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If the British people take a democratic decision to do something – in this case change the benefit system – they should be able to do so without having the prime minister scuttering around Europe asking permission…

Powered by Guardian.co.ukThis article titled “Democratic decisions on benefits of the EU” was written by Letters, for The Guardian on Tuesday 15th December 2015 19.32 UTC

Zoe Williams misses the point about Cameron’s negotiations with EU member states (There is no master plan. On the EU, Cameron is flailing, 14 December). Restricting benefits to EU migrants may or may not be a sensible, legal or logical way to meet the concerns of people, be they “Ukip-minded” or not. But once our PM had to ask permission to do so, the issue was completely transformed. It is no longer one of EU migrants’ access to benefits, but the far more fundamental question of who decides how British taxpayers’ money is spent. It became a question of national sovereignty. That’s why organisations such Trade Unionists Against the EU are not awaiting the outcome of “negotiations” and are campaigning to get the UK out. The issue is as simple as it is clear: if the British people take a democratic decision to do something – in this case change the benefit system – they should be able to do so without having the prime minister scuttering around Europe asking permission. This will continue to be the case while the UK remains a member of the EU.
Fawzi Ibrahim
Trade Unionists Against the EU

• David Cameron’s negotiations on limiting in-work benefits for EU immigrants appear to have won little support. One simple approach might be to limit levels of benefit to those payable in the country of origin of the European migrant. That would deter those seeking to exploit the system and could disarm politicians in other member states, who would no longer be able to claim that their emigrants were being monetarily disadvantaged. It would leave the fundamental right of freedom of movement untouched.
Ken Daly
Aisholt, Somerset

• Hans Dieter Potsch, the chairman of Volkswagen, glosses over the truth of what his company did to cheat emission tests: it wasn’t a “chain of errors”, it was a chain of liars prepared to sanction a management mindset (VW admits to ‘chain of errors’ at company, 11 December). Or is he not admitting responsibility, even though he is no doubt paid a monstrous salary on the basis of being in charge? This incident just confirms that all companies need active oversight from outside to try and stop such appalling actions. They cannot be trusted any more than managers of banks and other financial groups. This is why we need the EU and strong legislation trying to stop such abuses in companies that think they can do what they like.
David Reed
London

• Join the debate – email guardian.letters@theguardian.com

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Financial markets focused on the more downbeat indicators of construction and industrial production that some say might be a sign that the UK economy may be losing steam along with its largest trading partner the eurozone…

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Powered by Guardian.co.ukThis article titled “Official data points to loss of momentum in UK economy” was written by Katie Allen, for The Guardian on Friday 9th January 2015 16.30 UTC

Further evidence of a slowing British economy came on Friday as official figures showed a surprise drop in construction in November and falling industrial output as oil and gas output declined sharply.

But the data showed a bounceback in factory output that buoyed hopes for the manufacturing sector and good news on exports suggested UK companies could weather troubles in their biggest trading partner, the eurozone.

Financial markets focused on the more downbeat indicators, taking them as the latest evidence the economy lost steam in the final months of 2014. The pound lost ground against the dollar as traders bet the Bank of England would be in no hurry to raise interest rates from their record low, given the mixed signals on the economy.

“Disappointing official data are adding to survey evidence which indicate that the rate of UK economic growth slowed towards the end of last year,” said Chris Williamson, chief economist at data analysts Markit.

“Looking at all of the official statistics and survey evidence currently available, the data collectively point to the economy growing 0.5% in the fourth quarter, down from 0.7% in the third quarter,” he added.

While economists said it was too soon to say whether the slowdown at the end of the year continued into 2015, the latest figures will be unwelcome to the Conservatives as they seek to convince voters that the recovery remains on track.

“On balance, there is further evidence that UK growth is slowing as we head towards the general election,” said Simon Wells, chief UK economist at HSBC.

Among the bright spots for the economy in a clutch of reports from the Office for National Statistics was the news that manufacturing output rose by 0.7% in November, reversing October’s fall and beating economists’ expectations for growth of just 0.3%. On the year, output was up 2.7%.

But the wider industrial sector which also includes utilities, mining and oil and gas production, fell 0.1%. That drop was driven largely by a 5.5% fall in oil and gas output. The ONS said the weakness was partly down to maintenance work at two North Sea oil fields.

Respected thinktank the National Institute of Economic and Social Research said following the latest industrial production numbers it estimated growth slowed to 0.6% in the final three months of last year, after 0.7% in the three months to November 2014.

Separate official figures from the construction sector showed output fell by 2.0% on the month in November, defying economists’ forecasts for growth and contrasting with surveys of the sector.

The news on trade was more encouraging, however, as the ONS reported the narrowest trade deficit since June 2013.

The manufacturing sector is still not back to its pre-crisis strength and exports have not grown as fast as the government would have hoped. Progress has been slow in the government’s push to rebalance the economy away from overdependence on domestic demand, but some economists are predicting a strong 2015 for manufacturing.

A drop in oil prices to their lowest level in more than five years has buoyed hopes for the sector. Maeve Johnston at the thinktank Capital Economics cautioned it was far from certain oil prices will remain so low, but the fall should help “reinvigorate the recovery”.

“Indeed, if low oil prices are sustained, it should greatly reduce costs for the manufacturing sector, providing some welcome support over 2015. And sustained low oil prices would also ensure that the improvement in the trade deficit proves to be more than a flash in the pan,” she said.

The trade numbers beat expectations as the ONS reported the goods trade gap narrowed by £1bn to £8.8bn in November, as exports edged down but imports fell faster. Economists had forecast a £9.4bn gap. The less erratic figures for the three months to November showed exports grew by £2bn and imports shrank by £0.5bn.

The details showed exporters continued to benefit from targeting markets beyond the deflation-hit eurozone. Exports to countries outside the European Union increased by £2.1bn, or 6.0%, in the three months to November from the previous three months. Exports to the EU decreased by £0.1bn, or 0.3%. At the same time, the UK recorded its largest ever deficit with Germany, reflecting a decrease in exports and a slight increase in imports.

The trade gap for goods and services taken together fell to its lowest since June 2013, at £1.4bn in November.

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While jobs growth and output are rising fast in the construction industry, retail offers a more mixed picture of the UK economy. Forecasting groups have modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013…

 


Powered by Guardian.co.ukThis article titled “Construction and retail – contrasting perspectives on UK economic recovery” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 5th November 2013 00.01 UTC

Construction and retailing offer contrasting perspectives on Britain’s economic recovery. On the UK’s building sites, things are looking up . The monthly construction industry health check from CIPS/Markit showed jobs growth and output rising at their fastest for six years. Although that may be more a reflection of the deep hole the sector plunged into during the recession, sentiment has certainly improved. The Government’s Help to Buy scheme has boosted house building, but Monday’s report suggests demand for commercial property is also on the up.

Tuesday’s report from the British Retailers Consortium is more mixed. After a strong summer, spending growth in the high street has cooled in the last couple of months. That could be because sales of new winter fashions have been hit by unseasonally warm weather, or it could be that consumers are saving up for a big splurge at Christmas. It could be that individuals are finding it hard to make the sums add up during a prolonged period when prices have been rising more quickly than wages. In all probability, the cautious mood is a combination of all three.

Rising consumer spending is the reason economic activity picked up in the second and third quarters of the year. There was little boost from the other components of growth -– investment, exports and the state – so the expansion was the result of higher household spending. How is this possible when real earnings are falling? In part, spending has been encouraged by rising employment. In part, it has been aided by stronger consumer confidence, which has led to people running down the precautionary savings they built up when they were more pessimistic about the future.

Clearly, consumers will be unable to continue dipping into their savings to fund their spending for ever. That’s why forecasting groups such as the National Institute for Economic Research have only modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013. NIESR sees little prospect of stronger investment kicking in, and with the prospects for exporters decidedly mixed that means consumers will again bear the strain.

Even so, the NIESR forecast looks too low. There will be some recovery in investment in response to stronger consumer spending. More significantly, perhaps, the housing market now has real momentum and that will lead to some further drop in the savings ratio to compensate for squeezed incomes.

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After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

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This week UK GDP figures are expected to show a healthy increase, but is this the sort of recovery that benefits everyone? Analysts predict a growth rate of around 0.6%, perhaps even 0.8%, representing a strengthening of the recovery…

 


Powered by Guardian.co.ukThis article titled “Britain sees signs of recovery, but who has been left behind?” was written by Heather Stewart and Katie Allen, for The Observer on Saturday 20th July 2013 23.00 UTC

Row upon row of Range Rovers and Minis gleam in the afternoon sun in the yards around Southampton docks, waiting to be driven on to huge cargo ships that will carry them to car-hungry emerging economies.

From his office, port director Doug Morrison can see the towering cruise ships being loaded before they cast off for Mediterranean and Caribbean holidays. Alongside stands a ship awaiting a cargo of new cars, which arrive on the dockside on dedicated trains from manufacturers in the Midlands. Further along are container ships bringing TVs and clothes from the far east and a vast array of goods to stock Britain's shops.

"Two years ago there were 500,000 imports and exports of new cars here. This year it is 750,000 and I am pleased to say 65% of that is exports. They are from Jaguar Land Rover, Honda and there are Mini Coopers. Much of that growth is coming from Jaguar Land Rover sales to the far east," says Morrison.

This picture of a thriving British export sector is exactly the one the coalition will be hoping to project on Thursday, if, as experts expect, the latest GDP figures show the economy expanded at a healthy clip in the second quarter of 2013.

Analysts predict a growth rate of around 0.6%, perhaps even 0.8%, which would represent a marked strengthening of the recovery – good news for a coalition keen to seize on signs that the economy has moved "out of intensive care", as chancellor George Osborne puts it.

"We have a great economic barometer here. We can really see what is happening," says Morrison, who has run the docks for Associated British Ports since 2005. He talks about the "three C's" – cars, cruises and containers – and all point to an upturn, albeit with choppy seas ahead. "The cruise business continues to be very strong," he says.

Famous in the past as the port from which Titanic set sail on its ill-fated maiden voyage, Southampton now sees 1.6 million passengers embark and disembark from cruise ships every year. Less than a decade ago only a third as many were passing through the port.

But Morrison adds that the number of containers being landed has not risen – the lack of growth in consumer imports evidence of tough times on Britain's high streets. "When you look at what the likes of Tesco and Argos are saying, it's not surprising that you are not seeing any real growth in containers."

It is not only at the dockside that things are looking up, four years on from the depths of the recession. Jan Ward, chief executive and founder of specialist metals distributor Corrotherm International, based on an industrial estate on the edge of the city, says she is "overwhelmed with work".

"These have been the best five years we have had," says Ward, who started the company in 1992. On the back of strong demand for the nickel alloy parts the company supplies to the oil and gas industry, turnover grew 46% over the last year to £21m and Ward expects it to double this year. Corrotherm has recently opened offices in Abu Dhabi, Saudi Arabia, Korea and Perth in Australia and is about to open one in China.

Ward, an active member of the local chamber of commerce, believes the government's push for what the chancellor has called a "march of the makers" is finally starting to yield results. "All the signs that I see are very, very good. Finally, these messages are starting to get through to manufacturers and people who are looking to start businesses up. For the manufacturing sector things are looking very bright."

Despite her optimism, however, some economists are concerned that while a stronger GDP reading would undoubtedly be good news, there is so far little sign of the deep-seated shifts in the economy the government had hoped to bring about. Russell Jones of Llewellyn Consulting says: "It looks like what is driving this is the consumer to a large degree, and you could argue that that's the wrong sort of growth."

The housing market is starting to recover and retail spending is on the rise, but business investment in the first quarter of 2013 was more than 16% lower than a year earlier. Meanwhile the latest trade figures suggested that although exports are rising, so are imports, so that hopes of Britain becoming a new manufacturing powerhouse have so far proved over-optimistic.

Simon Wells, UK economist at HSBC, says: "Back in 2010, we were hoping the economy would rebalance in three ways: away from services and towards manufacturing; away from consumption and towards investment; and away from domestic demand and towards exports. Now it seems that for policymakers, any growth will do."

The Bank of England and the Treasury had expected the sharp depreciation in sterling since 2008 to spark an export revival, as British goods became cheaper on world markets. But the transformation has been hampered, both because our major markets have been in crisis and our industrial sector is so hollowed out that an increase in exports brings in its wake a jump in imports too, as manufacturers buy raw materials and parts.

At the same time, the decline in the pound has been one cause of the above-target inflation that has further hampered recovery by eating into workers' pay. Jones points out that with real incomes continuing to fall, in what the TUC has described as the longest squeeze on wages since the late 19th century, any rise in consumption is being driven by "people dipping into their savings".

There is certainly evidence in Southampton that the long-stalled property market is beginning to revive. Lisa Martin-Pope, who works in one of the many estate agents on the city's busy London Road, says: "The biggest indicator at the moment is we are seeing more first-time buyers and seeing banks and building societies lending to them more readily." Her agency, Martin & Co, is seeing homes selling more quickly, with the average buyer paying 93% of the asking price.

Labour will argue on Thursday that the benefits of the nascent upturn have been pocketed by a limited number of people, including those in financial services. Chris Leslie, shadow financial secretary to the Treasury, says: "Wages after inflation are now down by an average of £1,300 since David Cameron got into Downing Street, yet bank bonuses soared to £4bn in April as high earners took full advantage of the top-rate tax cut."

From his window on the docks, Doug Morrison agrees that not everyone is reaping the rewards of recovery. "The haves continue to spend and the have-nots cannot spend," he says. "People are reluctant to give up their holidays, the haves are still buying cars, but the poor people out of work or not getting any pay rises are not buying their three-piece suites or buying new clothes as often."

The haves are certainly in evidence at Southampton's Ocean Village marina, where shining white yachts are moored alongside motorboats. Luxury apartments overlook the water and in harbourside bars people sit around tables with glasses of chilled rosé and beer.

The only thing to spoil the idyllic summer scene is the sound of the jackhammers on the nearby construction site where a £74m, 24-storey apartment block will become Southampton's tallest building. James King, of local boat and home broker Waterside Properties, says there is a "cautious recovery".

But a short drive away from the marina, at Ford's soon-to-be-defunct Transit van plant, there's a powerful sense that not everyone is sharing in what Osborne calls the "healing" of recession-scarred Britain.

Engineer Chris finds it hard to conceal his dismay at losing the job he has had for 28 years. "It is devastating really. It's the end of an era. Anyone who has been here a long time is faced with a very empty shell of a plant. It is like a ghost town."

Chris, 52, who preferred not to give his full name, is moving to a new job with Ford in Wales, but not all his colleagues have been so fortunate, he says. "There's a lot of youngsters that have young families. We are closely knit."

When the factory is mothballed on Friday it will mark the end of more than a century of Ford vehicle manufacturing in the UK and more than 40 years of making Transit vans in Southampton. Faced with a prolonged slump in demand across western Europe that has seen new vehicle sales drop to a 20-year low, Ford is moving much of its production to a cheaper base in Turkey.

"The atmosphere in there is one of shock and disbelief. People are walking around as if they don't know what's happened. People in there I've known for years, grown men, they have been in tears," says Chris.

It remains to be seen if the long-hoped-for recovery that seems to be taking root will blossom as the year goes on, perhaps bringing with it the greater confidence for firms, and new jobs and pay rises for their staff, that would help to spread its benefits. Until that happens, most analysts will continue to be sceptical. "I'm still quite cautious about growth," says Wells of HSBC. "There must be a limit to how much we can grow when real, post-inflation wages are falling."

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Britain’s top companies lose £36bn in value as stock markets react to US warnings on QE and drop in Chinese manufacturing. Ben Bernanke, chairman of the Federal Reserve, hinted on Wednesday about a possible easing of its $85bn-a-month bond-buying programme, in a testimony to Congress…

 


Powered by Guardian.co.ukThis article titled “Stock markets lose nerve on fears of end to quantitative easing” was written by Nick Fletcher, for The Guardian on Thursday 23rd May 2013 18.13 UTC

A day after the FTSE 100 came within 90 points of its December 1999 all-time high, the index slumped 143 points yesterday to 6696, wiping £36bn off the value of Britain's top companies.

The 2.1% fall was the index's worst in one day since it lost just over 2.5% a year ago to the day, on fears that Greece could leave the eurozone. But after its recent strong surge this latest fall in the blue-chip index merely wipes out the gains made since last Friday.

Stock markets around the world tumbled from their recent highs as investors took fright at weak Chinese manufacturing data and signs that the US Federal Reserve might end its bond-buying programme sooner than expected.

Markets have been buoyed in recent months by the various measures taken by central banks to stimulate the global economy by flooding it with cash. Measures include printing money, buying up mortgage-backed bonds and keeping interest rates at historic lows. Much of the recent economic data indicated the policy was having the desired effect, while the long-running eurozone crisis seemed to have entered a period of relative calm.

But analysts have been warning that any signs the money taps were about to be turned off or that the global economy was not recovering as expected would be taken badly by the markets.

Thursday's rout began with comments late on Wednesday from the Federal Reserve suggesting that America could end its quantitative easing, or QE, programme in the near future, and accelerated after a Chinese survey showed factory activity had fallen for the first time in seven months in May. The Nikkei 225 dropped more than 7% overnight on Wednesday to 14,483, its biggest one-day fall for two years. However, analysts pointed out that the Japanese index had almost doubled in value since November, so was still well ahead for the year.

European stock markets fell, with Germany's Dax and France's Cac both closing around 2.1% lower, while Italy's FTSE MIB fell 3% and Spain's Ibex was down 1.4%.

On Wall Street the Dow Jones industrial average, which had reached an all-time high this week, fell sharply when trading opened on Thursdaybefore staging a recovery. By lunchtime the US index was down just 15 points following stronger than expected weekly jobless claims and home sales.

Rupert Osborne, futures dealer at City broker IG, said: "The stronger home sales and jobless claims … fit with the idea that the US economy is approaching a point where a reduction in stimulus is appropriate. This neatly illustrates the irony of the position; traders across the world are openly hoping for poor US data since this keeps the Fed involved."

Ben Bernanke, chairman of the Federal Reserve, had hinted on Wednesday about a possible easing of its bn-a-month bond-buying programme, in a testimony to Congress. These comments were later compounded by the minutes of the Fed's last policy-making meeting, which showed that some members thought such a move could come as soon as June, much earlier than any analysts had been expecting.

Michael Hewson, senior market analyst at financial spread-betting company CMC Markets UK, said: "There was an expectation after Bernanke's testimony on Capitol Hill that the latest Fed minutes wouldn't add too much to overall market expectations around the prospects for further easing against expectations of possible tapering.

"The release of the latest Fed minutes completely changed that dynamic with a single line, 'a number of participants express a willingness to reduce QE in June'.

"The disappointing Chinese manufacturing data gave markets the extra nudge over the edge that was needed and persuaded investors with money in the game to cash in."

In China the HSBC purchasing managers index fell to 49.6 points in May, from 50.4 the previous month. Any level below 50 produced by the survey of industry indicates a contracting sector. China is a major consumer of commodities, so the signs of a slowdown in the country put metal prices under pressure, with copper down more than 3%. Oil prices also slid lower, Brent crude falling nearly 1% to 2 a barrel.

But gold and silver edged higher as investors searched out safer assets amid the sell-off.

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It is time for the European Central Bank to show its independence and act in the interests of all eurozone citizens– not just Angela Merkel’s, writes The Guardian’s economics editor Larry Elliott.  A different approach is needed to save the eurozone…

 


Powered by Guardian.co.ukThis article titled “European Central Bank must heed eurozone warning signs” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 30th April 2013 12.57 UTC

The warning signs are flashing red for the eurozone. Inflation is plunging, unemployment is rising and activity is weakening across the board. Unless Europe wants to become the next Japan, mired in permanent deflation and depression, action is needed now.

Stage one of the process should be a cut in interest rates from the European Central Bank (ECB) when it meets in Bratislava on Thursday. The latest inflation figures show the annual increase in the cost of living across the 17-nation single-currency area fell from 1.7% to 1.2%, its lowest in three years and well below the ECB's 2% ceiling. Even Jens Weidmann, the ultra-hawkish president of Germany's Bundesbank, would be hard pressed to say there is a threat to price stability.

It's not hard to see why inflationary pressure is abating: the eurozone economy has been flat on its back for the past 18 months. Unemployment rose by 62,000 in March, taking the eurozone jobless rate to yet another record high of 12.1%. Spain and Greece remain the weak spots, but even in Germany labour market conditions are becoming more difficult. Across the eurozone, almost one in four young people are out of work.

Why is unemployment rising? Again, you don't have to be John Maynard Keynes to figure it out. Europe's banking system is bust, there is a shortage of credit, real incomes are under pressure and the deficiency of demand is being exacerbated by austerity overkill. Retail sales figures from Greece show that in February spending was more than 14% lower than a year earlier.

The malaise is spreading from the eurozone's periphery to its core. It will be mid-May before the official growth data for the first quarter of 2013 is published, but the early evidence from Spain, where GDP fell by 0.5%, is not encouraging. Judging by the grim forward-looking surveys of business and consumer confidence, the second quarter will suffer more of the same.

Monetary policy works only with a lag, so whatever the ECB does on Thursday will be too late to prevent the recession deepening. Angela Merkel has made it clear that she does not want to see a cut in the cost of borrowing, but it is time for the ECB to show its independence and act in the interests of all eurozone citizens, not just the one seeking re-election in the German polls this autumn.

In itself, a quarter-point cut in interest rates to 0.5% would do little to revive demand, ease the credit crunch or create jobs. Instead, it should be part of a three-pronged approach to boost growth. The cut in rates should be accompanied by an ECB announcement that it is willing to embrace the unconventional methods deployed by the Federal Reserve, the Bank of England and Japan to underpin activity. It should also be the catalyst for a less aggressive approach to cutting budget deficits, with countries given more time to bring their deficits below the eurozone ceiling of 3% of GDP.

For the past three years, macroeconomic policy in the eurozone has been run on sadomasochistic principles: that only regular doses of pain will ensure countries stick to strict reform programmes.

The upshot of this policy is clear for all to see. Businesses that are starved of credit are mothballing investment and cutting their workforce. Weaker growth means higher-than-expected budget deficits. Permanent austerity has bred social dislocation and political extremism. A different approach is needed to save the eurozone from catastrophe – starting on Thursday.

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Europe could have dealt with Cyprus cheaply and painlessly with a pan-European body able to recapitalize the country’s banks. Next could be Malta and Slovenia where the government is already making contingency plans for coping with bank losses…

 


Powered by Guardian.co.ukThis article titled “Eurozone crisis demands one banking policy, one fiscal policy – and one voice” was written by Larry Elliott, economics editor, for The Guardian on Monday 1st April 2013 13.24 UTC

It had all started to look quite promising. The US was picking up, China had avoided a hard landing and in Japan the early signs from the new government's anti-deflation approach were encouraging. Even in Britain, the first couple of months of 2013 provided some tentative hope – from the housing market and consumer spending, mainly – that the economy might escape another year of stagnation.

Then Cyprus came along. The last two weeks of March brought the crisis in the eurozone back into the spotlight, and by the end of the month the story was no longer rising share prices on Wall Street on the back of strong corporate profitability or the better prospects for Japanese growth. It was, simply, which country in the eurozone would be the next to require a bailout.

The past few days has seen what Nick Parsons, head of strategy at National Australia Bank, has called the "reverse Spartacus" effect after the scene at the end of Stanley Kubrick's epic in which captured slaves are offered clemency if they identify the rebel leader. All refuse.

In the aftermath of Cyprus, it has been a case of "I'm not Spartacus". Four members of the eurozone felt the need to issue statements explaining why they were different from the troubled island in the eastern Med. We now know that Portugal is not Spartacus, Greece is not Spartacus, Malta is not Spartacus and Luxembourg, which has the highest ratio of bank deposits to GDP in the eurozone, is not Spartacus. As Parsons noted wryly, Italy was unable to say it was not Spartacus because it still doesn't have a government to speak on its behalf. Otherwise it would probably have done so.

Few of the independent voices in the financial markets take such attempts at reassurance seriously. Another crisis in the eurozone could be avoided, but only if those in charge (sic) act more speedily and effectively than they have in the past. As things stand, another outbreak of trouble looks inevitable.

Cyprus has enough money to get by for a couple of months, but by then will be feeling the impact of a slow-motion bank run as depositors remove their money at the rate of €300 (£250) a day. The economy has been crippled by the terms of the bailout, a Carthaginian peace if ever there was one, and the country's debt ratio is bound to explode.

Investors are already casting a wary eye over Malta, which appears to have been the short-term beneficiary of capital flight from Cyprus, but the bookies favourite for the next country to need a bailout is Slovenia, where the government is already making contingency plans for coping with bank losses.

By focusing on the eurozone's minnows, the markets are in danger of overlooking a much bigger potential problem. If attempts to put together a new government in Rome fail, Italy will be facing a second general election and in such a scenario opinion polls currently put Silvio Berlusconi ahead.

It is not hard to sketch out a sequence of events in which Berlusconi completes a political comeback, the markets take fright, Italian bond yields go through the roof, the European Central Bank (ECB) under Mario Draghi says it will only buy Italian debt if Berlusconi agrees to a package of austerity and structural reforms, the new government refuses and then calls a referendum on Italy's membership of the single currency. Italy has already had six consecutive quarters of falling GDP and is on course for a seventh, making the recession the longest since modern records began in 1960. So when Berlusconi says he cannot let the country fall into a "recessive spiral without end", he strikes a chord.

If policymakers are alive to the threat posed by one of the six founder members of the European Economic Community back in 1957, they have yet to show it. The assumptions seem to be that Cyprus is exceptional, that the ECB will ride to the rescue if it proves not to be, and that Europe will be dragged out of the danger zone by the pick-up in the rest of the global economy.

This is the height of foolishness. The factors causing the crisis in Cyprus are replicated in many other member states. The ECB's "big bazooka" – buying the bonds of struggling governments without limit – has yet to be tested, and because Europe is the world's biggest market, the likelihood is that the re-emergence of the sovereign debt crisis will seriously impair growth prospects in North America and Asia.

Economists at Fathom Consulting draw a comparison between the eurozone today and the UK at the very start of the financial crisis. Mistakes were made with the handling of Northern Rock because of fears that a bailout would create problems of moral hazard – in other words helping a bank that had got itself into trouble through its own stupidity would encourage bad behaviour by others. The systemic risks were not recognised, with disastrous consequences.

Similarly, the eurozone has not understood the systemic potential of the current crisis, Fathom argues, not least the "doom loop" between fragile banks and indebted governments. Austerity is making matters worse because cuts to public spending and higher taxes hit economic activity by more than they reduce government deficits. Public debt as a share of national incomes goes up, not down.

Austerity can work, but conditions have to be right for it. It helps if a country's trading partners are growing robustly, because then the squeeze on domestic demand can be offset by rising exports. It helps if the central bank can compensate for tighter fiscal policy by easing monetary policy, either through lower interest rates or through unconventional measures such as quantitative easing (QE). And it helps if the exchange rate can fall. Not one of these conditions applies in the eurozone, which is why the fiscal multipliers – the impact of tax and spending policies on growth – are so high. Put bluntly, removing one euro of demand through austerity leads to the loss of more than one euro in GDP.

So what should be done? Clearly, the self-defeating nature of current policy needs to be recognised. Countries need to be given more time to put their public finances in order. The emphasis should be shifted from headline budget deficits to structural deficits so that some account is taken of the state of the economic cycle, and the ECB needs to be ready with its own version of QE.

Simultaneously, work needs to speed up on creating a banking and fiscal union. Europe could have dealt with Cyprus cheaply and painlessly had there been a pan-European body capable of recapitalising the country's banks. Delay in setting up such a body threatens to be costly.

Finally, the eurozone needs to start talking with one voice. A bit of "I'm Spartacus" would not go amiss.

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Capital controls in Cyprus will intensify the slump while severely damaging the credibility of the euro. The idea that the single currency would rival the US dollar as a secure store of wealth has taken a pasting as a result of the disastrous handling of Cyprus…



Powered by Guardian.co.ukThis article titled “Demolishing some myths about the single currency” was written by Larry Elliott, for guardian.co.uk on Wednesday 27th March 2013 22.29 UTC

The introduction of capital controls in Cyprus is a textbook example of shutting the stable door after the horse has bolted. Rich Russians and wealthy Cypriots knew the crisis was coming and have had the best part of a fortnight to spirit their money out of the country since it broke, even assuming they did not do so beforehand. The restrictions will intensify the slump Cyprus faces while not removing the risk of bank runs when branches finally open for businesson Thursday. What’s more, the controls severely damage the credibility of the euro.

That’s not to say the controls are unnecessary. Even with the severe restrictions announced in place, there is a possibility of bank runs. Without them, bank runs would be a certainty. Modern banking is essentially based on a sleight of hand under which banks have readily available funds that are only a fraction of their total deposits. If all the customers demand their money at once, as would be the case in Cyprus without controls, the banks go under.

The government in Nicosia insists capital controls will be removed within a week, but that looks as heroic an assumption as the idea that the economy will shrink by just 3.5% this year, the current EU forecast. Iceland introduced capital controls in 2008 and still has them in place. There will no doubt be pressure from Brussels on Cyprus to lift the controls as quickly as possible, but most analysts expect them to be in place for a minimum of six months.

As far as the real economy is concerned, Latvia – which had pegged its currency to the euro – suffered an 18% contraction of its economy following a banking collapse. And bank deposits were just 100% of GDP in Latvia; in Cyprus they were 800% of GDP before the crisis. To sum up, Cyprus is going to have a collapsing economy buttressed by capital controls, but unlike Iceland will not have the option of devaluation to make itself more competitive. Speculation that it will become the first country to leave the euro will not go away. Indeed, it will intensify the longer the capital controls are in place.

There are, of course, wider implications for Europe despite attempts over the last week to say that Cyprus is a special case. When the euro was created just over a decade ago it was supposed to embody certain principles. One of those principles was that a euro would be a euro anywhere inside the single currency zone. That has now been violated; a euro in Nicosia is not worth the same as a euro in Berlin.

A second trait of the single currency was that it was supposed to be a secure store of wealth. International investors would have confidence in it and it would rival the dollar as a global reserve currency. That idea has also taken a pasting as a result of the disastrous handling of Cyprus; the decision to make deposit holders pay a share of the bailout has been accompanied by a fall in the value of the euro against the dollar. That’s hardly surprising; savings in US banks are perceived as rock solid whereas those in eurozone banks are not.

A third core belief was that the euro would lead to economic convergence, with the weaker and poorer countries raising their performance to the level of the rich nations at the monetary union’s core. This has looked increasingly absurd against a backdrop of bailouts for Greece, Ireland and Portugal, and the chronic lack of competitiveness displayed by Italy, Spain and – more recently – France.

So Cyprus has put two myths to bed. One is the myth of convergence; the other is that the debt crisis is over. A new chapter has opened, that’s all.

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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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