May 29 2013

Highlights of the EC’s annual budget review. Barroso: We need growth and reforms. France urged to fix its competitiveness, while Germany told to let wages rise. Italian PM: we can be proud. Bank of Canada leaves rates unchanged…


Powered by article titled “France and Spain win more time to cut deficits as Europe puts growth over austerity – as it happened” was written by Graeme Wearden, for on Wednesday 29th May 2013 18.02 UTC

6.59pm BST

Closing summary

That's all for today, after quite a busy session.

Here's a very brief closing summary.

The European Commission has given seven countries more time to hit their budget targets, as it urged member states to back a new push on structural reform and growth.

Spain, France, Poland and Slovenia get another two years, while a 12-month extension was handed to the Netherlands, Portugal, and Belgium (which also avoided being fined despite failing to address its budget deficit).

Highlights from 1.12pm

Summary of the key points here

Analysis here

Early reaction here

The OECD has lowered its growth forecasts for the world economy. In its latest economic update, the Paris-based organisation expressed particular concern about the eurozone – urging the European Central Bank to consider embarkin on quantitative easing. Highlights from 10.12am.

World markets fell, with the FTSE 100 dropping almost 2%. Closing prices here, and reaction at 5.25pm.

The day began with the IMF lowering its growth forecast for China. See 7.52am.

And ended with a successful-looking auction of US debt. See 6.29pm

And also saw Spanish firemen clash with riot police in Barcelona. See 5.58pm

In Greece, the Pasok party was hit by another defection. See 4.16pm

While the German jobless rate remained at 6.9%, despite rising by 21,000 on a seasonally adjusted basis. See 9.12am onwards.

Thanks, as ever, and goodnight. GW

Updated at 7.02pm BST

6.40pm BST

France's president, Francois Hollande, has denied that Brussels can order Paris around, following the recommendations on labour and pension reform announced by the EC today.

AFP newswire reports that Hollande has said:

The [European] Commission doesn't have to dictate to France what it has to do. It simply has to say that France must restore its public accounts.

6.29pm BST

The US government's much-anticipated auction of bn of five-year bonds appears to have gone smoothly.

The debt was all sold at yields of up to 1.045%, which Reuters says was in line with market expectations. The bid-to-cover ratio was 2.79, which means total bids were almost three times as large as the amount of debt on offer.

And US 10-year Treasury bills are rising in value since the auction results hit the newswires – suggesting it has been well received.

Updated at 6.30pm BST

5.58pm BST

Photos: Spanish firemen protest

Just in – photos of a protest by Spanish fireman in Barcelona against the government's spending cuts, which cuminated in clashes with riot police outside the Catalan parliament:

Firemen march against sector budget cuts carried on by Catalonia Government
Photograph: Lino De Vallier/Demotix/Corbis
Firemen burned coffins that symbolized the death of the public services due to austerity measures in front of the Catalonia Parliament.
Firemen burned coffins that symbolized the death of the public services due to austerity measures in front of the Catalonia Parliament. Photograph: Lino De Vallier/Demotix/Corbis
Riot police try to stop the entrance to the Catalonia Parliament at firemen protesting for sector budget cut in Barcelona.
The rally ended in front of the Catalonia Parliament with clashes with riot police. Photograph: Lino De Vallier/Demotix/Corbis

Updated at 6.00pm BST

5.25pm BST

What the analysts say

Here's some analyst reaction to today's heavy falls on Europe's stock markets (see 4.49pm for the closing prices)

Michael Hewson of CMC Markets: ToTo is the new RoRo

In an almost complete reversal of yesterday’s price action the bears have reasserted themselves today, overturning the brief return to optimism as European equity markets slide back sharply on the back of rising bond yields.

The yield on US treasuries rose to its highest level in 12 months on growing concerns that the Fed could well be getting nearer to the point of a possible paring back in its current asset purchase program.

Instead of the usual “risk on, risk off” scenario (RoRo), we’ve become used to, now we have to contend with the new “taper on, taper off” scenario or (ToTo) which is likely to dominate market sentiment until the next Fed meeting on June 18th and 19th, and even possibly beyond that.

This concern saw Europe’s markets open lower this morning, and the declines had further fuel added to the fire by the OECD who in their latest assessment of the global economy revised their outlook down again, this time from 3.4% to 3.1% on a global basis.

The reductions in Europe were even deeper with a revision of EU GDP down from a contraction of 0.1% to a contraction of 0.6%, while France’s GDP target was slashed as well from 0.3% to -0.3%.

The OECD also voiced its concern that without some form of QE in Europe and negative deposit rates we could well see further forecast reductions in the coming months.

Retailers have also taken a hit after CBI retail sales plunged the most in 16 months in May. (details at 11.27am). It seems higher energy prices and below inflation wage growth along with tax changes in the new tax year have constrained consumer spending.

Yusuf Heusen of IG: is the market coming or going?

Once again the uptrend is looking under threat.

Yesterday’s impressive gains are a distant memory as the FTSE gives up the ground gained on Tuesday and back to levels seen last Thursday. It’s been a while since we’ve seen such volatility in both directions, which is at least a welcome reminder that markets can go down as well as up, but two consecutive triple-digit days suggests a market that doesn’t know whether it’s coming or going. Too many had probably forgotten that universal truth in the steady run higher this year.

A warning from the OECD about the negative impact of the end of QE on global growth prospects has reignited fears that any reduction in easing will bring the global party to a halt.

Such fears are understandable, but perhaps overdone; having seen the turmoil caused by even hinting at a reduction in QE, Ben Bernanke is going to tiptoe very carefully into this area

Updated at 5.25pm BST

5.01pm BST

Spain's slow struggle to emerge from a toxic mix of high unemployment, recession and swollen budget deficits looks set to take even longer than expected after both Brussels and the OECD changed their tunes on the country's future.

Our Madrid correspondent, Giles Tremlett, explains:

The OECD foresees the economy shrinking a further 1.7 percent this year, while growth of just 0.4 percent in 2014 will not create jobs – with growth now the major concern, ahead of the deficit.

It sees Spain's deficit barely shifting next year, with a drop from 7% to 6.9% of GDP, while unemployment is set to rise to 28%.

Brussels has also heard the warning bells and turned away from strict austerity, changing the country's deficit target to 6.5% of GDP from the previous 4.5%.

Even reaching this target, however, will require fresh measures – with Brussels demanding further tax hikes, more labour reform and a radical change in the way Spain calculates its pension payments.

These will have to be linked to the long-term sustainability of the pension system in an ageing population rather to inflation. The expected result is for pensions to fall in real terms.

Updated at 6.04pm BST

4.49pm BST

European markets slide

A gloomy day in Europe's stock markets has ended with heavy falls on the major exchanges.

In London the FTSE 100 has dropped almost 2%, down 134 points at 6627, with 98 shares falling (utility firms National Grid and United Utilities both fell 5%).

Here's a picture of the damage, including the latest prices from Wall Street.

Equity markets, at European close, May 29 2013
Photograph: /Thomson Reuters

As Brenda Kelly of IG explained at lunchtime (see 12.37pm), shares have been hit by several factors – including this morning's downgraded OECD forecasts, fresh fears that the Federal Reserve might tighten its QE programme, predictions that the Japanese Nikkei will fall tomorrow, and a bout of profit taking after the recent rally.

More reaction to follow….

4.30pm BST

ECB: Banks still face stability risks

The European Central Bank is warning this afternoon that Europe's banks to be further strengthened.

The ECB's six-monthly review of the eurozone financial sector warned that it is still fragile, and that stresses in the 'real economy' could easily cause new problems:

Here's the four main risks to stability (via Reuters):

  1. Further decline in bank profitability, linked to credit losses and a weak macroeconomic environment
  2. Renewed tensions in sovereign debt markets due to low growth and slow reform implementation
  3. Bank funding challenges in stressed countries
  4. Reassessment of risk premia in global markets, following a prolonged period of safe-haven flows and search for yield

Quite a wide-ranging set of threats — particularly as the eurozone economy continues to contract.

Vitor Constancio, the ECB's vice-president, told reporters:

Financial stability has improved but remains fragile … due to weak growth and banking sector vulnerabilities.

There is this disconnect between the significant improvements in financial markets in general and the real economy – and the situation in the real economy is affecting banks….So this is a cause of concern.

4.16pm BST

MEP’s defection leaves Greece’s Pasok party on the ropes

Over in Greece our correspondent Helena Smith reports that the formerly all-powerful socialist Pasok party has suffered yet another defection over government economic policies.

She writes:

If ever proof was needed that the once mighty socialist Pasok is imploding at an alarming rate, it came today when the prominent euro MP Kriton Arsenis also threw in the towel prompting a furious reaction from the party.

In an incendiary letter to party chief Evangelos Venizelos, the MEP said he had decided to become an independent because that way he could best continue the fight against the “irrational and destructive policy of unilateral austerity in Europe and Greece.”

A former green activist, Arsenis wrote that he was vehemently opposed to the privatization program ordered by the country’s troika of creditors at the EU, ECB and IMF and sale of “profitable” public utilities and sate-owned land which Pasok has endorsed as a partner in prime minister Antonis Samaras’ tri-partite coalition.

PASOK party leader Evangelos Venizelos (C) leaves the Prime Minister's office after a meeting in Athens, Greece, 27 May 2013.PANTZARTZI
PASOK party leader Evangelos Venizelos, pictured on Tuesday night.Photograph: SIMELA PANTZARTZI/EPA

Arsenis's defection – on the heels of last week’s decision by former EU commissioner and stalwart party cadre Anna Diamantopoulou to also break ranks — appears to have unleashed a massive row with the party demanding this afternoon that Arsenis return the seat. 

Helena explains:

In a withering statement, Fofi Gennimata, Pasok’s spokeswoman, said it was now up to Arsenis, who was appointed to the parliament by Venizelos’ predecessor George Papandreou, to do the “decent” thing. “He was not elected himself but appointed by the previous president of Pasok. This position belongs to the party. The euro parliamentarian post belongs to Pasok,” she told a local radio station. “So whoever does not wish to have anything to do with Pasok … I think must first leave that position and then make clear their objections which we can then talk about.”

Earlier this week Thanassis Ikonomou, another MP, also defected to the left-wing Dimar, saying “for a long time now Pasok has lost all its personality and identity.” 

The party’s free fall has become a major headache for the pro-bailout Samaras alliance with analysts fearing it could further weaken a coalition already combatting daily (if abated) anger over austerity measures.

Updated at 4.16pm BST

4.04pm BST

We shouldn't get carried away with suggestions that Europe is abandoning austerity altogether.

Even though Spain, France, Portugal, Poland, the Netherlands and Slovenia are getting up to two years more time to lower their deficits, Brussels is still pushing for some of its favourite measures including labour market reforms, welfare adjustments and (although slower) fiscal consolidation.

Open Europe, the think tank, has rounded up some of the key recommendations, and concludes:

For all the talk of this being the ‘end of austerity’ or ‘austerity in retreat’, is much really changing? Sure, there is some tinkering with timelines for deficit reduction (Spain, France and others have been given more time to cut public deficit), but ultimately the eurozone is still going along the same policy path – just slightly more slowly.

It adds that structural reform, welfare reform, fiscal consolidation economic liberalisation are all necessary, but adds:

The question remains whether they can all be done at the same time by a group of countries which are closely interlinked, and many of which are currently in recession.

And as an example, here's France's to-do list:

  • France should do more to cut labour costs, in particular by reducing social security contributions for employers.
  • The European Commission says France should adopt new measures by the end of the year to “bring its pension system into balance in a sustainable manner no later than 2020.” 
  • France should improve the business environment and help its firms become more competitive;
  • France’s unemployment benefit system should be “urgently” reformed, so that it is sustainable but also “provides adequate incentives to return to work”.
  • France should do more to tackle labour market segmentation, and remove “unjustified restrictions in the access to and exercise of professional services.”

More here: Despite much fanfare, the European Commission recommends much of the same for the eurozone

Updated at 4.04pm BST

3.35pm BST

Video: OECD chides eurozone for lagging behind

The OECD underlined the challenges facing the eurozone today, when it slashed its forecast for 2013 to a 0.6% drop in GDP. 

Here's a video clip of Pier Carlo Padoan, chief economist, explaining why Europe is lagging:

(if you scroll back to 10.12am there are details of the OECD's new forecasts, in which it predicted slower growth across the world economy).

3.27pm BST

Central bank news – Canada left rates unchanged at 1% at its monetary policy meeting today (quite a rarity, with so many choosing to ease borrowing costs in recent weeks).

Here's the statement from the Bank of Canada, which includes this assessment of the world economy:

In the United States, the economic expansion is progressing at a modest pace, with continued strengthening in private demand partly offset by fiscal consolidation.

Japan’s economy is beginning to respond to significant policy stimulus. Europe, in contrast, remains in recession. Growth in China has continued to ease from very strong rates, weighing somewhat on global commodity prices.

The Bank continues to expect global economic activity to grow modestly in 2013 before strengthening over the following two years.

Updated at 3.28pm BST

3.16pm BST

Italian government: we can be proud

Italy's new prime minister, Enrico Letta, has declared that the Italian people can be "proud" of the news that the country has been removed from the EC's excessive deficit list:

Our Rome correspondent, Lizzy Davies, reports that Letta also paid tribute to the efforts of his predecessor, Mario Monti, who suffered a bruising rebuff from the electorate in February's general election.

News from Brussels is not generally something to celebrate for the Italians, so the European Commission's announcement today that it is recommending the abrogation of the eurozone's third-largest economy from its Excessive Deficit Procedure (EDP) has understandably been welcomed in Rome.

In a statement on the Italian government's website, prime minister Enrico Letta said the move was "cause for great satisfaction" and something of which the Italian people should be "proud". 

The new premier, whose fragile grand coalition government was sworn in just a month ago, said Italy was now "reaping the rewards" of the previous technocratic government, which pushed the country through a series of punishing austerity measures. He expressed his "personal gratitude" to Mario Monti, and affirmed his own government's intention to stick to fiscal goals set down by Brussels. 

The move, which had been long anticipated but confirmed only this afternoon, has been hailed in the Italian media as a "shot of oxygen" for the new government. It is estimated that it will free up around €8bn of public money which would have gone on getting its annual borrowing down under the EDP. 

However Letta has been careful not to raise expectations, reportedly saying earlier this week that the benefits would only been seen on next year's budget. 

He was quoted in the Italian press as telling a meeting of regional governors: "As we know, it will not free up resources immediately."

Updated at 3.16pm BST

3.08pm BST

Mariano Rajoy, Spain's prime minister, has welcomed the confirmation of a two-year extension to bring its deficit below 3%. He declaried it as a sign that austerity is moving off the agenda, flags up journalist José Miguel Sardo:

Updated at 3.09pm BST

3.05pm BST

3.03pm BST

EC’s Slovenian worries

Another point to flag up from the EC's recommendations today – it is worried about the Slovenian banking system.

Its nine recommendations for Slovenia include this ominous warning:

Slovenia should arrange an independent review of the entire system, stand ready to re-capitalise further banks, if necessary, and adopt a comprehensive banking sector strategy.

and also:

Linked to the recommendation above, Slovenia should also review the supervision of the banking sector and act to strengthen its capacity and transparency.

Slovenia is already battling to avoid being forced to take a bailout, primarily due to the problems in its mainly state-owned banking sector.

(hat-tip to fastFT, who have more details on their new site)

2.44pm BST

Summary: what the EC has done:

A quick summary of the main decisions from the European Commission:

• Six countries have been given more time to bring their deficits under 3% of GDP: Spain, France, Poland and Slovenia get two more years, while the Netherlands and Portugal get a year each.

• Belgium has also been given another 12 months to correct its deficit, but will not be fined despite the lack of any 'effective action' in the past

• Five countries are being released from the Excessive Deficit Procedure having mended their ways: Hungary, Italy, Latvia, Lithuania and Romania.

• An Excessive Deficit Procedure is being opened on Malta, which will take the total number of countries under a EDP to 16.

And here's the key quote from President Barroso:

Now is the time to step up the fundamental economic reforms that will deliver growth and jobs, which our citizens, especially our young people, anxiously expect.

This is the only way to address the two lasting legacies of this crisis – the serious loss of competitiveness in many of our Member States, and persistent unemployment, with all its social consequences.

The recommendations issued by the Commission today are part of our comprehensive strategy to move Europe beyond the crisis. They are concrete, realistic, and adapted to the situation of each of our Member States.

2.18pm BST

EC’s annual budget report: instant reaction

Here's the first reaction to the Commission's new country-specific recommendations:

2.15pm BST

Olli Rehn also singled out the French pension system, saying that the Paris government must clarify its reform plans so that the system is sustainable.

2.08pm BST

2.08pm BST

Rehn summed up the EC's new budget targets as an "important breathing space" for countries in which member states must use to implement structural reforms.

1.58pm BST

Lucky Belgium

Belgium appears to have avoided being fined for violating the Commission's budget rules:

1.57pm BST

Rehn reiterates Barroso's point that it is "essential" that France uses extra time to tackle the underlying problems with its economic competitiveness.

1.53pm BST

Rehn: Malta back on the excessive deficit list

Now Olli Rehn, the commissioner for monetary policy, is speaking in Brussels.

He explains that the Commission is recommending that Hungary, Italy, Latvia, Lithuania and Romania should all be removed from the 'excessive deficit' list. However, it wants to put Malta back on the list, just six months after removing it.

Rehn also defends the EU's growth and stability pact:

1.48pm BST

Barroso: Italy can’t stop

Jose Manuel Barroso
Photograph: EC

Finally, Jose Manuel Barroso warns that Italy cannot abandon its austerity programme, despite being removed from the list of countries with excessive deficits.

He explains that its national debt, at over 120% of GDP, remains a concern.

The high debt/GDP ratio is still a burden to the Italian economy…

That is why we cannot say Italy should relax its efforts.

Updated at 1.49pm BST

1.42pm BST

Barroso: Germany should let wages rise

Next question: Should Germany do more to help the rest of the eurozone?

Barroso replies that the EC would like to see Germany pay packets rise:

Germany should ally wages with productivity – that means increased wages.

He also warns that it is currently too difficult for small firms from outside Germany to access its economy, as our Europe editor Ian Traynor flags up from the press conference:

1.39pm BST

The live feed just froze for a moment, so I missed Barroso cracking a joke (of sorts):

1.37pm BST

Barroso: France must use extra time to fix economy

Question time, and Barroso denies that the EC has bowed to pressure from Paris when it gave France an extra two years grace to lower its deficit.

It was our decision, he insists, adding:

We believed, on a very sound basis, that this is what makes sense from an economic and financial point of view.

France must use this time to make its economy more competitive, he adds.

Updated at 2.05pm BST

1.33pm BST

Barroso: more ambition needed on growth

Jose Manuel Barroso says that the EC's main recommendation this year is that all member states must be more ambitious on making economic reforms to boost economic growth.

He cited the need to improve the single market for services, and to make changes to labour reforms.

He also said member state must monitor the "critical relationship" between wage rises and productivity, suggesting that unemployment would increase if wages rose too quickly.

He ended by calling for a new "European consensus" , saying this was vital for confidence, and thus growth.

1.26pm BST

The EC's new country-specific recommendations are online here.

1.25pm BST

Barroso adds that talk of a battle between growth and austerity has been futile. The key, he insists, is to make structural reforms to deliver long-term growth,

1.24pm BST

Barroso: we have time to slow pace of consolidation

Jose Manuel Barroso is outlining the EC's new recommendations now:

He say Europe now has time to slow down the pace of fiscal consolidation, which is why it has decided to allow France, Spain, Poland, Slovenia the two-year extensions just announced, and the 12-month extensions for the Netherlands and Portugal.

He is explaining that these member states need to use the extra time to make structural reforms.

But because those changes will take time to deliver results, Barroso adds, "specific focused action is needed for the unemployed, especially young people".

Updated at 1.45pm BST

1.19pm BST

Breaking: the EC has agreed to give six European countries more time to bring their deficits under the official target.

France, Spain, Poland and Slovenia are all being granted two-year extensions.

Netherlands and Portugal both get one-year extensions.

And as expected, the EC is also ending its 'excessive deficit procedure' against Italy, recognising the fact that its deficit is now below the 3% mark.

Updated at 1.23pm BST

1.12pm BST

EC announces country-specific recommentations

The European Commission is announcing the details of its assessment of the EU member states national budgets NOW.

A press conference is getting underway in Brussels – it will be streamed here.

1.04pm BST

US bond sale looms

Speaking of the markets, the US government will be selling bn of five-year debt this afternoon (1pm New York time, or 6pm BST).

That sale will be closely watched by bond investors, after the yield on 10-year Treasuries spiked 16 basis points to 2.17 per cent overnight

(that's via fastFT, the Financial Times's new rolling markets news and views service which launched this morning, and is well worth checking out).

Tuesday's rise in US bond yields has been blamed on concerns that the Federal Reserve will start 'tapering' its quantitative easing programme soon, especially after strong consumer confidence and house price data from America on Tuesday.

12.37pm BST

European markets in retreat

The FTSE 100 is flirting with a triple-digit loss as Europe's financial markets turn south again.

Here's the latest prices:

FTSE 100: down 98 points at 6664, -1.44%

German DAX: down 140 points at 8340, – 1.6%

French CAC: down 54 points at 3997, -1.3%

Spanish IBEX: down 61 points at 8449, -0.7%

Italian FTSE MIB: down 120 points at 17398, -0.7%

I just spoke with Brenda Kelly, senior market strategist at IG, who cited three reasons for falling markets;

1) the OECD's new, lower economic forecasts (and the news that the IMF lowered its growth forecast for China)

2) Concern over Japan, after a coalition party member warned that the country's bond yields must not rise much higher (details here)

3) profit-taking ahead of next week's US jobs data (the non-farm payroll), which will give "clarity and direction" to the markets.

She also explained that there's been volatility in the foreign exchange markets today, ahead of the European Central Bank's meeting next week. Will it impose negative interest rates on bank deposits, as the OECD advised today?

As Kelly put it:

There's a lack of real certainty over what's going on with central bank policy makers.

The Dow Jones index is expected to fall around 100 points, or 0.7%, when it opens in two hours time. The futures market is also indicating that Japan's Nikkei will fall up to 3% tomorrow morning….

And here's the biggest fallers on the FTSE this lunchtime:

Biggest fallers on the FTSE 100, May 29, lunchtime
Photograph: Thomson Reuters

11.50am BST

Gurria: Eurozone periphery will get better….

Back to the OECD's economic forecasts, and secretary general Angel Gurria has offered hope that the pain in the eurozone's periphery will end.

Speaking to reporters in Paris, Gurria argued that the economic measures being implemented in Europe's weaker countries will yield results.

He told reporters that:

In the periphery in particular, which was hardest hit by the crisis, that is where the reforms are taking place at the faster pace and where things eventually are, I believe, going to be looking better faster once we go through the acute stage of the crisis.

Gurria was speaking after the OECD had urged the ECB to take more unconventional methods to end the eurozone recession (see 10.56am).

OECD Secretary General Angel Gurria (left) talks as Norway Prime Minister Jens Stoltenberg (C) and OECD Chief Economist Pier Carlo Padoan listen during the presentation of the Economic Outlook during the OECD Week at the OECD headquarters in Paris on May 29, 2013.
OECD Secretary General Angel Gurria (left) presenting the Economic Outlook in Paris. Photograph: ERIC PIERMONT/AFP/Getty Images

11.27am BST

UK retail sales gloom

Retail sales in the UK have fallen at their fastest rate in over a year.

The CBI’s latest Distributive Trades Survey, released a few moments ago, showed that 33% of firms reported a fall in sales this month, while just 23% said sales were up.

That's the weakest year-on-year performance since January 2012, the CBI said.

Sales of most items, including clothing and footware, fell, while grocery spending was flat.

The survey also found that retailers are cutting back on their own spending, with investment intentions now the weakest since the start of last year.

Barry Williams, Asda's chief merchandising office for food, warned that consumers are being squeezed:

Retail sales growth has weakened since the start of the year as households continue to feel the pinch, with wages failing to keep pace with the cost of living.

Analysts warned that the data shows the UK economy remains weak.

Jeremy Cook, chief economist at the foreign exchange company, World First, said:

Unemployment has remained high, but the disparity between wages and prices is hurting those who still have a job as well.

Energy and food prices have stayed high throughout the spring and unless they fall, or wages start to recover, the High Street will remain a tough place to be this summer…

Updated at 11.40am BST

10.56am BST

OECD: ECB must consider QE and negatives rates

The big news from the OECD's new economic outlook (see 10.12am onwards) is that it has called on the European Central Bank to take more dramatic measures such as quantitative easing to drag the eurozone out of recession.

The OECD wants the ECB to give serious consideration to launching an electronic money-print operation, in the face of a steadily shrinking economy.

It also recommended cutting the interest rate paid to bank deposits into negative territory, meaning banks would effectively be charged to leave money sitting with the ECB rather than in the real economy.

OECD chief economist Pier Carlo Padoan warned (via Reuters):

Europe is in a dire situation.

We think that the euro zone could consider more aggressive options. We could call it a euro zone-style QE.

The call came as the OECD slashed its forecast for the eurozone to a contraction of 0.6% this year, down from 0.1%. It warned that activity was falling in the face of fiscal consolidation, falling consumer confidence and tight credit conditiions,

It urged government's to allow "automatic stabilisers to operate" — ie, accept that tax receipts will fall during a recession while welfare payments will rise.

"High unemployment and excess capacity will depress inflationary pressures," it added, alongside this graph showing the grim state of the eurozone economy:

Eurozone GDP forecast, May 2013
Photograph: OECD

And here's the key section from the report (page 78 onwards):

The ECB should supplement its recent cut in the refinancing rate by reducing the deposit rate to below zero and issue forward guidance based on inflation prospects.

Further non-standard measures might be needed to improve monetary policy transmission. In particular, additional asset purchases could be considered.

Stronger bank balance sheets would enhance credit expansion and a banking union is critical to reduce negative feedback loops between sovereigns and banks.

Structural reforms in labour and product markets, including completing the Single Market, would boost growth and jobs.

Updated at 11.09am BST

10.25am BST

OECD cuts growth forecasts across the board

Here's a round-up of the OECD's new economic forecasts for 2013:

• It has slashed its growth forecast for the global economy, to 3.1% this year, from 3.4% six months ago.

• It trimmed its US growth forecast to 1.9%, from 2%.

• It cut its China forecast from 8.5% to 7.8% (so slightly higher than the iMF's own prediction this morning – see 7.52am)

• The OECD now expects the eurozone to shrink by 0.6%, not the 0.1% contraction expected

German GDP is tipped to rise by 0.4%, down from 0.6% six months ago

• While France's economy is expected to shrink by 0.3%, not grow by 0.3% as expected last November

10.12am BST

OECD economic outlook released

The Organisation for Economic Cooperation and Development (OECD) has just published its economic outlook, and slashed its growth forecast for the UK this year

The OECB warned that Britain will grow slower than expected, due to the government's spending cuts and struggling consumer and business confidence.

From Paris, our economics correspondent Phillip Inman reports:

In its half-yearly forecasts, the Paris-based Organisation for Economic Co-operation and Development warned that a long and bumpy recovery in the eurozone will continue to hit exports while the government's deficit reduction programme and the paying down of consumer debt will act as a brake on growth.

The OECD said it expected UK national output to grow by 0.8% this year, in line with most economic forecasts, but down from 0.9% six months ago.

It also cuts its growth forecast for 2014 to 1.5%, down from 1.6% six months ago.

Here's Phillip's full story: UK economic growth forecasts cut for 2014 by OECD

Updated at 10.36am BST

9.53am BST

BMW to recruit unemployed Spanish young people

BMW is recruiting a small number of unemployed young Spaniards to work in Germany in a pilot programme to "give something back" to its customer countries.

Here's the full story: BMW to recruit unemployed Spanish young people to 'give something back'

And here's more details:

Twenty-five workers aged 18 to 25 will be trained for a year at the German carmaker's headquarters in Munich, the BMW personnel chief, Milagros Caina-Andree, told Frankfurter Allgemeine Zeitung on Wednesday.

"They should be immersed in German culture, possibly live with a BMW host family and work in development, sales, marketing or another area. After that, these young people can go back home or stay here," she said

Yesterday, French president Francois Hollande argued that one solution to Europe's youth jobless crisis was to make it easier for appentices, as well as students, to study overseas. BMW's small pilot scheme could be the start of something bigger….

9.44am BST

Eurozone loans contract again

Loans to Eurozone companies fell again in April for the 12th month in a row, as the region's private sector found it hard to invest and some banks struggled to lend.

The European Central Bank reported that loans to the private firms fell by 0.9% year-on-year last month, a drop of €18bn. But M3 money supply – which measures the amount of cash in the economy – was up by 3.2%.

Howard Archer, economist at IHS Global insight, said the data was disappointing, and "clearly reflected an ongoing combination of limited supply and muted demand."

And here's some early reaction of Twitter, from the BBC's Gavin Hewitt and Societe Generale's currency expert, Kit Juckes.

9.34am BST

And here's a graph showing how German unemployment has outperformed the eurozone average since the crisis struck (following today's data

German unemployment vs eurozone average
Via Chris Williamson of Markit.

Updated at 9.35am BST

9.28am BST

Here's a full story about the IMF cutting its growth forecasts for China: IMF lowers China growth forecast and urges reforms.

Updated at 9.28am BST

9.25am BST

Here's Carsten Brzeski of ING's take on this morning's German jobless data (see 9.12am)

Despite the stable unemployment rate, it remains noteworthy that the non-seasonally adjusted drop was the weakest May performance since 2005. To some, this is a clear warning that the debt crisis is finally taking its toll on the German labour market. In our view, however, the weak spring revival of the labour market can also be explained by the relatively high number of public holidays in May and the still cold weather. Therefore, it is far too premature to start singing Swan Songs on the labour market.

Brzeski argues that the German labour market remains "the showcase example" for successful labour market reforms – topical, with the EC's latest budget recommendations due later today.

 Even the current success has also received a helping hand from strong export growth and the first wave of ageing, the reforms of the mid-2000s are still paying off. Up to the early 2000s, the German economy required growth of at least 1.5% to create new jobs. In recent years, GDP growth rates of less than 1% were sufficient for job creation. This bodes well for the near-term outlook, indicating that despite an expected GDP growth rate of only roughly 0.5% this year, the labour market should remain stable. At the Eurozone level, it is obvious that the success of its own structural reforms will further encourage the German government to continue hammering on structural reforms.

Updated at 9.25am BST

9.12am BST

German jobless data

The German government has declared that its labour market remains in good shape, after its latest unemployment data was released.

The number of people out of work fell below the 3 million mark for the first time since December, dropping by more than 83,000. This pulled the jobless rate down to 6.8%, from 7.1% last month.

However, on a seasonally-adjusted basis the number of people out of work rose by 21,000, much more than the 4,000 increase expected. That left the seasonally-adjusted jobless rate at 6.9%, unchanged from April.

Labour office chairman Frank-Juergen Weise commented:

Overall the German labour market is still in a good condition and is putting in a solid performance in a tough economic environment.

8.57am BST

Upbeat economic news from Sweden. It just beat analyst forecasts with growth of 0.6% in the first three months of 2013. That's twice as fast as economists had expected – in a quarter when the eurozone fell deeper into recession.

8.49am BST

The agenda

The other main event in the diary today comes from the OECD, which will publish its latest economic outlook in Paris this morning. That, and the EC's latest budget review (8.20am), means Europe's struggling economy could be under particular scrutiny.

OECD economic outlook released. 10am BST

EC announces annual budget review and makes policy recommendations: from 1pm BST

UK retail sales: 11am BST

Portuguese parliament debates latest budget: afternoon

Updated at 9.47am BST

8.29am BST

The Bank of Thailand has just become the latest central bank to ease monetary policy, by cutting interest rates by a quarter-point to 2.5%.

8.26am BST

Italy planning to be prudent

Around €8bn of public money will be 'unlocked' if Italy is freed from the EC's excessive deficit procedure today (as appears likely).

That money had been earmarked for deficit reduction, but could now be spent by Enrico Letta's government. The Italian PM, though, has already tried to dampen hopes of a spending splurge, saying resources will not be freed immediately (more details here).

8.20am BST

EC to ease austerity focus

The European Commission is expected to formally shift its focus away from austerity and in favour of growth later today, when it publishes its annual review of the national budgets of all 27 EU members.

The EC is expected to give three of its largest countries, France, Spain and the Netherlands, more time to bring their deficits down to the 3% target.

They'll be encouraged to reshape their economies, open up their labour markets, and implement structural reforms, but the underlying message will be that the pace of fiscal consolidation can be slowed.

As one official put it to Reuters:

The main message will be that the emphasis is shifting to structural reforms from austerity.

That is likely to mean two-year extensions for both Spain and France, giving them until 2015 to cut their annual borrowings below 3% of national output. The Netherlands is expected to get 12-months grace.

The EC will probably argue that the move is justified because the threat of a eurozone break-up has faded away. But opponents of full-blooded austerity could also take heart that the pendulum has swung, finally, in their favour.

The EC won't abandon its push for reform, either. Instead, it is likely to criticise a number of governments for failing to implement reforms quickly enough. Francois Hollande's government could be singled out.

As the FT puts it:

Brussels is expected to criticise several governments for their slow pace of reform and will demand immediate action by several it believes are at risk of prolonged economic stagnation. These include France, where senior officials in Brussels and Berlin believe time is running out for sufficient labour and economic reforms.

Italy, though, is likely to be freed from the EC's excessive deficit procedure, having cut its annual borrowing below 3% of GDP.

Updated at 8.21am BST

7.52am BST

IMF cuts Chinese growth forecast

Women shop for discounted fashion at a retail center, in Beijing, China, 29 May 2013. As China's leaders attempt to rebalance the economy, raising individual consumption is seen as one of the main goals.
A retail center, in Beijing today, where China’s leaders have been advised to boost individual consumption. Photograph: ADRIAN BRADSHAW/EPA

Good morning, and welcome to our rolling coverage of events across the eurozone and the wider global economy.

Overnight, the International Monetary Fund has lowered its growth forecast for China, in the latest signal that the world's second-largest economy is slowing.

The IMF urged the Beijing government to take "decisive" action to stimulate domestic consumption and to control the recent expansion of credit, as it trimmed its growth forecast for 2013 and 2014 to 7.75%, from 8% this year and 8.2% next year.

David Lipton, the first managing director of the IMF, warned that China's ability to absorb troubles in the global economy was shrinking.

Lipton said;

While China still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, the margins of safety are narrowing and a decisive impetus to reforms is needed to contain vulnerabilities and move the economy to a more sustainable growth path.

The IMF fears that the growth of credit in China is creating a stock of bad debts that will hamper future growth. As Lipton put it:

China’s economy faces important challenges. In particular, the rapid growth in total social financing raises concern about the quality of investment and its impact on repayment capacity.

Bloomberg has more details from Beijing: China Growth Outlook Cut by IMF as ‘Decisive’ Reforms Urged.

China needs a “decisive push for rebalancing toward higher household incomes and consumption,” Lipton said. The nation should allow more competition in industries “currently considered strategic” and increase dividends from state-owned enterprises to “improve financial discipline and provide additional fiscal revenue,” Lipton said.

The IMF's annual report comes a week after China's factory output took a surprise drop. Today's growth forecasts brings the IMF roughly into line with City analysts, but will add to concerns that the Chinese economy is losing its zip.

I'll pull together more reaction to the report this morning.

Also coming up today… the EC is to announce its annual review of compliance with its budget rules. It is expected to give several countries more time to hit their deficit targets. More to follow….

Updated at 8.11am BST © Guardian News & Media Limited 2010

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In the trading room today: What is Keeping the GBP Capped? With the GBP looking heavy and unable to build a strong momentum, we take a close look at the sterling and explain the reasons why the GBP is being capped against the EUR and the USD for the time being, we analyze the test of an important support level in the GBP/USD currency pair, we continue to monitor the range in the EUR/USD pair, we note the pullback of the USD vs JPY, we highlight the market’s reaction to the Japanese Retail Sales, the German Unemployment Rate, the U.K. CBI Distributive Trades, and the U.S. Consumer Confidence, we discuss new forecasts from Bank of New York-Mellon and Commerzbank, and prepare for the trading session ahead.