One of the themes of my blog is that the commodity price rises which have taken place in the latter part of last year and the early part of this present an inflationary danger to many parts of the world. Not all because mired in disinflation (falling prices) Japan for example may welcome a small dose of price rises. The problem as ever is that even a small dose may build up, a fact ignored these days by many central bankers including the Governor of the Bank of England Mervyn King.
In spite of a recent dip to 484.99 on the Commodity Research Bureau foodstuffs index we still have a rise on this index of more than 20% since the latter stages of November 2010. If at any time we are tempted to ignore the consequences of this change for the economies of the world we only need look at the disturbances in North Africa which have spread to Arabia. We can now add Libya,Yemen and Bahrain to the list and sadly 4 more people have died. This morning wheat and corn prices are rising again and one staple which has risen less,rice, is joining them. Oil from this area is priced in relation to Brent crude oil and has risen to just under US $104 per barrel. The gap between it and the American West Texas Intermediate measure is now nearly twenty dollars for the spot price. This proves an old trading rule that spotted anomalies usually get worse before they improve, no matter how illogical they may be.
Greek economic output falls heavily
Whilst overall economic output for the Euro zone rose by 0.3% in the last quarter of 2010 we received figures for Greece which reminded us yet again of “two-speed” Europe. From the Hellenic Statistical Agency we received this.
Available data indicate that in the 4th quarter of 2010, the Gross Domestic Product (GDP) decreased by 6.6% in comparison with the 4th quarter of 2009 and by 1.4% in comparison with the 3rd quarter of 2010.
The significant decrease recorded in final consumption expenditure has contributed to the decline of GDP, while the improvement in the external trade balance has partially offset the negative effect.
These figures represent a major contraction for the Greek economy and represent something I was concerned about from the beginning of the International Monetary Fund inspired austerity plan. Back on the twelfth of March 2010 when I looked at the experience of Latvia under an IMF austerity programme I wrote this.
So Latvia was in an economic mess and the IMF medicine was an austerity programme. Now here is the real issue GDP was expected to fall by 5% in 2009 but it actually fell by 12.2%. So my fear of a downward spiral for Greece actually happened for Latvia
It may be hard to believe now but the Greek government was forecasting a fall of 0.3% in GDP in March 2010 which was just around the second austerity package. A forecast so wide of the mark that UK readers may be wondering if the Governor of the Bank of England has been moonlighting! Unfortunately if we look back to earlier periods we can see that economic growth was revised down as well in the third quarter of 2010 to -1.7% which makes the annualised fall some 5.7% then.
If we link the rising price trend story with this we can see something for the UK to mull over too. You see Greek consumer price inflation is at 5.2% as of the latest figures for January,whilst her economic output is dropping at an annualised rate of 6.6%. I take intellectual satisfaction but no pleasure from pointing out that this reinforces an argument I have made for some time that you can have deflation (falling aggregate demand) and inflation at once. Sadly those responsible for Greece have manged to create what is a very toxic mess
This is a very sad state of affairs. I always thought that the very optimistic official scenarios for Greek economic growth in 2010 and 2011 were a type of public relations which if you wish to put it less kindly is another way of saying those making them were either incompetent or not telling the truth. The experience of Latvia which I wrote about eleven months ago indicated a severe adjustment even if one allows for the fact that the world economic recovery that is taking place means that Greece should for example be operating in a more favourable exporting environment.
What this means is that the fiscal figures in terms of her deficit and her ratio of national debt economic output will deteriorate. The annual deficit and the national debt are compared to an economic output (GDP) which is now 6.6% lower than a year ago. Also the shrinking economy will mean that some tax receipts will fall such as VAT and income tax and as unemployment is likely to rise further than public spending will come under upward pressure.
I do not like to present such bad news without offering advice for an improvement and it comes from an area I have been recommending since the beginning of the Greek crisis. That is that the has to be a type of default or more specifically a “haircut” to her public debt. I remember arguing for this to be of the order of 15% originally but now feel that her situation has deteriorated so badly that it would have to be at least 30%. There is a massive irony that a “rescue-plan” has helped lead to this and this partly explains why Portugal is so desperate to avoid being “rescued”. Here is a new definition for a lexicon a rescue which has the opposite effect.
I do not feel that a haircut even of this size would solve Greece’s problems on its own. If you do the necessary calculations it would help but not solve the problem. I always felt that psychology would be its strongest weapon as in it could be used to explain the need for reform in other areas as even bankers were being punished! With it would have to come an even stronger drive for economic reform of the type that Greece so badly needs. As we stand opponents can to easily point to the fact that the banking sector which helped cause the crisis remains essentially unreformed. Put another way the “haircut” buys some time for Greece to reform which to survive without an outright default she will have to take.
Why Portugal does not want to be “rescued”
Yesterday Portugal auctioned some one year debt and she sold a total of 1 billion Euros at a yield of 3.99%, up from 3.71% in the previous equivalent auction on February 2. She also offered to buy back some bonds maturing in April and June and found little demand as only 215 million Euro’s was purchased. However officials who claim this as a “success” might want to remember their own banking stress tests which ignored bonds which were held to maturity! Perhaps the banks took this more seriously than Europe’s bureaucrats. Either way Portuguese ten-year bond yields at 7.45% point to future insolvency.
Having mentioned that Portugal is trying to avoid a “rescue” the government bond yield gives us a clue as to why. The supposedly rescued Greece has a ten-year bond yield of just under 12% and Ireland has one of 9.18%. So if we look at the dent markets the “rescued” are in fact looking like they are worse and not better off. This is one of the reasons I have suggested that Portugal to go only to the IMF if she can. Whilst an austerity programme that has flaws will be deployed the borrowing would be cheaper at maybe half the interest-rate depending on the amount borrowed.
The UK economy: rising inflation and rising unemployment
The Bank of England’s inflation report: same as it ever was
As I have pointed out earlier this week this report is becoming something of a farce for two main reasons. The first is the extraordinary inaccuracy of the inflation forecasts presented and the second is that we always get the same message which keeps proving to be wrong. Here it is from yesterday.
The near-term profile is markedly higher than in November, largely reflecting further rises in commodity and import prices since then. Further ahead, inflation is likely to fall back, as those effects diminish and downward pressure from spare capacity persists.
If you look at the fan chart for expected inflation it shows a sharp fall in the latter part of 2011. This may or may not be true and on the Bank of England’s record is unlikely to be true, although they cannot be wrong for ever! If I may borrow the lyrics of David Byrne of Talking Heads this section is “Same as it ever was.”
One little curiosity in the fan chart is that the upper level for inflation has been 6% for some time. It is perhaps symbolic of the Bank of England’s failure in this area that it now goes up to 7%! Also a journalist from the Financial Times asked the Governor what he had learned from a sequence of very inaccurate inflation forecasts which stretch back to 2005. To which he got no satisfactory reply.
Unemployment Rises in the UK
The Office for National Statistics reported these figures yesterday. What we got was an increase in the unemployment rate of 0.1% to 7.9%. Over the last quarter unemployment rose by 44,000 to now total 2.49 million.Overall employment fell by 0.3% to 70.5%. Perhaps the most disappointing figures was that unemployment for those aged 16 to 24 rose by 66,000 to reach 950,000 which is the highest figure since these figures began in 1992.
If we look for existing themes then one clearly continued. That is that people are leaving the labour force as early retirement and other factors meant that what is measured as economic inactivity rose by 93,000 on the quarter to 9.36 million. The other theme of rising part-time employment reversed slightly as some 65,000 less were in this category when compared with September. Against this involuntary part-time work increased by 44,000 to 1.19 million which is the highest this number has been recorded at since they began to be collected in 1992.
Whilst disappointing these figures are pretty much in line with the way the UK economy is performing and more similar figures can be expected in 2011. The numbers for younger people are particularly disappointing but are in fact below the European Union average so it is a wider problem than just the UK. I saw that there was something of a political race yesterday to declare some measure to help this. I am afraid the political race to look sympathetic and to look like they are doing something is likely to lead to failed knee-jerk responses. What we need is an overall programme which looks at the situation from the beginning of our education system and makes reform to help those who leave it to get a job.
The mainstream media is likely to concentrate on a “cuts,cuts,cuts” agenda on this issue ignoring the inconvenient truth that they really begin in April.Personally the rising rate of economic inactivity bothers me and I feel it should bother others more. We may find some home truths if we ask the question, Why is this happening?