Eurozone crisis live: Growth fears hit shares and oil price
This article titled ” IMF cuts growth forecasts and urges George Osborne to rethink fiscal plans – as it happened” was written by Graeme Wearden, for theguardian.com on Tuesday 16th April 2013 16.08 UTC
Time to wrap things up for the day here – but do check out the website tonight for more news from the IMF's meetings in Washington.
Here's a closing summary:
• The International Monetary Fund has cut its forecasts for economic growth this year, in the latest warning that the world economy is struggling.
In its latest World Economic Outlook, the IMF lowered its world growth forecast to 3.3%, from 3.5%. It also expects a deeper recession in the eurozone (-0.3%, from -0.2%), and slightly less growth in the US this year (+1.9%, from 2.0%) (see 2.07pm onwards).
The IMF said the global outlook is slightly more positive than last autumn, but warned of a 'bumpy road ahead'.
• The IMF lowered its forecast for UK growth this year to just 0.7%. It also urged chancellor George Osborne to consider changing the pace of his fiscal reform plans (see 2.01pm)
It pointed to the weakness of the economy, particularly the private sector, with chief economist Olivier Blanchard saying tonight that Osborne is 'playing with fire'. (see 5.06pm)
• Fears over the global economy had already driven the oil price down, with a barrel of Brent crude costing less than 0 for the first time in nine months.
• German analysts and economists are also more worried about the situation. The monthly ZEW index posted a surprise fall this morning, with global trade and the Cyprus bailout blamed (see 10.11am).
• The ZEW index helped to push shares down in Europe again today. The major indices all fell, with traders warning that the eurozone economy could be weaker than previously thought (see 4.53pm for closing prices).
• Cyprus's president piled more pressure on the country's central bank governor. He attacked the Bank of Cyprus's conduct in a letter to ECB president Mario Draghi (see 3.59pm)
• An opinion poll showed that Germany's new eurosceptic party has the support of around 3% of the country's voters – not enough to win seats in the Bundestag (see 11.17am).
• The latest inflation data showed that the cost of living in the UK remained unchanged, at 2.8% (as measured by the CPI). Economists predicted that CPI will soon be back above 3%. (see 9.32am onwards).
I'll be back tomorrow – until then, thanks and goodnight!
The IMF's Olivier Blanchard has increased the pressure on George Osborne, telling Sky News this evening that the chancellor is 'playing with fire', and should considering changing his plans:
Shares rally on Wall Street
Shares have risen on Wall Street, with the Dow Jones industrial average and the S&P 500 both recovering some of yesterday's losses. Both indices had fallen in late trading on Monday, following the news of the fatal Boston Marathon bombing.
Dow Jones: up 128 points at 14,727, + 0.88%
S&P 500: up 15 points at 1,567, +0.98%
Traders held a moment of silence for the victims of yesterday's attack and their families, before the session started.
Markets close in the red
Stock markets in Europe have closed for the day, with the major indices posting small losses.
The gold price hasn't managed much of a recovery today, currently up 1.1% at ,376 per ounce (having tumbled 9% on Monday).
And the oil price remains under pressure, with a barrel of Brent crude trading at .98, having dropped below 0 for the first time in 9 months this morning.
Here's the closing prices:
FTSE 100: down 39 points at 6304, -0.6%
German DAX: down 21 points at 7,690, -0.28%
French CAC: down 17 points at 3692, – 0.48%
Italian FTSE MIB: down 96 points at 15,533, -0.6%
Spanish IBEX: down 65 points at 7,948, -0.8%
This morning's drop in German economic confidence (see 10.11am) has helped to push shares down. Jennifer McKeown of Capital Economics said the ZEW index had fuelled concern that Germany's recovery is faltering.
While we still see Germany easily outperforming the rest of the euro-zone this year, we think that a strong and sustained recovery is too much to hope for. We maintain our forecast for the economy to stagnate this year and grow by just 0.5% in 2014.
The International Monetary Fund's warning to the UK over the pace of its fiscal adjustment (see 2.01pm) has triggered a political clash between the UK government and the Labour opposition.
The Treasury first. It downplayed the IMF's concern, pointing out that Britain's growth forecasts for this year are better than Europe's two biggest economies.
A spokesman said:
Today’s report from the IMF highlights the risks that continue to face economies around the world. Though the UK is forecast to have stronger growth than either France or Germany in 2013, difficulties in the euro area are still creating economic headwinds.
However, as the Chancellor said at the Budget, we are slowly but surely fixing this country’s economic problems. The deficit is down by a third, a million and a quarter new private sector jobs have been created and because of the credibility the Government has earned, families and businesses are benefitting from near-record low interest rates.
Thus sidestepping the IMF's call for the government to consider a change….
…to the chagrin of Ed Balls, shadow chancellor. Balls responded thus:
It was a serious mistake for George Osborne to totally ignore the IMF’s calls for a reassessment of fiscal policy in the Budget. They are right to step up their warnings and insist that a change of economic policy is considered right now.
“Our economy has flatlined for two and a half years, real wages are falling month by month and the result is £245 billion more borrowing than planned to pay for this economic failure. How much more damage needs to be done before the Chancellor finally acts?
Balls pointed out that the IMF had predicted growth of 2% for 2013 a year ago – but now expects GDP to expand by just 7%.
These downgraded growth forecasts are yet another damaging blow to a downgraded Chancellor whose economic policies have totally failed.
Cyprus president blasts central bank’s handling of the crisis
Back in the eurozone… the battle over the future of Cyprus's central bank governor has taken another twist.
The president of Cyprus, Nicos Anastasiades, has written to Mario Draghi, telling the ECB president that the country's central bank failed to perform its duties in the run-up to the crisis.
The letter is a rebuttal to Draghi's warning last week that national central bank governors cannot be sacked unless they are "guilty of serious misconduct" or can no longer perform their duties.
Reuters has the details of the letter, apparently sent yesterday:
The governor of Cyprus's central bank failed to regulate its now-crippled banking system effectively, the island's president Nicos Anastasiades said in a letter to ECB chief Mario Draghi.
Deepening a row between the government and central bank, Anastasiades attacked Panicos Demetriades, who was appointed as governor last year, for what he said was sustaining an insolvent bank using a European Central Bank cash lifeline.
The president also said there were damaging delays in resolving problems in the banking sector, after depositors were slapped with massive losses to fund a state bailout last month.
In an April 15 letter to ECB President Draghi, a copy of which was seen by Reuters, Anastasiades speaks of "shortcomings of the Central Bank of Cyprus".
Speaking of Draghi, his appearance at the European Parliament didn't bring MEPs flocking:
MAP: Growth forecasts for 2013
This map, from the World Economic Outlook, shows which parts of the world economy should expand strongly this year (dark blue), which should manage solid growth (light blue), which will grow slower (yellow) or struggle (orange), and which will actually contract (red).
You can see why the IMF remains so concerned about Europe.
Updated at 3.34pm BST
Updated at 2.56pm BST
Larry Elliott: Europe languishing in three-speed global economy
Economics editor Larry Elliott has also analysed the report, and confirms that Europe's woes continue to alarm the IMF:
Prolonged stagnation in the eurozone – GDP falls by 0.3% this year after a 0.6% drop in 2012 – is worrying in itself but it also has knock-on consequences for the rest of what the Fund sees as a three-speed global economy. In the first division are the emerging economies, which are exploiting their ability to catch-up with the countries of the developed world. They should see growth of more than 5% this year, similar to last year's performance.
The second division includes the US, Canada and Japan – even though the IMF clearly believes the stop-at-nothing reflationary strategy adopted by the new government in Tokyo is "risky" given the high level of public debt and the absence of a credible plan for putting the public finances back into some sort of order.
Finally, there is Europe, firmly in division three and with no immediate prospect of promotion.
Full analysis here: Eurozone crisis clouds IMF's improving outlook
Our full story about the IMF's warning to the UK is online here:
IMF to hold discussions with UK
The IMF will hold talks with the UK government over how the fiscal adjustment programme could be slowed.
From Washington, economics editor Larry Elliott reports:
Blanchard just singled out the UK as acountry that needs to show more flexibility on austerity.
"In the face of very weak private demand it is time to consider adjustment to the original fiscal plans," Blanchard said.
Blanchard added that the IMF will hold discussions with the UK over the coming months to "see what can be done" about pace of deficit reduction.
The IMF conducts an annual health check on the UK, which gives it a forum to raise its concerns.
Previously, the IMF has backed George Osborne's strategy while cautioning that a rethink might be needed if the economic situation worsened. With UK GDP shrinking again in the last three months of 2012, that moment has apparently arrived.
Back to the IMF briefing in Washington: chief economist Olivier Blanchard has told reporters that the risk that the eurozone might not stick together has "disappeared" due to measures from the European Central Bank and the European Union.
However, there is "a further urgent need to strengthen banks without weakening sovereigns", he added.
In other news, Mario Draghi is testifying at the European Parliament now. The president of the European Central Bank is telling MEPs that it is vital to deliver closer economic and monetary union. Live stream here.
IMF: Bumpy road ahead
The top-line message from the International Monetary Fund is that the world economy has improved since last October, but there's still plenty of problems.
As it puts it:
Global prospects have improved again but the road to recovery in the advanced economies will remain bumpy.
The IMF is relieved that policymakers in 'advanced economies' have successfully "defused" the threat of a breakup of the euro area and a sharp US fiscal contraction cut to the “fiscal cliff".
But, it warns that "old dangers remain and new risks have come to the fore.". And the eurozone continues to be top of the list:
In the short term, risks mainly relate to developments in the euro area, including uncertainty about the fallout from events in Cyprus and politics in Italy as well as vulnerabilities in the periphery.
Click here to see an overview of the IMF's projections:
Other key points from the IMF. It also expects France to shrink by 0.1% this year, Italy to contract by 1.5% and Spain to shrink by 1.6%.
And as expected (following last Friday's leak), it has cut its forecast for US growth this year to 1.9% (from 2%).
Updated at 3.31pm BST
Watch the IMF press conference
The IMF is presenting its new World Economic Outlook at a press conference in Washington – you can see it live here:
IMF warns of deeper eurozone recession
The IMF has taken the red pen to most of its economic forecasts, admitting that the global recovery is weaker than expected.
It has cut its forecast for global growth to 3.3%, from 3.5% in the previous World Economic Outlook.
And it now expects the eurozone to shrink by 0.3% this year, worse than the 0.2% contraction expected before.
IMF cuts UK growth forecasts and urges austerity rethink
Breaking: The International Monetary Fund has cut its growth forecasts for the UK and urged George Osborne to reconsider the pace of his austerity programme.
The warning comes in the IMF's new World Economic Outlook figures, just released.
From Washington, our economics editor Larry Elliott reports:
George Osborne has been told by the International Monetary Fund to re-think the pace of his deficit reduction plan after the Washington based institution cut its forecast for UK growth in both 2013 and 2014.
The IMF’s flagship publication – the half-yearly World Economic Outlook – provided fresh ammunition for the chancellor’s Labour critics when it said the Treasury should contemplate being flexible about its austerity strategy.
In its latest forecasts, the Fund said gross domestic product in the UK would rise by 0.7% this year and by 1.5% in 2014 – in both cases a cut of 0.3 points from its last set of predictions in January.
The warning comes a week before the latest GDP data shows if Britain is in a triple-dip recession.
The IMF warned that the UK recovery was progressing slowly. Here's the key statement on the UK, explaining why Osborne should consider changing course.
Domestic rebalancing from the public to the private sector is being held back by deleveraging, tight credit conditions and economic uncertainty, while declining productivity growth and high unit labour costs are holding back much needed external rebalancing.
…In the UK, where recovery is weak owing to lacklustre demand, consideration should be given to greater near-term flexibility in the fiscal adjustment path.
The IMF is presenting the full World Economic Outlook in Washington now….
The number of new housing starts in the US has jumped to the highest level since June 2008 (three months before Lehman Brothers Failed).
The number of housing plots where work actually began jumped by 7% in March to 1.036 million, suggesting the housing recovery is strengthening.
US inflation data shows falling prices in March
The cost of living actually fell last month in America, according to the latest inflation data just released.
On a month-on-month basis, the consumer prices index was down by 0.2% in March vs February – mainly due to falling gasoline prices.
Inflation was also lower than expected on an annual basis, with CPI up by 1.5% compared with March 2012.
MEPs approve bank bonus curbs
The European Parliament has given its approval to new rules for the banking sector, which include restrictions on bonuses – pegging them at 100% of annual salary.
AP has the story:
The European Parliament on Tuesday voted in favor of financial reforms, including a new law to cap bankers' bonuses.
The rule limits bonus payments at one year's base salary, or double that if a large majority of a bank's shareholders agrees. It will come into force next year and will also apply to European units of foreign banks and the employees of EU banks working overseas in New York, for example.
Lawmakers in Strasbourg overwhelmingly backed the proposed law and passed a sweeping package of financial laws that will force banks in the 27-nation European Union to strengthen their capital buffers.
"We are making our banks more resilient to crises with today's decision so that they no longer have to be bailed out with taxpayers' money," said Othmar Karas, a leading conservative lawmaker who oversaw the legislation.
The new reforms detailed in a 1,000-page document also lay important groundwork for the creation of a centralized banking supervisor for the eurozone, a cornerstone of the 17-country currency bloc's effort to tackle its debt crisis.
The package of financial reforms which implement the internationally agreed Basel III rules were hammered out earlier this year after months of arduous negotiations between EU governments, the EU Commission and parliament. They now have to be implemented in national law by next year.
Karas called the set of rules the "most comprehensive and far-reaching banking regulation in the EU's history."
The different legislative packages were adopted by about 600 European lawmakers, with about 40 or less voting against them.
EC president Jose Manuel Barroso and Commissioner Michel Barnier have just issued a statement welcoming the move. Here's a flavour:
These new rules will strengthen the internal governance of banks.
Remuneration policies will have to be aligned with sound and effective risk management. Shareholders are given a special responsibility and an appropriate and reasonable maximum ratio is introduced between the fixed salary and the bonus for all risk takers.
Critics of the plan, though, claim it will drive up basic salaries and make bankers less accountable for performance….
Goldman Sachs beats expectations
Meanwhile on Wall Street, Goldman Sachs has just smashed analyst expectations with its results for the first three months of 2013.
Goldman posted earnings per share of .29, against expectations of .88. And net revenues from investment banking were 36% higher than a year ago.
CEO Lloyd Blankfein said Goldman was 'pleased' with its performance, but claimed the firm isn't immune to the wider economic ills. He warned shareholders:
The potential for macro-economic instability was felt in the quarter and constrained overall corporate and investor activity.
Still, it's a sharp contrast with the gloom in much of Europe.
Just 90 minutes until the International Monetary Fund releases its latest World Economic Outlook, and anticipation is building…
Economist Nouriel Roubini has warned that today's drop in optimism among German economists and analysts confirms that the eurozone 'malaise' has reached Germany:
Looking back at the markets, and Brent crude oil remains below the 0 mark.
As this graph shows, the oil price has been on a downward path since early February, before recent disappointing economic data provided the latest push:
Europe's major indices are still in the red, with the DAX falling further after the ZEW index showed that economic optimism has fallen in Germany (see 10.11am)
FTSE 100: down 33 points at 6310, -0.5%
German DAX: down 42 points at 7669, -0.5%
French CAC: down 22 points at 3687, -0.6%
Spanish IBEX: down 31 points at 7982, -0.4%
Italian FTSE MIB: down 28 points at 15,600, -0.18%
The sell-off in London would be sharper, but for a rumour that the drawn-out merger of Xstrata and Glencore has been approved by China. Their shares are up over 5% each – but most of the market is down (79 shares have fallen, versus 21 risers):
Germany’s new anti-euro party has 3% support
Germany's new eurosceptic political party has the support of 3% of the population, according to a poll released by the tabloid Bild today.
It's the first survey since Alternative für Deutschland (AfD) held its founding conference on Sunday. AfD fervently opposes eurozone bailouts, and will campaign in this autumn's election for the "orderly dissolution of the euro".
That leaves AfD some way adrift of the 5% threshold to claim seats in the Bundestag – but there's still several months until the elections. The poll also confirms that Angela Merkel's CDU party holds a solid lead over the main opposition group, the SPD:
AfD has been criticised by several German politicians since its launch – and Bild itself (no fan of eurozone bailouts) points out that a return to the Deutsche mark would make German exports much pricier.
Guy Verhofstadt, the former Belgian prime minister who leads the Alliance of Liberals and Democrats for Europe in the European parliament, took to Twitter to blast the party today. He called AfD "suicide for Germany" and a "nightmare" for the rest of Europe….
Rather than loosening Europe's ties, Verhofstaft's solution is closer fiscal integration:
Greek ferry workers hold 24-hour walkout
A 24-hour strike has been called by all Greek seamen unions today, in protest at the country's austerity programme and a bill that will undermine workers' collective bargaining rights.
The walkout, which ends early on Wednesday morning, has left Greek islands without ferry links with the mainland, AP reports.
Living In Greece had more details:
• There is usually a last sailing from the islands as many vessels must return to slips in Athens.
• Routes between Greece and Italy are unaffected if the crew is Italian and ports are not blockaded.
Some suburban railway employees are also planning to hold four-hour stoppages between 8pm and midnight today, and on Wednesday and Thursday (more here).
Updated at 11.00am BST
German economic sentiment takes a dive
Germany's ZEW index of economic sentiment has fallen sharply, as fears over the eurozone crisis loom over its largest economy.
The ZEW economic sentiment index slipped to just 36.8, down from March's 48.5 (and much worse than expectations) – a sign that optimism is faltering among the economists and analysts surveyed by ZEW.
The think tank cited recent disappointing economic data, and the ongoing eurozone crisis.
Updated at 10.15am BST
Eurozone inflation data is just in – CPI rose by 1.7% year-on-year in March, that's down on February's 1.8%.
That may give the European Central Bank more opportunity to cut interest rates…..
Inflation: what the economists say
City economists are warning that UK inflation will head higher this year. Here's a round-up of early reaction, from Reuters:
GEORGE BUCKLEY, DEUTSCHE BANK
I do think you are going to see some increases in inflation over the course of the next three or four months. I wouldn't be surprised to see inflation heading above 3 percent. The one uncertain factor is here is how much petrol prices fall over the next few months based on the fact that we've seen lower oil prices and that could actually limit the peak in inflation we originally had at 3.4% or 3.5%….
ROB WOOD, BERENBERG BANK
The trend for inflation is probably up, heading to 3% pretty soon.
The Bank of England seems unlikely to engage in more asset purchases in the next month or two, with inflation threatening to go into letter-writing territory soon."
PHILIP SHAW, INVESTEC
This is about as close to consensus as you're likely to get. Our view remains that CPI will move above 3% in the coming months.
The big question is whether the MPC will look through this and become more aggressive on QE. We suspect it will.
Wages failing to keep pace with inflation:
At 2.8%, the cost of living in the UK continues to outpace the rise in wages, as economist Shaun Richards points out:
And it appears it's partly our fault:
Not free websites, of course 🙂
UK inflation: the details
While the consumer prices index rose by 2.8% year-on-year, prices were up by 0.3% during March itself.
Here's a chart that breaks down today's inflation data, showing how prices rose/fell last month compared to February, and compared to March 2012.
The retail prices index (which includes housing costs) came in at 3.3%, or up 0.4% during March.
UK inflation stays steady
UK inflation rose by 2.8% year-on-year in March, as measured by the Consumer Prices Index (the Office for National Statistics just reported).
That's a repeat of February's reading, and in line with expectations.
Clothing and footwear showed the largest month-on-month increase, while food and alcoholic beverage prices were down compared with February.
Table to follow…
Updated at 9.33am BST
We'll also be watching the European Parliament this afternoon, where Mario Draghi is scheduled to make an appearance (at 2pm BST, RanSquawk flags up).
The biggest event on the agenda today is the International Monetary Fund's latest forecasts for the world economy.
We also have inflation data for the UK, the eurozone, and the US, as well as the ZEW measure of German investor confidence.
Some of the data from the IMF leaked last Friday, suggesting it will cut its prediction for US growth (see here), but there should be plenty of other interesting news to cover.
• UK inflation data for March: 9.30am BST
• Eurozone inflation data for March: 10am BST
• German ZEW index of investor confidence: 10am BST
• US inflation data: 1.30pm BST (8.30am EST)
• IMF's latest World Economic Outlook: 2pm BST
Shares down again
Europe's stock markets are in the red this morning,.
FTSE 100: down 24 points at 6318, – 0.3%
German DAX: down 12 points at 7700, – 0.16%
French CAC: down 3 points at 3706. -0.1%
Spanish IBEX: down 50 points at 1,963, – 0.6%
Italian FTSE MIB: down 54 points at 15,574. -0.35%
Rebecca O'Keeffe, head of investment at Interactive Investor, blamed fears over the state of the US and Chinese economies. She also fears more losses ahead – partly because of the eurozone crisis
With China disappointing and recent weak data from the US raising serious questions about whether the tax increases and spending cuts suggest a more significant impact on US growth, there seems little to entice investors.
And with continuing problems in Europe and the seemingly ever expanding black hole that represents the financial position of Cyprus, investors may be well advised to be more cautious over the coming weeks.
An alternative view on gold….
Updated at 8.45am BST
Gold price up, but close to two-year low
Gold has staggered back off the mat this morning, up around 1.3% at ,378 per ounce.
A crumb of comfort for gold bugs, whose morale and wallets are badly bruised by Monday's slump (gold was trading around ,560 last Thursday).
But few City analysts this morning are predicting a swift recovery. Katie Martin of Dow Jones sums up the latest reaction:
Updated at 8.48am BST
Moody’s cuts China’s outlook
Rating agency Moody's has dented China's hopes of a credit rating upgrade this morning, by cutting the outlook to 'stable' from 'positive'.
In the latest sign of concern over China, Moody's warned that it had not made much progress in addressing potential bad debts held by its local government bodies.
Progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth; therefore, some of the upward pressure on the Aa3 rating has eased.
Aa3 is the fourth highest rating on the Moody's scale. More here.
Updated at 8.10am BST
Brent crude hits nine-month low as global fears grow
Good morning, and welcome to our rolling coverage of the latest developments in the eurozone crisis and the global economy.
Concern over the state of the global economy is growing today, as the jitters that hit the markets yesterday continue to reverberate around the trading floors.
Brent crude oil has fallen below the 0 a barrel mark overnight, its lowest levels since July 2012. Monday's disappointing growth figures from China are being blamed – with investors anticipating lower demand for oil if (as feared) the global economy is entering a stickier patch.
The message this morning is that economic growth may be more elusive than expected (despite the ultra-loose monetary policy we've been showered with since the crisis began).
As Myrto Sokou, senior analyst at the Sucden brokerage, explained to AFP:
The recent Chinese economic data failed to meet analysts’ expectations and added further pressure to the market that was already showing sharp losses following disappointing US economic data last week.
And Jonathan Barratt, the chief executive officer of Barratt’s Bulletin, warned that:
There is a level of confidence evaporating from the [oil] market.
Of course, lower oil prices could actually help Europe's struggling economies – lowering inflationary pressures and cutting transport costs.
But the broader picture remains that the economic picture does not look too great – Monday's Empire State Manufacturing Index, which measures the health of the US manufacturing sector, was also a disappointment.
Michael Hewson, senior market analyst at CMC Markets, warns that shares and commodities are likely to keep falling today:
Yesterday’s China inspired sell off looks set to continue this morning in the wake of continued sharp falls in oil, gold and copper prices as investors appear to be starting to lose patience and confidence in the so called global recovery story.
Another disappointing US economic indicator by way of the Empire manufacturing survey did nothing to quell these concerns as the run of disappointing US economic data continued.
Despite billions of dollars of financial stimulus from central banks worldwide the global growth story still appears to be no closer to showing signs of moving into a higher gear, and if anything continues to misfire like a clapped out old motor vehicle.
And to complete the picture, Moody's has lowered its outlook on China from positive to stable (more on this shortly).
So, that's the cheery picture this morning – I'll be tracking all the economic news and developments in the euro crisis through the day …
Updated at 8.53am BST
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