot had failed to consult properly with other workers who would be affected by Aulnay’s closure, and the Paris Appeal Court agreed,

The ruling comes as France reels from the news that its labour minister had described the country as “totally bankrupt”.

Michel Sapin told radio listeners yesterday that:

There is a state but it is a totally bankrupt state.

That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective.

Government officials have been scrambling to unpick the damage, with finance minister Moscovici insisting that the fiscal situation was merely “worrying’”, while Sapin himself insisted he was merely describing the situation under Nicolas Sarkozy….

Meanwhile, the city of Dijon has just sold off half of its municipal wine cellar to raise fund to support its social welfare bill.

As socialist mayor François Rebsamen put it:

We have overall a good budget this year, but the social action spending of the city just keeps going up. There are more and more of our co-citizens who are appealing for social aid.

More on the FT

Updated at 3.14pm GMT

12.22pm GMT

Chart: The Great Rotation

This might be of interest — Bank of America Merrill Lynch has released research predicting the areas of finance that might do well this year, after suffering during the heights of the crisis.

Summarised in this handy chart, it suggests a significant shift this year (assuming the current optimism continues, and is validated by events):

11.58am GMT

S&P raises Austria’s outlook

Another signal that the crisis is easing – Standard & Poor’s has raised the outlook on Austria’s AA+ credit rating to stable, from negative.

The move comes 12 months after S&P downgraded Austria’s AAA rating, and warned a further cut was possible.

Updated at 12.10pm GMT

11.33am GMT

Martin Koehring of The Economist Intelligence Unit isn’t convinced by the Greek finance minister’s claim that the risk of leaving the eurozone has almost vanished (see 9.23am for details)

Greece can take heart from ongoing rebalancing in its external accounts (the current account deficit has fallen dramatically since 2008, but mostly because of a collapse in imports), and a marked improvement in budget performance. But Grexit risk is not dead: political instability remains high amid ongoing risks of social unrest and an early election. And domestic opposition to the reform agenda will remain strong, especially if the economy does not turn around significantly, which we do not expect to happen before 2015.

Koehring also isn’t convinced by Yannis Stournaras’s argument that the Athens government has turned the economy around:

From its pre-crisis peak in the third quarter of 2007 to its latest trough in the third quarter of 2012, the Greek economy contracted by more than 19%. After five years of depression, we expect the economy to contract further in 2013-14. Domestic demand in particular remains extremely weak amid ongoing fiscal austerity and rising unemployment, which has suppressed household disposable incomes.

Updated at 12.04pm GMT

10.41am GMT

MPs hear perils of QE

Over in the UK, MPs are quizzing pensions experts about the Bank of England’s quantitative-easing (QE) programme.

Mark Hyde-Harrison of the National Association of Pension Funds warned parliament the decision to buy £375bn of UK government bonds with newly created electronic money had pummeled the pension industry.

He said QE had pushed up the deficits across defined benefit schemes by about £90bn. That is because the value of gilts has risen (as the Bank was there as a willing buyer) driving down the yield (or rate of return) for holding them.

That, he explained, meant pension funds looked weaker (as measured by the current rules) as the assets they retain are less lucrative.

Even pension funds that do not own gilts are affected, because gilt yields are used as the rate to discount future pension fund liabilities, which therefore rise when yields get suppressed (my colleague Jo Moulds points out)

Hyde-Harrison added:

The argument we have is not particularly with quantitative easing, it’s more about the way that once that £90bn deficit has been created, the regulations require companies to fill it.

We don’t believe we’re flexible enough to cope with the environment we are now in.

According to Hyde-Harrison, companies are having to contribute to their schemes (and not invest elsewhere) which negates the impact of QE.

Dr Ros Altmann, pensions expert and director-general of the Saga Group, was also critical of the impact of QE. She said that such loose monetary policy has backfired by devaluing pensioners’ income and making them less willing to spend:

Altmann added:

Quantitative easing and ultra-low interest rates have hampered the spending power of those in the economy who were not over-indebted and who would otherwise have spent money.

Updated at 1.38pm GMT

10.16am GMT

Carpetright has had a fright in the eurozone, suffering a double-digit fall in the three countries where it operates over the past 13 weeks.

This took the shine off the UK flooring company’s 3.2% rise in domestic sales, as my colleague Nick Fletcher explains:

The European business – Netherlands, Belgium and the Republic of Ireland – was rather more threadbare than the UK, down 11.5%. The weak spot was the Netherlands, with good performances elsewhere.

Chief executive Darren Shapland said: “Our focus in the Netherlands is on protecting profit in what remains a very weak consumer environment.”

The Netherlands, of course, is suffering a recession, while its government implements an unpopular austerity package. Weak carpet sales suggest consumers are hunkering down.

The Dutch housing market is in retreat, with prices falling 7% in 2012 and sales down by a similar amount.

Updated at 11.21am GMT

9.50am GMT

German consumer confidence growing

In other economic news, German consumer confidence has risen for the first time in four months, indicating that the eurozone’s largest economy expects a stronger year. No relief in France, however.

The research firm GfK said German consumers were “more confident again” having watched the recent stock market rally:

Currently there are few negative reports relating to the sovereign debt crisis in the press so Germans are once again focusing on the generally pleasing domestic state of affairs.

GfK revised up its reading of German consumer sentiment to 5.7 on its index, from 5.6, and reported a further rise to 5.8 this month.

In France consumer sentiment remained unchanged. The country’s statistics body reported overall confidence at 86 in January (100 is average), the same as December 2012.

Updated at 10.29am GMT

9.23am GMT

Greek finance minister: Recovery begins soon

Greece’s finance minister has declared there’s almost no chance of the country leaving the eurozone, and the recovery will begin at the end of this year.

In an interview with the BBC broadcast overnight, Yannis Stournaras said the economic position was tough, with further wage and pensions cuts hitting Greeks this year.

However, there was “much more optimism” in the markets that the worst was over. Asked if the fear of Greece leaving the euro had vanished, Stournaras said:

The probability of this happening is very, very small. We have managed to turn the economy around, yes. So I’m very optimistic that we have avoided the risk of Grexit.

Stournaras also predicted the Greek economy would end its long slump this year, with recovery beginning in the final quarter.

I feel absolutely sure, 100%, that this is the last year of the Greek recession.

As for Britain’s future in the European Union, Stournaras warned:

Britain belongs to Europe politically, financially….. All in all, I believe it would be a grave mistake if Britain decides to get out of Europe.

He rejected the idea that Britain could reshape its relationship with the EU, warning that every other country would also want a new deal, heralding ‘the end of Europe’….

Full interview here.

Updated at 10.27am GMT

8.47am GMT

An unmerry Christmas in Spain

Good morning, and welcome to our rolling coverage of the eurozone financial crisis and other key events in the world economy.

First up, the latest economic news from Spain shows that many families suffered serious belt-tightening in the Christmas season.

Spanish retail sales tumbled by 10.7% year-on-year last month – worse than the 7.8% decline recorded in November, and close to the all-time record fall of 11% recorded in September.

Retail sales in Spain have fallen for 30 successive months, and accelerated since PM Mariano Rajoy implemented austerity measures intended to bring its budget into line. But with Spain’s recession accelerating, Brussels officials may realise a change is needed.

Olli Rehn, the EU’s economic and monetary affairs commissioner, hinted as much last night. He told reporters in Madrid:

If there has been a serious deterioration in the economy, we can propose an extension of a country’s adjustment path…

That’s what we did last year in the case of Spain.

Spain is understood to have flunked its target of cutting its deficit to 6.3% of GDP in 2012, which makes it much harder to hit 2013′s goal of 4.5%. Rehn may be making the groundwork for another relaxation.

Last week’s appalling jobless data – showing 60% of young Spanish people out of work – even sent alarm bells ringing at Davos last week, with Angela Merkel calling for help from businesses to reverse the trend.

Rajoy, too, may recognise that fiscal consolidation alone isn’t the answer. His officials have leaked news that next month’s state of the nation speech will include measures to stimulate growth such as tax breaks for young entrepreneurs.

As usual, we’ll be tracking the latest developments in the world of economics and finances through the day….

Updated at 9.20am GMT

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The pressure of economic bad news is becoming so intense that banker is turning publicly upon banker– and even supposed panaceas such as rate-setting independence are in question. Political interference puts central banks under attack…

Powered by Guardian.co.ukThis article titled “Facade of central bank control is starting to crumble” was written by William Keegan, for The Observer on Sunday 27th January 2013 00.06 UTC

The outgoing governor of the Bank of England indulges in thinly disguised criticism of the views of his nominated successor, the Canadian Mark Carney. A former member of the Bank’s monetary policy committee – the American Adam Posen – conducts a manifestly undisguised assault on the centralised way in which Sir Mervyn King allegedly runs the Bank, having already on many occasions differed from him on policy.

And Jens Weidmann, president of Germany’s Bundesbank, says that Stephen King, the chief economist at HSBC, is “perhaps right” in forecasting the demise of that fashionable financial panacea of recent decades – central bank independence. Weidmann cites political interference with the independence of the Bank of Japan, among others.

Yes, central banks are under attack: and central bankers are taking pot-shots at one another.

King, who did more than any other British official to promulgate the adoption of “inflation-targeting”, made an impassioned plea last week for its preservation, including, in his speech in Belfast, a history of all those inflationary problems of the 1970s, and the long struggle to bring inflation down to tolerable rates.

In saying “tolerable” I am begging the question; but economic history shows that a moderate amount of inflation is a necessary condition for growth. Rip-roaring inflation is certainly not, and is socially destructive as well. But deflation – falling prices – is inimical to growth, as the recent experience of Japan has demonstrated.

In recent years King’s position has been an Augustinian one: the necessity of announcing inflation targets, but the desirability of not hitting them too soon, if at all.

By contrast, Carney has revived the idea of a target for nominal gross domestic product, a measure that is the sum of inflation and real growth.

People seem to have forgotten that, under chancellor Nigel Lawson, the Thatcher government tried targeting “money GDP” with pretty poor results. Carney could do well to study that excellent book The Economy Under Mrs Thatcher, 1979-1990, by the economist Christopher Johnson (who, sadly, died just before Christmas). As Johnson wrote, with the money supply statistics all over the place, “the use of money GDP created further confusion and was ineffective in controlling either real growth or inflation”.

Another book worthy of Carney’s attention is Inside The Bank of England: Memoirs of Christopher Dow, Chief Economist 1973-84, which has been long delayed, but whose publication last week turns out to be well timed.

Dow, who was on the frontlines when inflation was serious (25% in 1975) kept a diary – against the wishes of the governor of the time, Gordon Richardson, who, I am pretty certain, would have granted him a posthumous pardon if he had read this remarkable book. (That is, if they are not already discussing it up there in the great central bankers’ resting parlour in the sky.)

Richardson was governor from 1973 to 1983. He arrived at the Bank shortly after Dow had been appointed by the previous governor, Leslie O’Brien, and worked closely with Dow throughout, one of the latter’s self-appointed tasks being to try to keep Richardson’s flirtations with monetarism, and concerns about public sector borrowing, within reasonable bounds.

In their introduction to the memoirs, the economists Graham Hacche and Christopher Taylor, who worked for Dow, note that “the main worries for UK watchers when Dow entered the Bank were slower trend productivity growth than in other major economies, persistent balance of payment problems, and an upward trend in inflation”.

Plus ça change, although, as noted, inflation then was in another league. But, as now, it was a time of economic crisis – welcome to the party, Mr Carney – and, in addition to concerns about economic policy, Richardson and Dow spent much of their time trying to reform the Bank, a task which, the chancellor and the Treasury have made no secret about, is due to be embarked upon all over again under the leadership of Carney.

In a foreword to the book, Sir Kit McMahon, former deputy governor, says of the Bank in the mid-1970s: “The Bank’s organisation was ancient and creaking.” Not to put too fine a point upon it, that is what the Treasury thought when appointing Carney.

But if the Treasury thinks that by tinkering with monetary policy Carney will help it out of a fiscal hole, it may have another think coming. A sound Keynesian, Dow thought that the management of aggregate demand, with the object of maintaining high output and employment, depended mainly on fiscal policy. A contractionary fiscal policy – especially one of trying to cut the deficit at a time of depression – is hardly calculated to bring us out of depression, as a succession of GDP figures, including the latest 0.3% decline, have shown.

Thus, as Gordon Brown wrote recently in an article for Reuters: “The policy void today lies less in the weaknesses of national central bank leadership than in the reluctance of national governments to contemplate global leadership.” Brown demonstrated such leadership in 2008-09, both in his contribution to the rescue of the banking system and in coordinating the G20 economic stimulus in April 2009. Then came the austerity merchants, to, literally, devastating effect.

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In the broadcast today: All Eyes on the Fed and the USD in the Week Ahead. With the Fed’s monetary policy decision, the U.S. Q4 GDP estimate and the Non-Farm Payrolls report on the horizon, we focus on the USD as the currency taking the center stage in a busy week ahead that could become crucial for the future fate of the greenback, we list the Top 10 spotlight economic events that will move the markets next week, we examine the consensus forecasts for the upcoming economic data, we analyze the bullish breakout in the EUR/USD currency pair, we take a close look at the USD/JPY exchange rate’s break above the 90 yen level, we keep an eye on the GBP/USD pair following the report of another contraction in the U.K. economy, we highlight the market’s reaction to the Japanese CPI, the U.K. GDP, the German Ifo Index, and the U.S. New Home Sales, we discuss new forecasts from Morgan Stanley, Wells Fargo and UBS, and prepare for the trading session ahead.

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UK economy contracts more than anticipated by 0.3% in the last quarter of 2012 and is not expected to regain peak level for another two years, marking slowest recovery in a century. A triple-dip recession will occur if the economy contracts again in Q1 2013…

Powered by Guardian.co.ukThis article titled “Britain heading for triple-dip recession as GDP shrinks 0.3% in fourth quarter” was written by Phillip Inman, economics correspondent, for guardian.co.uk on Friday 25th January 2013 12.09 UTC

Britain could be on course for its third recession in four years after the economy shrank 0.3% in the last three months of 2012.

The figures were worse than expected and could put pressure on the government to consider a “plan B” that would stimulate demand.

A fall in manufacturing output dragged down the economy, countering a small rise in construction between October and December, according to the Office for National Statistics. The economy achieved zero growth for the year as a whole.

Sterling dived on the news, reflecting fears the UK will lose its AAA credit rating and status as a haven economy, though the stock market shrugged off the news, remaining at a four-year high.

George Osborne said he would not “run away” from the problems facing the UK economy: “We have a reminder today that Britain faces a very difficult economic situation. A reminder that last year was particularly difficult, that we face problems at home because of the debts built up over many years and problems abroad with the eurozone, where we export most of our products, in recession.”

The shadow chancellor, Ed Balls, called on Osborne to introduce policies which will “kickstart our flat-lining economy”. “A plan B now should include a compulsory jobs guarantee for the long-term unemployed and a temporary VAT cut to boost family incomes and our struggling high streets,” said Balls.

The Trades Union Congress (TUC) general secretary, Frances O’Grady, said the chancellor’s austerity plan had “pushed the UK economy to the brink of an unprecedented triple-dip recession”.

A triple-dip recession will occur if the economy contracts again in the first quarter of 2013. The economy remains 3.5% below its peak in 2007 and is not expected to regain its previous level for at least another two years, making it the longest recovery in 100 years.

“We are now midway through the coalition’s term of office and its economic strategy has been a complete disaster. We remain as dependent on the City as we did before the financial crash,” O’Grady said.

In the 10 quarters since the election, manufacturing has contracted by 0.4% and the construction sector has shrunk by 9%, the TUC said.

The contraction in GDP in the fourth quarter followed a near 1% rise in the third quarter when the economy was boosted by the Olympics.

A survey of economists had predicted a 0.1% drop in GDP in the fourth quarter, though several prominent analysts had forecast a bigger contraction after a series of surveys last year showed the manufacturing industry suffering from a downturn in exports.

The ONS data showed that within the manufacturing sector, mining and quarrying output suffered its biggest decline since records began because of maintenance on North Sea oil and gas fields.

In the powerhouse services sector activity ground to a halt in the fourth quarter due to the absence of the London Games boost in the previous three months.

The only bright spot was construction, which delivered a 0.3% rise in output. A post-Olympic cut in spending on sport and recreational facilities pushed down the index for government and other services by 0.7%, after an increase of 1.6% in the previous quarter. All Olympic ticket sales were counted in the previous quarter, giving the ailing economy a one-off boost.

Despite the contraction in the economy, employment has remained resilient, with figures this week showing that almost 30 million adults were in a job in the quarter to November, up by more than half a million on the previous year.

The Bank of England governor, Sir Mervyn King, said this week the UK had been slower to recover than most other countries. But he insisted there were signs of a “gentle recovery” under way and asked Britons to be patient.

Lee Hopley, chief economist at EEF, the manufacturers’ lobby group, said there was little positive news from the figures. “Even assuming some unwinding of activity from the Olympics boost in the previous quarter, this still leaves no real signs of underlying growth in the economy. The news from industry was particularly weak, with November’s sharp drop on output contributing to a rather grim fourth quarter and leaving the overall picture for manufacturing in 2012 the weakest since 2009.”

guardian.co.uk © Guardian News & Media Limited 2010

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In the broadcast today: What’s Next for the JPY after the BoJ Decision? Following the Bank of Japan’s decision to raise the inflation target but to postpone open-ended QE until next year, we examine today’s strengthening of the JPY and explore what the future might have in store for the Japanese currency, we analyze the latest trend developments in the USD/JPY currency pair, we keep an eye on the GBP/USD pair’s test of its monthly range bottom, we note yet another failure of the EUR to break higher vs. the USD, we highlight the market’s reaction to the Bank of Japan monetary policy announcement, the U.K. Government Borrowing, the German ZEW Index, and the U.S. Existing Home Sales, we discuss new forecasts from Citigroup and Commerzbank, and prepare for the trading session ahead.

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Economists warn that the continued rise in public borrowing has put Britain’s triple-A rating under threat. Global jobless to hit record 200m this year. Bank of Japan introduces inflation target of 2% and promises open ended QE to start in January 2014…

Powered by Guardian.co.ukThis article titled “UK credit rating under threat as borrowing rises again – eurozone crisis live” was written by Josephine Moulds and Nick Fletcher, for guardian.co.uk on Tuesday 22nd January 2013 15.19 UTC

3.15pm GMT

Spanish bond success eases pressure for bailout request

Spain’s successful 10-year bond (see below) eases the pressure on the country to seek a bailout. Annalisa Piazza at Newedge Strategy said:

After yesterday’s Eurogroup meeting (that somehow remained supportive on Spain) and cross-country spreads remaining under control since the start of the year, we have seen increasing speculation that Spain could possibly be able to avoid the request of a credit line to the ESM.

We still see risks for Spain in the coming months as a deeper than expected recession in 2013 would completely offset the positive effects of the fiscal consolidation process.

However, the request for aid doesn’t seem to be so imminent as expected.

Updated at 3.19pm GMT

3.07pm GMT

US existing home sales fall unexpectedly

Away from Europe, a blip in the US housing market recovery. Existing home sales unexpectedly fell by 1% in December to an annual rate of 4.94m units.

This was below the 5.1m forecast, as many Americans decided not to put their houses on the market since they were worth less than the value of their mortgage.

But despite that, the December figure was still the highest rate of sales since November 2009.

Updated at 3.11pm GMT

2.57pm GMT

EU ministers will again be tackling the thorny issue of its budget next month, according to the president of the European Council.

2.50pm GMT

Looks like things could have been stirred up by this morning’s spate of market rumours, which included speculation about the resignation of the Bundesbank head – swiftly denied as “utter garbage” – and a possible profit warning from Deutsche Bank.

Updated at 2.50pm GMT

2.15pm GMT

Confidence boost for Spain after wildly successful bond sale

And sticking with the debt markets, there has been a huge amount of demand for a new 10-year Spanish government bond.

Spain’s economy minister Luis de Guindos said demand was unprecedented, with investors putting in orders for a total of €24bn bonds; while bank desks said demand reached around €17bn.

In the end, Spain reduced the interest rate it was willing to pay on the bonds because of the huge flood of demand. But still it chose only to sell €7bn of bonds to leave appetite in the market.

Spain sold the bond via a syndicate of banks, rather than a public auction. This shows a renewed confidence from the country, as it gets to set price in a syndicated bond, rather than taking whatever price investors offer in an auction.

Final pricing of the bond was a spread of midswaps plus 365bp. That’s around 0.1% higher than current yields on Spanish 10-year bonds in the secondary market.

And with that, I’m handing over to my colleague Nick Fletcher.

Updated at 2.45pm GMT

1.50pm GMT

Ireland could apply for ECB support in bond market

Back to Brussels, where Irish finance minister Michael Noonan has said Ireland could apply for support from the European Central Bank’s bond-buying programme – the outright monetary transactions – but only after it has completed two-longer-term bond issues.

There is no inhibition on Ireland applying for OMT, but we would need to be fully back in the market first.

European commissioner Olli Rehn said the EC was working on a series of options to help Ireland and Portugal return to the markets and that the OMT was one possibility.

1.41pm GMT

Germany and France to propose deeper economic union

Meanwhile, German chancellor Angela Merkel and French president Francois Hollande have given a joint press conference in Berlin, where they said they would put forward proposals for a deeper economic and monetary union later this year. Merkel said:

France and Germany together want, by May, to put forward proposals – in preparation for the June European Council – for the stabilisation and deepending of the economic and monetary union. It is about a deeper cooperation in economic policy with the goal of social security, employment, growth and financial stability.

Updated at 1.45pm GMT

1.32pm GMT

Already the reaction the approval of the financial transaction tax (see below) is coming in.

Predictably the UK business group the CBI bemoans the move to levy trading at banks and calls for it to be limited to the eurozone countries.

Matthew Fell of the CBI said:

The UK government is right to reject a Financial Transaction Tax as damaging for jobs and growth. It is disappointing that eurozone economies are pursuing the FTT, whose costs ultimately fall on consumers and businesses, and will be a drag on the eurozone recovery. This tax must not impinge on non-participating member states by including extra-territorial reach into financial services activity conducted in the UK. As the UK’s largest single trading partner, a healthy European economy is in everyone’s interests so we urge participating member states to reconsider this tax.

But Danish MEP and Green economic affairs spokesperson said the European Commission must quickly follow up with a detailed proposal, so that the scheme can be implemented as soon as possible.

The Greens call on the Commission to present an ambitious proposal. It should cover not only shares but also bonds and derivatives, and there should be no exemption for pension funds. The FTT should also include provisions on an ‘issuance principle’, whereby financial institutions located outside of the participating states would also be obliged to pay the FTT if they traded securities originally issued within the EU. This will also make it more attractive for other member states outside the initial 11 to join.

1.28pm GMT

European finance ministers approved the financial transaction tax, despite fierce opposition from business groups. My colleague Phillip Inman reports (in a story soon to be up online):

EU finance ministers gave their approval at a meeting in Brussels, allowing 11 states to pursue a levy on financial transactions. The UK abstained in the vote alongside Luxembourg and the Czech Republic.

Eleven countries won the EU’s backing for a financial transaction tax (FTT), with Germany, France, Italy and Spain adding their names to eurozone neighbours Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia.

The levy, which could raise as much as €35bn euros a year for the 11 countries according to one EU official, is held up as a way to restrict the exuberance of investment banks in times of economic growth.

A tax would raise the costs of individual trades, many of which economists suspect are carried out by banks to extract commission and fees from fund managers that handle large scale pension fund assets.

Opinion is divided over whether banks would continue to trade at current levels and pay the tax or cut back on the number of trades, potentially saving pension schemes millions of pounds.
Algirdas Semeta, the European commissioner in charge of tax policy, said: “This is a major milestone in tax history.”

12.32pm GMT

EU gives go ahead for Robin Hood tax

As expected, the EU finance ministers have given the go-ahead for the financial transactions tax – the so-called Robin Hood tax – for 11 eurozone countries including Germany and France.

12.06pm GMT

Lunchtime round-up

So, for a quick lunchtime round-up…

The UK’s triple-A rating is under threat as borrowing continues to rise, warn economists (see 10.28am)

The global jobless total will hit 202m this year, says the ILO (see 8.09am and onwards)

The Bank of Japan has introduced an inflation target, under pressure from the new prime minister (see 9.13am and more here)

Economic sentiment in Germany has hit a two-and-a-half year high (see 10.13am)

12.00pm GMT

Greek government threatens striking metro workers

Over to Greece, where the government has indicated that it could force striking metro staff back to work, as their prolonged walkout causes traffic chaos. Our correspondent Helena Smith reports:

With metro workers digging in their heels six days after they walked off the job, Greece’s governing coalition issued its strongest warning yet saying “there are limits” to strike action.

The walkout – the longest since the inauguration of the urban transit network in the 90s – has caused gridlock in the capital, prompting fury among Greeks. The front-page headline in today’s Ta Nea encapsulates rising passions: “1.5 million hostages on the roads of Athens” it said of the worsening traffic chaos.

Workers are protesting against collective work agreements in the civil service that the EU and IMF have demanded in exchange for emergency aid. But state-run TV channel NET insisted today that only “a minority” of the metro’s 1,300-strong staff were behind the action.

Quoting government sources, it said the government would not back down and showed the development and transport minister Kostis Hadzidakis saying: “I’m afraid the ways things are developing there is no respect for rules or limits …
what we are seeing is a minority who is threatening and a majority who are paying [the price].”

Hinting that staff would be forced to go back to work under court order, the normally mild-mannered politician warned “this will be brought under control”.

Despite courts determining their action to be “illegal and abusive”, unionists vowed to continue the strike saying their action was as much motivated by disagreement over economic reforms as the “acute heart attacks” two co-workers had suffered as a result of the transport minister’s threats.

11.50am GMT

UK manufacturing could be past its worst – economist

Back in the UK, the CBI industrial trends survey was a mixed bag. Orders (particularly export orders) fell in January but expectations for near-term output and employment improved.

Howard Archer at IHS Global Insight said:

 The overall impression is that the manufacturing sector may be past the worst after a pretty torrid 2012, but it still has its work cut out to return to sustainable growth in the face of ongoing challenging domestic and international conditions.

Signs that eurozone activity may have bottomed out around October and the recent appreciable easing of the region’s sovereign debt tensions does offer some hope for UK manufacturing exports. In addition, sterling’s recent retreat, particularly against the euro, will be largely welcomed by UK manufacturers as it should boost their competitiveness.

Taking a look at the actual numbers, the total order book balance fell back to -20% in January from -12% in December, driven by a sharp drop in export orders.

Despite that, the balance of manufacturers expecting to increase their output over the next three months climbed to 8% in January from zero in December and -9% in November.

Updated at 11.50am GMT

11.42am GMT

EU finance chiefs likely to approve Robin Hood tax

As the pictures come in from the meeting of the 27 EU finance ministers, it’s worth looking at the so-called Robin Hood tax that they have been talking about this morning.

This is the proposed levy on trading, known as the financial transactions tax, that Britain has so vehemently opposed. But reports suggest the 27 EU finance ministers will today approve it for the eurozone. Austrian Finance Minister Maria Fekter said before the meeting:

I expect that we will receive this authorisation today. This is the precondition for setting such a cooperation into motion.

We already know that Britain will abstain from the vote and Reuters is reporting that other countries have expressed concern about the impact on states that do not join the scheme.

Trading in London – Europe’s biggest financial centre – for example, will be affected, as the levy can be imposed regardless of where the transaction takes place if either the buyer or seller is based in one of the countries imposing the tax.

Updated at 11.58am GMT

11.10am GMT

Irish politicians welcome delay to EU loan repayment

But Ireland’s politicians were sounding a more positive note this morning, after the EU gave the country more time to repay its loans. Our correspondent Henry McDonald reports:

Irish finance minister Michael Noonan has said that the EU’s decision to give the Republic more time to repay its loans will boost confidence in the global markets.

Welcoming today’s decision in Brussels to extend the maturity of the rescue loans to Ireland and potentially lowering cost of the multi-billion euro bailout for Dublin, Noonan said: “We’re not talking about hundreds of millions, we’re talking about savings of a certain amount of billions. We’d have to quantify that when the work is done on it. We’re not talking about huge amounts of money, we’re talking about a significant amount.”

Noonan’s Cabinet colleague, the deputy prime minister Eamon Gilmore, however warned that “time is running out” for Ireland to get a deal on its banking debt from the country’s European partners.

The Republic is due to pay a crippling €3.1bn for the cost of rescuing the bank that nearly bankrupted the country – the Anglo Irish Bank.

Noonan, Gilmore and the taoiseach Enda Kenny have themselves banked their reputations on persuading the rest of the EU to shoulder some of the burden of the cost of rescuing Anglo. “We are now at a critical stage of the discussions with the [European Central Bank] on the promissory note,” said Gilmore. The ‘promissory note’ is Ireland’s IOU to Europe in respect to that part of the emergency loans that rescued Irish banks.

11.03am GMT

Over in Ireland, meanwhile, there are clear signs of the country’s ongoing unemployment problem. Simona Zudyte reports:

Seven days after staff denied it was shutting, the HMV store on Dublin’s Grafton Street confirms it is closing its doors for the last time. Even on Ireland’s premier shopping thoroughfare, here are signs of Ireland’s inability to curb its increasing unemployment, which is close to 15%.

10.56am GMT

Back in the UK, Labour have pounced on the poor public finance data (see 9.44am) as evidence that chancellor George Osborne’s Plan A is not working. Labour’s shadow chief secretary to the Treasury, Rachel Reeves, said:

David Cameron and George Osborne’s … failure on jobs and growth means they are now failing on the one test they set themselves – to get the deficit and debt down.
Borrowing is rising and is over £7bn higher than at the same point last year. And this is borrowing to pay for economic failure as a flat-lining economy and rising long-term unemployment have sent the welfare bill soaring and tax revenues have been revised down.
By squeezing families and businesses too hard, choking off the recovery and so pushing borrowing up not down, the government’s economic policies have badly backfired. But David Cameron and George Osborne have decided that millions of working families will pay the price with further cuts to tax credits and benefits while millionaires get a tax cut.

10.51am GMT

Cyprus could derail progress in eurozone – ECB’s Asmussen

Meanwhile, ECB board member Joerg Asmussen has said that problems in Cyprus could derail the fragile recovery in the eurozone. He said to Reuters:

Disorderly developments in Cyprus could undermine progress made in 2012 in stabilising the euro area. Cyprus could well be systemic for the rest of the euro area despite its size.

Cyprus’s economy represents just 0.2% of eurozone GDP and some states say it is not systemically relevant and therefore is not in need of a bailout. Asmussen clearly disagrees.

Under normal circumstances one would expect the direct impact of a default to be limited, and it’s obvious that without assistance [Cyprus] will default.

At the same time we should recognise that the situation is not normal. Even though the promise of the OMT and other important decisions have calmed the markets, this siutation is still fragile.

Updated at 10.52am GMT

10.28am GMT

UK to lose triple-A rating, say economists

Britain will lose its triple-A rating this year, says Rob Wood at Berenberg Bank, after public finance data showed chancellor George Osborne’s attempts to cut the deficit are failing. (see 9.44am)

The fiscal position is likely to drift further off course as the UK veers towards a triple-drip recession. There is only so long that the Chancellor’s combination of smoke and mirrors and optimistic growth assumptions can disguise the problem. The UK will probably lose its AAA credit rating this year with at least one rating agency.

James Knightley at ING notes that tax receipts are down, as the economy continues to flat-line and austerity fails.

The disappointment has come from the tax side mainly, with income tax revenues, corporation tax revenues and VAT revenues all down on the same period for financial year 2011/12. This highlights the weak state of the UK economy and the fact that austerity measures are failing to generate the improvement in government finances that were hoped for.

He too asks, how long can the UK can hold onto its AAA status?

With the US and France having been downgraded by one ratings agency in the past couple of years, another disappointing UK borrowing number and a widely expected contraction in 4Q12 GDP on Friday will intensify the threat of the UK suffering the same fate.

Howard Archer of IHS Global Insight says a downgrade would be humiliating for Osborne but would not have a great impact on the economy.

The loss of the UK’s AAA rating would clearly be seen as an embarrassment for the government given the emphasis it has frequently placed in the past on keeping the AAA rating. Indeed, Chancellor George Osborne made it a key focus for the UK’s fiscal austerity prioritization as soon as the government came to power in the summer of 2010.

However, we suspect that the loss of the AAA rating would have only limited negative impact for the UK economy. There are so few countries left now with a AAA rating, that to lose it would not be the stigma or major threat to market confidence that it would have been say a couple of years ago.

Updated at 10.28am GMT

10.13am GMT

Investor sentiment in Germany hits two-and-a-half year high

Germany’s confidence survey looks good, showing analyst and investor sentiment in the country rose sharply in January to hit its highest level since May 2010.

The ZEW index hit 31.5 for January, compared with 6.9 in December, and smashing through analyst forecasts of a reading of 12.

The report said sentiment had improved as the uncertainty over Europe had diminished. But the economic situation of important trade partners for Germany was still considered to be weak.

Overall economic perspectives for Germany over the next six months have brightened. And this boost in sentiment could soon result in companies investing more.

9.44am GMT

UK public borrowing rises as spending outstrips income

Back to the UK, where public finances continue to look pretty bad. The government borrowed (slightly) more than expected in December and spending grew faster than income.

So chancellor George Osborne continues to fail in his attempt to bring the budget deficit down.

Public sector net borrowing (excluding the impact of bank bailouts) – the government’s preferred measure – rose last month to 15.4bn, compared with 14.8bn in December 2011. Government receipts rose 3.6% on the year, while spending grew by 5.4%.

We’ll have reaction to those figures coming in shortly.

9.29am GMT

Weidmann resigning rumour DENIED

Apologies, it appears the rumour that Jens Weidmann was quitting as governor of the German central bank was unfounded. The Bundesbank press office has denied it fairly robustly. A press officer said:

This is totally utterly nonsense. I don’t know why you believe all these things on Twitter. He is right now in the weekly board meeting of the Bundesbank. He really enjoys his job.

Updated at 11.58am GMT

9.25am GMT

Rumours fly that Bundesbank’s Jens Weidmann could resign

While this is very much rumour and speculation at this stage, financial broker Abshire-Smith says there is talk in the market that the Bundesbank’s Jens Weidmann could step down.

That would be huge news for the eurozone, where Weidmann is often the only dissenting voice.

Updated at 9.33am GMT

9.18am GMT

The moves by the Japanese government to influence the Bank of Japan will trouble central bankers around the world. Jens Weidmann, governor of Germany’s Bundesbank yesterday warned of the dangers of bringing politics into central bank decisions (see 7.55am).

9.13am GMT

Bank of Japan introduces inflation target of 2%

Also overnight, the Bank of Japan has bowed to pressure from new prime minister Shinzo Abe and agreed to introduce an inflation target of 2%, in a bid to boost the economy.

In a joint statement with the government, the Bank of Japan said it would aim for a 2% annual increase in the nation’s consumer price index and take additional steps for monetary easing to achieve that goal, including “open-ended” central bank asset purchases similar to the strategy followed by the US Federal Reserve.

Japan’s economy has been plagued with debilitating deflation since the late 1990s – an all-round fall in prices, profit and incomes. But the promise of monetary easing has already weakened the yen, in a boon to the competitiveness of exporters, which make up much of Japan’s growth.

8.39am GMT

ILO urges governments to ease austerity

Having laid bare the jobless crisis around the world (see below), the ILO urged governments to ease austerity, which it said has made the global economic crisis much worse.

Austerity measures and uncoordinated attempts to promote
competitiveness in several European countries have increased the risk of a deflationary spiral of lower wages, weaker consumption and faltering global demand. In light of the global jobs and consumption deficit, countries should adapt the pace of their fiscal consolidation to the underlying strength of the economy and recognise that short-term stimulus may be needed to grow out of debt burdens.

Updated at 11.55am GMT

8.27am GMT

The true extent of the unemployment crisis is masked by a growing number of people dropping out of the jobs market altogether, the ILO said in its relentlessly gloomy report (see posts below).

That problem is particularly severe in the European Union, it said, where long-term unemployment and a weak economic outlook has discouraged people from looking for jobs.

Looking ahead, the ILO said, the global number of unemployed is expected to rise further to almost 211m over the next five years.

8.20am GMT

Global youth unemployment hits 12.6%

Youth unemployment, which is more than 50% in Spain and Greece, is a particular concern, the ILO said.

Globally, the youth unemployment rate – which had already increased to 12.6 per cent in 2012 – is expected to increase to 12.9 per cent by 2017.

The crisis has dramatically diminished the labour market prospects for young people, as many experience long-term unemployment right from the start of their labour market entry, a situation that was never observed during earlier cyclical downturns.

Some 35% of all young unemployed people have been out of a job for six months or longer in advanced economies, up from 28.5% per cent in 2007. It said:

Such long spells of unemployment and discouragement early on in a person’s career also damage long-term prospects, as professional and social skills erode and valuable on-the-job experience is not built up.

In Europe, this problem is particularly severe and the ILO estimates that 12.7% of all young Europeans are neither employed nor in education or training (almost 2 percentage points higher than at the start of the crisis).

Updated at 11.53am GMT

8.09am GMT

Recession in Europe pushes global jobless to 202m this year

The global jobless total will rise to a record 202m this year, says the UN’s jobs watchdog, the International Labour Organisation.

In a report released overnight, the ILO said there were some 197m people without a job in 2012. While almost 40m people had dropped out of the jobs market altogether as job prospects proved unattainable. The jobless total will rise by 5.1m this year and another 3m next, it predicts.

It says the recession in the eurozone has spilled over globally, primarily because of a decline in international trade.

Entering 2013, the crisis in the Euro area constitutes the single biggest risk to global employment trends for the year ahead. The financial crisis in the Euro area, brought on by a combination of banking sector distress and protracted financial and household deleveraging, coupled with high levels of sovereign debt and unsustainably high government bond yields in some countries, has emerged as a disruptive and destabilizing force not only in the Euro area itself, but also for the global economy as a whole.

And, in very strong language for such a report, the ILO lays the blame for the crisis squarely at the feet of ‘indecisive’ policymakers.

Incoherence between monetary and fiscal policies adopted in different countries and a piecemeal approach to financial sector and sovereign debt problems, in particular in the Euro area, have led to uncertainty weighing on the global outlook. Investment has not yet recovered to pre-crisis levels in many countries.

The indecision of policy-makers in several countries has led to uncertainty about future conditions and reinforced corporate tendencies to increase cash holdings or pay dividends rather than expand capacity and hire new workers.

Updated at 11.52am GMT

7.55am GMT

Bundesbank warns of currency war risk

Germany’s central banker Jens Weidmann has warned of the risk of currency wars as exchange rates become ever more politicised, writes the FT this morning.

Michael Steen in Frankfurt reports:

The erosion of central bank independence around the world threatens to unleash a round of competitive exchange rate devaluations, which leading economies have so far avoided during the financial crisis, the president of Germany’s Bundesbank warned on Monday.

Jens Weidmann, whose institution’s own fierce independence from political influence was the model for the European Central Bank when it was founded, said Stephen King, the chief economist at HSBC, was “perhaps right” in forecasting an end to the era of central bank independence.

“It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” Mr Weidmann said in a speech in Frankfurt.

“Whether intended or not, one consequence could be the increased politicisation of the exchange rate,” he said, according to a text of his speech provided by the Bundesbank. “Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way.”

7.45am GMT

Today’s agenda

Merkel and Hollande will today be attending an event to commemorate the 50th anniversary of the Elysée Treaty, which normalised relations between Germany and France after the second world war. Also , the finance ministers of the 27 EU member states meet in Brussels this morning.

  • EU 27 finance ministers meet: 8am
  • UK public finances (December): 9.30am
  • Germany ZEW survey (January): 10am
  • CBI trends (January): 11am
  • Google, La Stampa, La7 briefing on Italian elections: 11am
  • Merkel, Hollande and EU’s Schulz at Elysee treaty event: 1.15pm
  • ECB’s Nowotny in discussion in Vienna: 4pm
  • ECB’s Draghi speaks in Frankfurt: 6pm
  • Bank of England’s King speaks at CBI Northern Ireland dinner: 7.45pm

Updated at 11.49am GMT

7.35am GMT

Good morning and welcome to our rolling coverage of the eurozone crisis. Overnight the International Labour Organisation put out a sobering report on global unemployment, which it expects to reach record highs this year. More on that shortly.

Later today we’ve got public finances data out for the UK, and an economic confidence survey in Germany. We’ll have details of those and all the latest developments in the eurozone and beyond, throughout the day.

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