Prices up everywhere
The FT and others are leading with the increase in prices by several industrial companies, notably by Dow Chemicals in the US and Posco of South Korea, to raise prices for their industrial goods, as the chemical industry is facing strong inflationary pressures from rising commodity prices, which they are now trying, and succeeding, to pass on to their customers. The price increases of the two companies were in the order of 20-30%. In the US, inflation expectations have continued to increase, leading to a fall in consumer confidence.
Spanish unemployment to rise sharply
El Pais makes the observation that the Spanish government’s economic forecasts cannot keep up with the rapid deterioration of the economy. The employment minister yesterday raised its projections for unemployment from 10 to 11%, meaning another 370K unemployed. The full official government forecasts are out next month, probably showing an even steeper decline in economic growth than expected (probably to below 2%). (We think Spain is headed for an actual recession with negative output growth, but we think it is unlikely that the government is likely to admit this until after it had happened.)
Steinmeier versus Merkel
FT Deutschland and other German newspaper had the story this morning that the SPD Chairman Kurt Beck, deeply unpopular in his party, will leave it to Frank Walter Steinmeier, foreign minister, to challenge Angela Merkel at the 2009 election. While Steinmeier is quite popular, the only problem with the choice, is that Steinmeier has never fought an election before, in fact he is not even a politicians, but someone who rose in the back offices of Gerhard Schroder before he suddenly became foreign minister. That said, Mr Steinmeier is apparently more popular than Mr Beck, who has come to the conclusion that the SPD is not going to win in any case, which it does not matter too much who is the candidate.
How a House Price decline works
As ever, the Calculated Risk blog produces some interesting insights into the US housing market. This time it is tiered Case Shiller index, meaning the price for a city, in this case LA, is subcategorised in upmarket, mid-market and down-market segments, showing clearly that so far, most of the losses have been in the lower segment of the housing market. As this is a real series, one would expect house prices to fall back to the bottom of the chart, which shows how far the correction has yet to go – and how catastrophic the total correction will be for the lower market segment, but also that the other segments have yet to fell the real pain.
iTraxx Watch – the credit crisis is coming back
It’s back again. The iTraxx, an index for credit default swaps, is rising again, which means that risk aversion is returning after a significant fall in spreads during the spring. FT Alphaville reports that the benchmark iTraxx Europe index is close to breaching the 100bp level, and quotes an analyst as saying he expect the iTraxx Europe to go to 120bp and the crossover index with junk rated bonds as underlying to 600bp. (it was at over 1000bp at one point, when risk aversion was extreme).
Is the ECB subsidising banks?
Willem Buiter ask an important question in his blog: Is the ECB subsidising banks through the way it conductions its open market operations? Buiter says the ECB should make publically available the methods, and underlying models, for the pricing of illiquid collateral. That information is still not in the public domain. He called on the European Parliament’s Committee on Economic and Monetary Affairs to request this pricing information from the ECB. Buiter has a suspicion that the ECB has already paid massive subsidies to bail out the Spanish banking sector.
Charles Goodhart on regulation
Writing in Vox, Charles Goodhart says that central banks cannot achieve price and financial stability with one instrument (interest rates). A counter-cyclical regulatory system is needed to dampen asset booms and to smooth busting bubbles. To use such macro-prudential instruments effectively, regulators need courage, quantitative triggers, and independence; they will be criticised by lenders, borrowers and politicians in both booms and busts.
Martin Wolf on stagflation
In his FT column Martin Wolf has a gloomy outlook for the world economy’s descent into stagflation, and offers the following advice. First, monetary policy needs to be tightened, especially in emerging market, which would necessitate more exchange-rate adjustment. Second, governments must allow the rise of energy price to pass through the system, not prevent it, so that adjustment can take place. Third, the poorest should be compensated. He concludes that of the multiple shocks we are currently witnessing, the energy crisis is the most significant.
Sarkozy's visit to Ireland is counterproductive
Sarkozy’s visit to Ireland could backfire according to MEP Avril Doyle, reports The Irish Independent. This is what she had to say about him on TV: "I'm not sure it [his visit] would help things. I'm a bit nervous about Sarkozy. He's - you know -- a little bit unpredictable in terms of what he says and how he says it. He's colourful, but whether he'll help the cause, help the understanding of Europe, help connect people to what the real issues in the Lisbon Treaty were, I'm not sure."
Time for a new approach to Europe
Joschka Fischer says in his weblog at Die Zeit that the Irish No is a near catastrophe for Europe, because it means continued introspection, end of enlargement, lack of solidarity. He says it is now time to think of alternative structures for political integration, on lines similar to the euro.
Wolfgang Munchau, writing in the FTD, comes to exactly the same conclusion. Lisbon was the last-ditch attempt to keep the EU27 together as a unit. This will probably have failed. What we will now be seeing are various core-Europe alternatives.
It will be never so good again
Brendan Keenan looks at the Irish economy in the 1970s for lessons to the government facing its first recession since 1983. He said that the prospects for recovery are good as the non construction sectors are robustly growing, but that Ireland will have it never so good again. Here is his take: “A strong Irish recovery may require some significant improvement in competitiveness, without any help from a falling currency. The biggest challenge is to accept that, if and when such a recovery comes, the future will still not be anything like the recent past. Government-spending growth will have to stay permanently below 7% a year, although there will be scope to switch from investment to services. Living standards will have to rise only in line with productivity. Consumption will have to be less conspicuous.”
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