The euro zone: That sinking feeling (again)

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The euro zone

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If Germany, France and Italy cannot find a way to refloat Europe’s economy, the euro may yet be doomed

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JUST a few months ago the euro zone’s leaders believed that, having weathered the storm, they were set fair at last. Buoyed by the promise of Mario Draghi, the president of the European Central Bank, to do “whatever it takes” to support the currency, confidence had seeped back into the continent. Growth seemed to be returning, albeit at a slow pace. Troubled peripheral countries were recovering, after bail-outs and painful measures to cut budget deficits and improve competitiveness. Unemployment, especially among the young, was still desperately high, but at least in most countries it was falling. And bond spreads had narrowed sharply, as financial markets stopped betting that the euro would fall apart.
It was an illusion. In recent weeks the countries of the euro zone have begun to take in water once again. Their collective GDP stagnated in the second quarter: …

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The Fed and the ECB: A less dovish Yellen, a more dovish Draghi

The contradictory signals generated by American labour market data in the last year have provided grist for both hawks and doves at the Federal Reserve. For hawks, the rapid decline in the unemployment rate shows slack in the economy is disappearing so the Fed should tighten soon. For doves, the low rate of wage growth suggests there’s plenty of slack and tightening should wait.Since becoming chair, Janet Yellen has usually been in the second camp, on balance interpreting the data as suggesting there wasn’t any urgency about raising rates. Her speech to the Kansas City Fed’s Economic Symposium on Friday in Jackson Hole, Wyoming struck a different tone. True, it covered both sides of the debate without coming down on either; Ian Shepherdson counted “1 coulds, 20 buts, 11 woulds, 7 mights, and a magnificent 56 ifs.” But she raised enough questions about the dovish case to suggest her own convictions are weakening. She was not telegraphing the case for raising rates soon. But it should be a wake-up call for investors who assume she would spin all the labour data that comes her way in a dovish direction. The main dovish case is that the fall in unemployment overstates the reduction in slack. Because of the decline labour force participation, many people who don’t work are no longer classified as unemployed. Some of the drop in participation is structural, for example …

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Monetary policy: Be bold, Mario

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What China wants

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Monetary policy

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The European Central Bank should learn from the success of unconventional policies in America and Britain

CENTRAL bankers from around the world gather this week in the foothills of the Teton mountains to hike trails and share gossip and ideas. It is an apposite time to swap notes: the rich world’s economies have taken divergent paths and the bankers at Jackson Hole have much to learn from one another about which policies work best.
In America and Britain, output and employment have surpassed their pre-crisis peaks and are growing solidly. But the picture in the rich world’s other two big economies is darker. In the second quarter Japanese output shrank sharply, largely because consumers had accelerated purchases in the first quarter in order to avoid a consumption-tax rise. The euro zone’s woes are harder to dismiss: second-quarter output was flat, and it remains no higher than it was in 2011.

European policymakers should study their peers. America’s Federal Reserve …

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Bank settlements: Goodbye to all that

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Bank of America shells out to end litigation tied to the financial crisis

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[Update (2.30pm GMT): Bank of America has agreed to pay $16.65 billion to settle the mortgage probe.] 
BANK OF AMERICA’S shares fell a bit, early on August 20th, before an unexpected bounce in the afternoon left them up for the day. The jump would be of little moment but for the event that provoked it—a report that it was, as The Economist went to press, on the verge of agreeing to pay a staggering $17 billion to resolve claims from the financial crisis tied to the sale of mortgage-backed securities that defaulted.
The penalty amounted to more than 10% of the company’s market capitalisation. It probably stemmed in large part from actions taken by another firm, Countrywide, a rival it took over during the financial crisis and whose business was tied to the government-backed and government-influenced housing-finance agencies. The government eagerly blessed the union, much as it had …

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Secular stagnation: Fad or fact?

ADVANCED countries have struggled to make up the ground that they lost in the “great recession” that followed the financial crisis of 2007-08. America and Germany were relatively quick to regain lost ground but Britain has only just surpassed its pre-crisis GDP peak. And despite the support from generally strong German growth since the middle of 2009, the euro zone as a whole has failed to do so owing to a double-dip recession that lasted even longer than the first one and a subsequent feeble recovery that ground to a halt in the second quarter of 2014. The overall lack of progress has occurred even though interest rates are pinned to the floor and despite the stimulus from big quantitative easing programmes in Britain and America.This suggests that something more fundamental has gone wrong than the usual down-phase of the business cycle. That misgiving was encapsulated when Laurence Summers, a prominent American economist, suggested last year that advanced economies might be suffering from “secular stagnation”. That term had first been coined by Alvin Hansen in 1938 to describe what he feared was the fate of the American economy following the Great Depression of the early 1930s: a check to economic progress as investment opportunities were stunted by the closing of the frontier and the collapse of immigration.Hansen’s forebodings were proved to be quite wrong. Will a …

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European economy guide: Taking Europe’s pulse

Our interactive overview of European GDP, debt and jobs

Europe’s economies

CurrencyEconomyGDP per personUnemploymentYouth unemploymentDebtPublic debtBudget balancePrimary balanceGrowthLatest GDP change2014 GDP forecast2015 GDP forecast

Source: The Economist

*2012

Source: Eurostat

Source: Eurostat

*15- to 24-year-olds

Source: Eurostat

Source: European Commission

Source: European Commission

…

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Buttonwood: Caught out

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Back to Iraq

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Buttonwood

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Markets have defied expectations in 2014, leaving investors with few options

THIS was supposed to be the year when normal service resumed in the global economy and markets. As the recovery picked up steam, shares were expected to continue their rally and government bonds were projected to lose value (which would make the yield they pay rise), according to the consensus view.
But that is not what has happened. As of August 11th the Dow Jones Industrial Average was fractionally down on the year (the broader S&P 500 was up) and there were losses for the FTSE 100 in Britain, the CAC 40 in France, the DAX in Germany and the Topix 500 in Japan. Government-bond yields were testing historic lows, particularly in Germany, where the ten-year yield had dropped to 1.06% from 1.93% at the end of 2013; the yield on the equivalent Treasury bond had fallen to 2.42% from 3.03%.

The reasons that equity and bond markets have not conformed to the consensus view are many. First, some markets …

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The economy: How long will the expansion last?

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The economy

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Weighing the evidence

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WASHINGTON, DC

NEWS that America’s economy grew at a brisk annualised rate of 4% in the second quarter was greeted with relief. After a puzzling first-quarter contraction, growth has returned, though the recovery remains the weakest since the second world war. As of June, the expansion is now five years old, longer than the post-war average of 58 months (see chart 1).
The next recession could in theory be around the corner. But unlike people, business expansions don’t die of old age: they are killed by an unpredictable shock, says Bob Hall, an economist at Stanford University and chairman of the academic panel that dates American business cycles: “The next recession will come out of the blue, just like all of its predecessors.”

Recessions have become rarer in recent decades. The three expansions preceding the 2008 crisis lasted on average for 95 months. For that, economists …

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The euro-zone economy: Cyclical stagnation

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The euro-zone economy

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The recovery grinds to a halt

THIS week’s figures for the euro-zone economy were dispiriting by any measure. An already feeble and faltering recovery has stumbled. Output across the euro area was flat in the second quarter (see chart). That followed a poor start to the year when the single-currency club managed to grow by just 0.2% (0.8% at an annual rate).
There were some bright spots in the bulletin of misery. Both the Dutch and Portuguese economies, which had contracted in the first quarter, rebounded, growing by 0.5% and 0.6% respectively. Spanish growth picked up from 0.4% in the first quarter to 0.6% in the second. But these perky performances were overshadowed by the poor figures recorded in the three biggest economies. Italy, the third largest, had already reported a decline of 0.2%, pushing it into a triple-dip recession. France, the second biggest, continued to stagnate. But the real blow came from Germany, the powerhouse of the euro zone, where output …

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Cash for clunkers revisisted: Putting cars into reverse

THE “cash for clunkers” program, introduced during the depths of the downturn, was supposed to be a policy two-for-one. By paying people to trade in their old fuel-guzzling cars for new efficient ones, the scheme was supposed to jump start consumption of durable goods, boost the hard-hit car industry, and improve the fuel efficiency of America’s fleet. The eight-week programme generated an immediate spike in car sales, with almost $3 billion spent on the popular rebates. However, a new paper suggests that the programme may have actually decreased total spending on new motor vehicles creating a net drag on the economy.The study, by Mark Hoekstra, Steven Puller and Jeremy West from Texas A&M University, examined the difference between consumers who were on the border-line of being eligible for the scheme. To qualify as a ‘clunker’, a vehicle needed to achieve less than 18 miles per gallon. Thus by comparing households whose cars were just under this threshold, with those who were just over it, the authors were able to measure the impact of the scheme on consumption patterns. Unsurprisingly, they found that the scheme dramatically increased the car purchases for eligible households over the 8 weeks. But this was largely due to households changing the timing of their purchase. Instead of stimulating new car sales, the spike was mostly attributable to sales that would …

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