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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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USA 

Alexis Tsipras and his party have returned to power with a mandate to govern Greece and implement the bailout deal. Syriza officials said the party would seek to form a stable government immediately with the aim of maintaining confidence in the country…

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How well did Syriza and Alexis Tsipras do?

With 99.5% of the votes counted, Syriza had 35.5% of the vote, easily beating the centre-right New Democracy, the next biggest party on 28.1%. After Tsipras disappointed supporters by accepting a harsh eurozone-led austerity programme finalised in August, leftwingers appeared to be deserting Syriza, with polls showing New Democracy level just two weeks ago. But Syriza will now have 145 seats in the 300-member parliament – just four fewer than when Tsipras took power in January. Its share of the vote is also less than one percentage point down on its 36.3% share in January, although turnout was put at a record low of 55.6%.

What next for Syriza and Alexis Tsipras?

Syriza officials said the party would seek to form a stable government immediately with the aim of maintaining confidence in the country. Its former coalition partner, the small anti-austerity rightwing Independent Greeks party, is ready to use its 10 seats to forge a power-sharing agreement with Syriza. Independent Greeks’ leader, Panos Kammenos, joined Tsipras on stage to celebrate the result. Tsipras claimed the result gave him a mandate to govern and that he intended to serve a full term, promising relief for voters weary from five elections in six years.

Does this change the bailout deal with the EU?

No. Syriza campaigned on a pledge to implement the €86bn (£63bn) bailout, while pledging measures to protect vulnerable groups from some of its effects. In exchange for the bailout funds, Tsipras agreed to deficit-reduction measures including tax rises, changes to pensions and social welfare cuts. Other aspects include labour market reform, liberalisation of consumer markets and fewer perks for civil servants. Tsipras’s first task will be to persuade EU lenders that Greece has taken enough agreed steps to ensure the next payment. The bailout programme is up for review next month.

Could the IMF decline to join the bailout?

Yes. The International Monetary Fund has said it will refuse to take part in the bailout unless there is an “explicit and concrete” agreement on debt relief for Greece. The IMF has argued that Greece cannot bear the full burden of the austerity programme and that its creditors should include debt relief in the package. Without a long moratorium on repayments, perhaps of 30 years, or a reduction in the value of the debt, the burden will become unmanageable, the IMF has argued.

Will Greece need another bailout anyway?

Greece might need another rescue. Tsipras hopes Syriza’s electoral victory will give him renewed clout to negotiate debt relief and less onerous austerity measures from Greece’s creditors. But that stance will not be popular with Germany or European institutions that imposed draconian measures on Greece in the name of fiscal discipline. If Tsipras is unable to extract significant concessions, the economy will remain weak, endangering deficit-reduction targets in the current deal and potentially requiring another bailout to head off a debt default.

What do the markets think?

Reaction in financial markets was muted on Monday morning. The euro was little changed while Britain’s FTSE 100 share index, which has gyrated in the past in reaction to Greek events, rose slightly. The yield on Greek two-year bonds fell a little, meaning traders think the risk of default is reduced. Simon Smith, chief economist at the currency trader FxPro, said: “The immediate impact has been minimal, the single currency opening little changed versus Friday’s opening levels. In the wider picture, it’s not going to make life any easier for the likes of the EU, IMF and European Central Bank and the negotiations surrounding debt sustainability over the coming months.”

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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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With its linked trade and innovation deficits, the UK seems as unprepared for a currency war as it was for real war in 1939. Countries are trying to export deflation somewhere else, using currency manipulation to do so…

 


Powered by Guardian.co.ukThis article titled “UK looks ill-prepared if a global currency war breaks out” was written by Larry Elliott economics editor, for The Guardian on Sunday 17th November 2013 19.41 UTC

Rumours of war are in the air. Currency war, that is. The US treasury has forged an alliance with Brussels to attack Germany’s beggar-thy-neighbour approach to the rest of the eurozone. Last week the Czech government said it would defend its economy by driving down the value of  the koruna, following the aggressively interventionist example of  Japan and Switzerland.

It’s not hard to see why the atmosphere is becoming less cordial. This is a low growth world marked by over-capacity. Wages are under downward pressure and this is leading to ever-stronger deflationary pressure. A lack of international policy co-operation means that countries are trying to export deflation somewhere else, using currency manipulation to do so.

If a full-scale currency war does break out Britain looks as ill-prepared as it was for a military fight in 1939. We like to think of ourselves as a nation of buccaneering traders but only 16% of small and medium enterprises, with a turnover of over £20m, are actually exporting. We like to think of ourselves as the nation of innovators, yet as Richard Jones, of Sheffield University, notes, the UK is a less research and development intensive country than it was 30 years ago, and it lags well behind most of its rivals. The UK has linked trade and innovation deficits.

Jones, in a paper for the Sheffield Political Economy Research Institute, examines in detail how during the past 30 years the UK’s corporate laboratories have vanished and how big R&D spenders such as ICI and GEC switched from being companies that thought about long-term investment to ones where the prevailing doctrine was to return the money spent on R&D to shareholders.

Those in charge of UK manufacturing companies became more interested in the next bid, the next deal and the next set of quarterly results than in developing new product ranges.

The consequences of decades of neglect of the country’s productive base and an over-reliance on North Sea oil and financial services are now glaringly apparent. In the past, recessions have ended with the current account broadly in balance. This recovery starts with a current account deficit of more than 3%  of national output.

This is despite a fall of 20% in the value of the pound between 2007 and 2013, which in theory should have boosted exports. In reality, exports grew by 0.4% a year between early 2009 and the start of 2013, compared with 1% a year in the previous decade.

Ministers have a pat answer when quizzed about the poor performance of exports. It is, they say, the result of geography. More than 40% of UK exports go to the eurozone, where growth is weak and demand for imports has collapsed. So the impact of sterling’s depreciation has been blunted.

This view is not shared by the Bank of England. While admitting that the global recovery is patchy, the bank noted in its February inflation report that “the relative weakness of UK exports does not reflect particular weakness in its major trading partners”. It concluded that some other explanation was needed “to explain the disappointing performance of UK exports”, and found it in a sharp drop in exports of financial services and the tendency of UK firms to use a cheaper pound to boost profits rather than increase market share. The decline in exports from the City since the crash highlights the risks for Britain of the “eggs in one basket” approach.

As Ken Coutts and Bob Rowthorn note in a paper on the prospects for the balance of payments, the UK has gone from being a country that had a 10% of GDP surplus in trade in manufactures in 1950 to running a 4% of GDP deficit by 2011. North Sea oil and gas were in decline, so energy added to the deficit by 1.3% of GDP. Food and government transfers to overseas bodies such as the EU, World Bank and UN were the other big debits.

On the other side of the ledger there were three sources of surpluses: financial services and insurance (3.1% of GDP); other knowledge-intensive services, which include law, consultancy and IT (2.5% of GDP); and investment income (1.1% of GDP). Once all the debits and credits were totted up Britain had a current account deficit of 1.9% of national income. This rose to 4% of GDP in 2012.

The recession has taken a heavy toll on two of the surplus sectors. Investment income has turned negative, and global demand for financial services has fallen. This has affected the UK more than the other big global providers of financial services, the US and EU.

According to the Bank of England, “This could reflect lower demand for UK financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis.” This is a polite way of saying that no one any longer wants what Lord Turner once dubbed the City’s “socially useless” products.

Coutts and Rowthorn model what happens to the current account using assumptions for growth in the UK domestic economy and world trade, the level of UK competitiveness, oil prices, North Sea oil and gas production, and returns on financial assets.

The baseline projection is that the current account is 3% of GDP in 2022. Using a slightly more pessimistic assumption, the deficit swells to 5% of GDP. As the authors note: “A deficit of this magnitude would be a cause for serious alarm.”

It certainly would be. The outgoing trade and investment minister, Lord Green, told a conference in the City to mark export week that there was no guarantee the rest of the world would be prepared to finance deficits of this size for ever. The government has a target for raising exports to £1tn a year by 2020 – which will require them to grow by 9% a year. (The average since 2012 has been 5%.)

We have heard the “export or die” message many times in the past, to little effect it has to be said. It is not impossible to improve Britain’s export performance, though doing so with the current economic model is a pipe dream. It will require nurturing manufacturing, knowledge-based services and those bits of the financial services sector for which there is long-term demand.

Britain, Jones says, “needs to build a new developmental state, a state that once again takes responsibility for large-scale technological innovation as the basis for sustainable growth and prosperity”. Amen to that. If a currency war is brewing, we need the can-do spirit of 1940, not the head-in-the-sands approach of 1938.

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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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Greece ‘backsliding in democracy’ in face of joblessness, social unrest, corruption and disillusion with politicians, says thinktank. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc…

 


Powered by Guardian.co.ukThis article titled “Greece’s democracy in danger, warns Demos, as Greek reservists call for coup” was written by Helena Smith in Athens, for The Guardian on Thursday 26th September 2013 19.27 UTC

No country has displayed more of a “backslide in democracy” than Greece, the British thinktank Demos has said in a study highlighting the crisis-plagued country’s slide into economic, social and political disarray.

Released on the same day that judicial authorities ordered an investigation into a blog posting by an elite reservist group linked to Greece’s armed forces calling for a coup d’etat, the study singled out Greece and Hungary for being “the most significant democratic backsliders” in the EU.

“Researchers found Greece overwhelmed by high unemployment, social unrest, endemic corruption and a severe disillusionment with the political establishment,” it said. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc and voiced fears over the rise of far-right extremism in the country.

The report was released as the fragile two-party coalition of the prime minister, Antonis Samaras, admitted it was worried by a call for a military coup posted overnight on Wednesday on the website of the Special Forces Reserve Union. “It must worry us,” said a government spokesman, Simos Kedikoglou. “The overwhelming majority in the armed forces are devoted to our democracy,” he said. “The few who are not will face the consequences.”

With tension running high after a crackdown on the neo-Nazi Golden Dawn party, a supreme court public prosecutor demanded an immediate inquiry into who may have written the post, which called for an interim government under “the guarantee of the armed forces”.

The special forces reservist unit who issued the social media call – whose members appeared in uniform to protest against a visit to Athens by the German chancellor, Angela Merkel – said Greece should renege on the conditions attached to an international bailout and set up special courts to prosecute those responsible for its worst financial crisis in modern times. Assets belonging to German companies, individuals or the state should be seized to pay off war reparations amassed during the Nazi occupation.

Underscoring the social upheaval that has followed economic meltdown, the blog post argued that the government had violated the constitution by failing to provide adequate health, education, justice and security.

Insiders said the mysterious post once again highlighted the infiltration of the armed forces by the extreme right. This week revelations emerged of Golden Dawn hit squads being trained by special forces commandos.

Fears are growing that instead of reining in the extremist organisation, the crackdown on the group may ultimately create a backlash. The party, whose leaders publicly admire Adolf Hitler and have adopted an emblem resembling the swastika, have held their ground in opinion polls despite a wave of public outrage over the murder of a Greek rap musician, Pavlos Fyssas, by one of its members. Golden Dawn, which won nearly 7% of the vote in elections last year and has 18 MPs in Athens’ 300-member parliament, has capitalised more than any other political force on Greece’s economic crisis. “Much will depend on how well it will withstand the pressure and they are tough guys who seem to be withstanding it well,” said Giorgos Kyrtos, a political commentator.

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Larry Elliott: It is hard to see how the Fed can start to scale back its quantitative easing program this year. Nobody is sure any longer what the Fed is really up to. What will it take for the Fed to start winding down the stimulus?…

 


Powered by Guardian.co.ukThis article titled “Federal Reserve tapering decision has baffled the markets” was written by Larry Elliott, economics editor, for The Guardian on Thursday 19th September 2013 17.19 UTC

The dust was still settling on Thursday after the Federal Reserve delivered one of the biggest surprises to financial markets in many a year. This was a return to the central banking practices of the past when policymakers liked to keep people guessing about their intentions. These days central bankers pride themselves on their transparency.

But nobody is sure any longer what the Fed is really up to. Clearly it got cold feet about announcing even the most modest reduction in the amount of stimulus provided to the US economy through its long-term asset purchase programme, but both the decision and the way it was announced raised more questions than they answered.

Why was there no warning to the markets that the Fed was worried about the slowdown in growth? Why, in the absence of such a warning, did it not go ahead with a tokenist reduction in the stimulus, of say $5bn (£3.17bn) a month, that would have made good the commitment to start tapering but had no material impact on growth? What will it now take for the Fed to start winding down the stimulus?

But although the Fed’s communications strategy now lies in tatters, some conclusions can be drawn from the postponement of the taper. Firstly, policy is going to remain loose for longer than the markets envisaged. It is hard to see how the Fed can start to scale back its quantitative easing programme this year, and the prospect of the process being completed in 2014 – as originally envisaged – is as good as dead.

Secondly, the Fed is even more doveish than the markets thought. When Ben Bernanke first floated the idea of the taper back in May, the notion was that the trigger for the taper would be falling unemployment. But despite a continued moderate improvement in the labour market, the Fed still feels the time is not ripe to act. It took fright when speculation about the taper led to rising bond yields, making mortgages more expensive. It looked askance when share prices fell. And it is worried about the possible consequences of the looming budget showdown between Democrats and Republicans in Washington. So when the time came to act, it blinked.

Thirdly, the Fed has provided a respite – albeit probably temporary – to emerging markets that had seen their currencies fall against the dollar in anticipation of a gradual withdrawal of the stimulus.

Finally, the muted second day reaction to the decision was the reaction to one final unanswered question: does the Fed have the remotest idea how to unwind the stimulus? As Stephen Lewis of Monument Securities put it: Bernanke has given the “impression of being astride a tiger he dare not dismount.”

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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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Weaker-than-expected growth figures scotch fanciful hopes that Abenomics had found a magic cure for Japan’s woes. Weak growth has raised doubts about whether the government will go ahead with the increase in consumption tax next year…

 


Powered by Guardian.co.ukThis article titled “Weak Japanese GDP data highlights flaws in Shinzo Abe’s three ‘arrows’” was written by Larry Elliott, for The Guardian on Monday 12th August 2013 16.36 UTC

The honeymoon is over for Japan’s prime minister, Shinzo Abe. The financial markets loved it when Abe announced a three-arrow strategy last year for ending his country’s two decade struggle with deflation and sluggish growth. Share prices soared and the yen fell after the new government pledged large-scale quantitative easing, higher public spending and structural reform in a package dubbed Abenomics.

But markets were left distinctly underwhelmed on Monday by Japan’s latest GDP figures, which showed growth at 2.6% in the year to the second quarter of 2013, down from 3.8% in the 12 months ending in March. The rate of expansion was far weaker than expected and scotched the always rather fanciful hopes that Abe had found a magic bullet for Japan’s woes. He hasn’t.

Problems have emerged with every bit of the three-quiver policy. Firstly, driving down the value of the yen was supposed to boost the Japanese economy by making life easier for its key export sector. But it has also raised the cost of imports, particularly fuel, at a time when domestic energy production remains hampered by the Fukushima nuclear plant. Dearer energy raises business costs and eats into consumers’ real incomes. As some analysts noted, Japan is getting higher inflation as planned, but it is the wrong sort of inflation.

A second problem is that doubts are starting to surface about the government’s commitment to structural reform. Japan is an elderly and conservative country where the dynamics of an ageing population make it mightily difficult to raise participation rates in the labour market or reduce subsidies to farmers, even if ministers were prepared to make themselves unpopular.

But the biggest immediate problem for Abe is that the weak growth has raised doubts about whether he will go ahead with the increase in consumption tax next year, designed to show markets that Tokyo is serious about tackling Japan’s public debt, currently 240% of GDP. The increase in sales tax from 5% to 8% is chunky and, with a second increase to 10% planned for 2015, clearly has the capacity to derail economic recovery.

Japan has history in this respect, with tentative recoveries in the 1990s aborted due to over-hasty tightening of policy. Ideally, the increase in sales tax should take place at a slower rate over a longer period, which is what one of Abe’s advisers suggested on Monday. The question is whether this can be achieved without the government’s credibility being shredded. A final decision will be taken next month: the hesitancy adds to the sense that Abenomics is essentially smoke and mirrors.

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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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