The euro area is tipping into stagflation
The FT led this morning’s edition with the June fall in the PMI to below 50 – the critical level at which industry suffers a recession (from 51.1 to 49.5). The article says that this the euro area is now heading towards stagflation, and the fall in the PMI, while significant, will not sway the ECB from holding back from raising rates. The slowdown is also affecting Germany, though less so, with the PMI still at over 53, but the rise in the oil price and the euro are finally taking their toll on economic activity.
Worse to come for the Irish economy
The Irish economy faces its first recession since 1983 according to the latest ESRI forecast. The research institute expects output of goods and services to fall this year. The Irish Independent writes that the main culprit is the collapse in house construction, which has plunged from 75,000 units last year to just 30,000 next year. This fall is so serious, it wipes out all the growth in the rest of the economy. The public deficit is expected to be above the EU limits of 3% of GDP, borrowing almost €2bn next year. Alan Barrett from ESRI blames the government for the €10bn swing in public finances as it blew the finances from the boom even though everybody knew that i. He expects that a pay freeze in the public sector would be needed if the government is to get the growth in public spending sufficiently down.
Second round effect watch:
Not in Germany, on the contrary…
So much for second-round effects in Germany: Frankfurter Allgemeine leads its business section that during the first quarter this year, German earnings growth was 2.8% higher compared with the same period last year, while inflation was 2.9%. In other words, the trends towards a decline in real incomes continued (and the gap between German and Spanish competitiveness presumably continued to widen). The focus of the article is not the euro area, but purely domestic, and the point the paper makes is that the people have been suffering a loss of purchasing power once again.
..but they are kicking in in the UK
The FT has an interesting report about second round effects in the UK, following last week’s 14% pay agreement for Shell tanker drivers. While this may be a one off, there is concern now that in the UK pay settlements are not based on the BoE’s CPI target indicators, but on RPI, the old retail prices, which has persistently remained above 4% for quite some time. The FT quoted a number of other pay settlements in the 7% plus region, all based on RPI. So there appears to be evidence of wage-push inflation, and this would make the job of the BoE somewhat harder.
Spain versus Italy, again
Italy’s Il sole 24 ore had a headline this morning saying the Spanish economy was going down the drains while Zapatero consoled himself with football. (If Italy would have won, the same could have been said about Berlusconi by El Pais). Zapatero apparently made the remark after the game that the Spanish sorpasso of Spain over Italy was now complete, both in terms of the economy, and in terms of football. The article then goes on to tell how the Spanish economy is about to fall off a cliff.
La Repubblica has more on the Italian Spanish divide. According to Eurostat, the gap between the two countries widened even further. On some measure of domestic output per head of population Spain scores 107 to Italy’s 101 (Corriere said in a headline: “Eurostat: Spain defeats Italy 107-101”). El Pais also picks up on the story, trying very hard to hide its satisfaction.
Jacques Delors and Joschka Fischer on the future of Europe
Frankfurter Allgemeine has an interesting report about the Mouvement Europeen conference in Berlin, where Joschka Fischer criticised Merkel’s position on core Europe. He said she was right to do everything to keep everybody on board, but if this process is exhausted, she would be wrong to block any core Europe initiatives. Jacques Delors has also come out in favour of an EU avant-guard, pointing the success of Schengen and the euro itself, projects that have started with a smaller number of members.
Paul Krugman on oil
Paul Krugman tries to explain how and when speculation can effect the spot price of a commodity. If two normal speculators engage in a future bet, then this has no implications, no matter how many speculators, and how large the bet. If a speculator who actually owns the commodity engages in a future bet, and sits on the commodity to pay off to deliver on an eventual claim in the future, then it does. But there is no indication so far of a rise in inventories. Hence no indication that speculation is driving up spot prices.
Debate on the Great Moderation
Stephen Cecchetti’s comment in the Financial Times provoked an interesting debate about the causes of the Great Moderation – the period from the early 1990s to a few years ago, during which inflation and interest rates moderated globally. The Naked Capitalism blog picks on Cecchetti’s argument that financial innovation caused the Great Innovation, and that we must not kill off financial innovation, as we would risk killing off the Great Moderation for good. The blog quoted another author, Thomas Paley, who argued that the Great Moderation was due to a number of transitory phenomena, a rise in asset prices, a consumer driven boom, also financial innovation, and that this period has now come to an end.
Pisauro on Italian labour market
Giuseppe Pisauro takes a closer look at the Italian public sector employment market, one of the biggest problems of the Italian economy, which has not been successfully address in the last 15 years. He notes that the Berlusconi government has produced some interesting ideas, with the ultimate goal to raise public sector productivity, but he warns that the best way to implement any change is strategically, starting with an agreement of measuring public sector productivity, and providing incentives in a well-defined and transparent way.
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