New York Fed president William Dudley has dismissed speculation that the US Federal Reserve could adopt negative interest rates as “extraordinarily premature”.
Speaking a day after Fed chair Janet Yellen concluded two days of congressional testimony during which she left open questions on whether the US could follow central banks in Europe and Japan by adopting negative rates, Dudley, a voting member on the Fed’s policymaking committee, struck an optimistic tone.
He said US households and banks are better able to absorb shocks than they were when the last recession hit.
Against a backdrop of supportive US consumer and household debt data released Friday, Dudley added US monetary policy remains “quite accommodative” after the Fed’s decision to raise interest rates in December.
“Key sectors of the US economy, such as the household sector, seem to be in good shape,” he said, repeating Yellen’s assertion that despite market turmoil that’s caused the S&P 500 to lose 10% of its value this year, economic expansions do not simply “die of old age”.
On that note we’ll close up, and say thanks for all your comments. See you again soon.
European markets end a turbulent week on a buoyant note
Worries about a global slowdown, falling oil prices and the effect of negative interest rates on banks have combined to produce another traumatic week for stock market investors.
But the week ended with sentiment much improved, with European markets showing significant gains. Oil jumped on renewed hopes that producers would agree to meet to cut output (although we have heard this many times before), which helped lift energy companies. Nicholas Hyett, investment analyst at Hargreaves Lansdown said:
Oil stocks are rallying today on speculation that Opec might be willing to cut production. It will need to be a big cut though; some US storage facilities are at 90% of capacity with new production still to come online this year.
Banks also came back from their beaten-down levels, after better than expected figures from Commerzbank, news that JP Morgan’s Jamie Dimon was snapping up the bank’s shares and Deutsche Bank’s plan to buy back debt.
Wall Street also helped, moving higher after better than expected US retail sales, while there appeared to be no real shocks in the eurozone GDP figures, albeit Greece moved back into recession.
Investors are already looking ahead to Monday, when Chinese markets re-open after a week’s holiday for New Year. Will its stock market move higher or play catch up with the falls elsewhere in global markets? With Wall Street closed on Monday, it could be another volatile day. Meanwhile the final scores in Europe ahead of the weekend showed:
The FTSE 100 jumped 3.08% or 170.63 points to 5707.60, its biggest one day rise since August
Germany’s Dax added 2.45% to 8967.51
France’s Cac climbed 2.52% to 3995.06
Italy’s FTSE MIB rose 4.7% up at 16,514.87
Spain’s Ibex ended 2.25% better at 7920.8
In Greece, despite the protests and a slump back into recession, the Athens market added 3.04% to 454.29
In the US, the Dow Jones Industrial Average is currently 227 points or 1.4% higher.
More pictures from Greece, where farmers are protesting outside parliament.
And more proof of the volatile week markets have just suffered:
Deutsche of course had been hit by worries about its balance sheet and the effect of negative interest rates, like others in the sector, as well as pressure on its contingent convertible bonds.
But along with the recovery in bank shares, Deutsche has also been lifted by news it planned to buy back debt.
FTSE 100 sees biggest daily rise since August
The FTSE 100 has jumped 3.08%, its biggest one day rise since 27 August.
As of Thursday, some £80bn had been wiped off the UK’s leading index.
With today’s recovery that has been cut to £36bn.
More on oil:
Despite the current market rally, leading shares still have some way to go to mount a major recovery. Chris Beauchamp, senior market analyst at IG, said:
The week finishes in much better form than it began, with stock markets in Europe and the US clawing back losses, with even some better US retail sales figures adding to the merry mood. European markets in particular can look forward to more positive momentum on Monday, when the US is out of action for Presidents Day.
That of course is the short-term picture, and for the FTSE 100 even a significant recovery in coming weeks, similar to that seen in January, would still leave the market in a firm downward move.
Oil prices have been on another tear higher today, which has provided a firm base on which to build the broader stock market rally. However, pessimists (and there are many around at the moment) will be quick to point out that there’s little sign of an actual meeting between major oil producers, and that Saudi intransigence on production cuts remains the chief, and currently insuperable, obstacle to tackling the problem of huge oversupply.
At least the banks are doing better today, with both the FTSE banking sector and its European counterparts racing away. After all, even if rates aren’t going higher, there’s always the hope of more ECB largesse to sweeten the outlook somewhat…
The return of China to the market fray after their holiday could also be key for further gains, although a couple of days of volatility as they play catch-up cannot be ruled out.
But one of her colleagues is not so sure. New York Fed President William Dudley said negative rates elsewhere – ie in Japan and Europe – would have little effect on the US economy, reports Reuters, adding that negative rates “should not be part of the conversation right now in the US.”
He also said US bank were in good shape despite the share price falls in the sector in recent days.
Negative interest rates should help lift growth and inflation but if the market turmoil continues, the economic consequences could outweigh the benefits, says Michael Pearce at Capital Economics. He says:
In principle, cutting policy rates into negative territory should boost growth and inflation. But central banks have not communicated these benefits clearly, and the hesitant way in which they have been introduced has undermined confidence, raising the risk that negative rates do more harm than good.
Although markets are rebounding today, the sharp falls in equity prices and in particular bank shares since the beginning of the year have led many to claim that negative rates are damaging global economic prospects. Markets have focused on three main concerns.
First, negative deposit rates impose a direct financial cost on banks, harming their profitability and thus their willingness to make new loans…[But] we estimate that negative policy rates in the four European economies that have applied them are costing the banking sector around €3bn a year. That is a trivial fraction of their assets and is not a game-changer for their profitability either…
The second fear is that the rush to impose negative policy rates is the latest front in a futile currency war. There is some truth to this argument as a weaker exchange rate is a key channel through which negative rates can operate. But there is little evidence that the major central banks are competing to weaken their currencies, and insofar as they are, the result will be looser global monetary policy which should be positive for global growth.
Perhaps the biggest worry though is that cuts to policy rates have added to the sense that the world economy is slowing sharply and that policymakers are running out of options. Policy loosening has fuelled, rather than soothed, market fears…Central banks themselves are partly to blame for this response because they have repeatedly claimed that policy rates could not be lowered further, only to surprise the markets by cutting rates weeks later. No central bank has given a clear idea of how low interest rates on excess reserves could go, adding to the perception that they are flying blind. Nonetheless, claims that monetary policy has reached its limits are exaggerated. After all, there is still plenty of scope for further quantitative easing.
The University of Michigan survey suggests a falling outlook for inflation:
The US consumer confidence figures are not too bad under the circumstances, reckons James Knightley at ING Bank:
US consumer confidence as measured by the University of Michigan dipped to 90.7 in February versus 92.0 in January. This is a bit weaker than the 92.3 consensus, but isn’t too bad given the scale of equity market sell-off.
Indeed, strong employment gains, rising real incomes and a firm housing market are providing enough offsetting effects for now and with retail sales having come in stronger than expected (when upward revisions are included) it looks a reasonably encouraging consumer spending story for now.
However, equity markets don’t seem particularly interested unfortunately and the longer that this goes on the greater the risk that it feeds negatively into the real economy through weaker sentiment and tighter financial conditions.
And after the US retail sales, here is some less positive news in terms of consumer confidence.
The University of Michigan consumer sentiment index has missed expectations with a fall from 92 in December to 90.7. The consensus forecast was for a reading of 92 for January. The index of consumers expectations fell from 82.7 to 81, a four month low.
Meanwhile business inventories rose 0.1%, in line with forecasts.
Oil continues to rebound, on renewed hope of production cuts to stem the supply glut.
Apparently helping the rally were reported comments from United Arab Emirates oil minister Suhail Al Mazrouei that producers were ready to work together.
But we have been here many times before, and he was also reported as saying that there would be no cuts unless there was full co-operation among producers.
There have been several optimistic reports suggesting Opec might be ready to talk to other producers such as Russia about limiting output, but so far no real progress.
Nevertheless, Brent crude is now up 5% at $31.59 a barrel while West Texas Intermediate – the US benchmark – is 6% better at $27.79.
And that is one of the factors helping to support stock markets as they bounce back from recent lows.
Another cut in the European Central Bank’s deposit rate in March has strong support among the central bank’s governing council, Reuters is reporting.
Any cut could come as part of a broader package including some changes to the bank’s asset purchase programme, but there is little appetite for more radical action . Reuters says markets are pricing in at least two rate cuts by the end of the year, taking the deposit rate from -0.3% to -0.55%.
Banking groups are unlikely to be happy, since their shares have been hammered this week by fears about the effects of the wave of negative rates on their balance sheets and margins.
Reuters reports one policymaker as saying: “Cutting the deposit rate by more than 10 basis points would hurt bank profitability, not a popular idea right now, especially given what’s happening in the banking sector.”
Wall Street opens higher
With markets elsewhere moving ahead after the recent turmoil (the Nikkei was the exception), the US has joined in the more optimistic mood.
The Dow Jones Industrial Average is up 140 points or 0.9% while the S&P 500 opened 0.6% higher and the Nasdaq added 1%. Energy and financial stocks were among the early gainers.
The US retail sales show consumer spending remains important to the country’s economy but the key question is how it will cope with the global problems, says Nancy Curtin, chief investment officer at Close Brothers Asset Management:
Consumer spending has played a starring role in supporting growth in the US’ service-led economy, and the latest retail figures suggest this is set to continue. Lower oil prices have certainly helped, with the US consumer benefitting from cheaper gas to the tune of $80m per day. The labour market continues to strengthen and consumer confidence hasn’t been shaken, all of which bodes well for the domestic economy.
What really matters though, is how well the US weathers the global risks in the long-term: namely, Chinese devaluation and the exacerbating effect of the stronger US dollar. Clearly, the tentacles of the Chinese slowdown are spreading, and the lack of a clear enough policy is a red flag to ongoing volatility. Equally, the dollar has been strengthening due to the robustness – until recently – of the US recovery and the Fed’s decision to hike rates in December. However, it does drag down exports and adds to the already widening trade deficit. While it’s not yet a case of stunting US growth, all eyes will remain on Yellen to soothe where she can. For now, as hinted in her testimony to Congress, she’ll continue to put any immediate rates rise on hold.
Dennis de Jong, managing director at UFX.com, said the US retail sales showed some positive signs:
With US data on the whole far from convincing following the interest rate rise, Fed Chair Janet Yellen will be pleased with the green shoots shown in today’s retail sales figures.
Any positive figure is a step in the right direction, and onlookers still await an uptick in consumer activity prompted by continuing low fuel and energy prices.
Yellen will still be wary given that the numbers have been given a leg-up from the holiday season, and she should expect there to be further strain on the US economy in the coming months.
Overall, US retail sales rose 0.2% in January, while the December figure has been revised upwards from a 0.1% fall to a gain of 0.2%, said the Commerce Department.
Cheaper fuel prices as the oil price tumbled seemed to encourage spending, although it also cut back revenues at petrol stations, while spending at bars and restaurants was hit by the severe winter weather. But clothing stores saw sales rise 0.2% and online retailers saw a 1.6% jump (the effect of harsh weather again presumably).
US retail sales beat forecasts
Over in the US and signs that consumers may be spending again as retail sales beat expectations.
Core retail sales – which exclude cars, fuel, building materials and food services – increased 0.6% in January after a 0.3% fall in the previous month. Analysts had forecast an increase of around 0.3%.
Deutsche Bank has confirmed earlier reports it may buy back some of its debt, an idea which has been supporting its share price after its falls earlier this week.
Deutsche has said it will offer to buy up to €3bn of European debt and $2bn of US debt.
And Poul Thomsen, head of the IMF’s European department, said it had not yet seen such a plan. He repeated that debt relief – a bone of contention among some of the country’s creditors – needed to be a key element of the programme. He wrote in a new IMF commentary:
The IMF does not want Greece to implement draconian fiscal adjustment in an already severely depressed economy. In fact, we have time and again been the ones arguing for a fiscal adjustment path that is more supportive of recovery in the near term and more realistic in the medium term.
We have yet to see a credible plan for how Greece will reach the very ambitious medium-term surplus target that is key to the government’s plans for restoring debt sustainability. This emphasis on credibility is crucial for generating the investor confidence that is critical to Greece’s revival. A plan built on over-optimistic assumptions will soon cause Grexit fears to resurface once again and stifle the investment climate.
The overriding objective of the IMF’s engagement with Greece is to help the country put itself back on a path of sustainable growth that benefits the Greek people. The IMF will support the Greek authorities and their European partners in developing a program of reforms and debt relief that adds up. There are difficult choices to be made, but it is important to make them so that Greece’s efforts over the last six years are not wasted.
On the need for both reforms and debt relief, he said:
It is argued that the IMF has made its participation dependent on socially draconian reforms, especially of the pension system. This is not the case. Ultimately a program must add up: the combination of reforms plus debt relief must give us and the international community reasonable assurances that by the end of Greece’s next program, after almost a decade of dependence on European and IMF assistance, Greece will finally be able to stand on its own. This implies an inverse trade-off between ambition of reforms and strength of debt relief—we can certainly support a program with less ambitious reforms, but this will inevitably involve more debt relief.
This said, no amount of pension reforms will make Greece’s debt sustainable without debt relief, and no amount of debt relief will make Greece’s pension system sustainable without pension reforms. Both need to come about. There is no doubt that both Greece and its European partners will face politically difficult decisions in the coming months to arrive at a program that is viable—one that adds up.
And on pensions, he said Greece is too poor to afford its present pension system:
Despite the pension reforms of 2010 and 2012, Greece’s pension system remains unaffordably generous. For instance, the standard pensions in nominal Euro terms are broadly similar in Greece and Germany, even though Germany—measured by the average wage—is twice as rich as Greece. Add to this that Greeks still retire much earlier than Germans and that Germany is much better at collecting social security contributions. The result is that the Greek budget needs to transfer some 10 percent of GDP to cover the gaping hole in the pension system, compared to a European average of some 2½ percent. Clearly, this is unsustainable.
The next phase of the eurozone crisis is about to begin, to judge by the latest GDP figures, argues our economics editor Larry Elliott. He writes:
Greece is back in recession. Italy is barely growing. Portugal expanded but only at half the expected rate. The message could hardly be clearer: the next phase of the eurozone crisis is about to begin.
But scratch beneath the surface and the picture looks far less rosy. The beneficial impacts of the European Central Bank’s quantitative easing programme have started to wear off, as has the effect of the big drop in oil prices in the second half of 2014. The eurozone peaked in the second quarter of 2015 and the trend was starting to weaken even before the recent turbulence on the financial markets...
In the short term, further stimulus from the ECB is a bolt-on certainty next month, either through cuts in interest rates or an expansion of its QE programme, or more likely both. In the longer term, a summer of crisis eurozone summits to discuss the fate of Greece looms. Probably not what David Cameron wants as he contemplates how to win his Brexit referendum.
Larry’s full comment is here:
Here’s our full report on the eurozone GDP figures:
Bank shares are still rallying, with Deutsche Bank up 9% and Commerzbank 17% higher after it announced its first dividend since 2007 today.
Here’s the lunchtime scores:
FTSE 100: up 100 points at 5636, + 1.8%
German DAX: up 136 points at 8,891, + 1.5%
French CAC: up 47 points at 3,944, +1.2%
David Lamb, head of dealing at the forex specialists FEXCO, says European investors are pinning their hopes on more stimulus from the European Central Bank:
“It’s hard to imagine how the sense of deja-vu could be any stronger. The confirmation that Greece has slumped back into recession came as rioters stalked the streets of Athens to protest against government austerity.
“Growth in the Eurozone’s biggest economies remains weak too, so at first glance it’s a puzzle that both European stocks and the Euro should rally in response to such a bleak picture.
“The reason is the now racing certainty that the ECB will soon restart the Euro’s printing presses. Mario Draghi has dropped ever heavier hints that more QE is coming – and on this evidence it may come as soon as March.
Summary: Eurozone GDP
Here’s a round-up of the latest eurozone GDP data, from Howard Archer of IHS Global Insight:
Fourth-quarter Eurozone GDP growth was limited by lacklustre GermanGDP growth of 0.3% quarter-on-quarter, which matched the third-quarter performance. German growth was reportedly held back by negative net trade in the fourth quarter as exports fell and imports rose.
In addition, FrenchGDP growth edged down to 0.2% quarter-on-quarter in the fourth quarter from 0.3% quarter-on-quarter in the third quarter, as it was held back slightly by a hit to economic activity from the Paris terrorist attacks in November.
Particularly disappointingly,Italian barely grew in the fourth quarter as GDP edged up just 0.1% quarter-on-quarter. This continued a disappointing slippage in growth through 2015, as quarter-on-quarter GDP expansion came down from 0.2% in the third quarter, 0.3% in the second quarter and 0.4% in the first. Seemingly, unlike most Eurozone countries, Italian GDP was reliant on net trade in the fourth quarter as domestic demand was reported to have been a drag.
On a more positive note, Spanish GDP growth held up well at 0.8% quarter-on-quarter in the fourth quarter, having edged back to this level in the third quarter from a peak growth rate of 1.0% quarter-on-quarter in the second quarter.
Among the other Eurozone countries, there were modest pick-ups in quarter-on-quarter GDP growth in the fourth quarter in the Netherlands (to 0.3% from 0.1%), Belgium (to 0.3% from 0.2%) and Portugal (to 0.2% from 0.0%). Cyprus grew by 0.4% quarter-on-quarter, which was down slightly from 0.5% in the third quarter.
Additionally, there was robust expansion in Slovakia (up 1.0% quarter-on-quarter, as it had been in the third quarter) and Estonia (up 1.2%).
However, Greecemoved into recession as GDP contracted by 0.6% quarter-on-quarter in the fourth quarter after a drop of 1.4% in the third quarter as it continued to be hampered by fiscal austerity and capital controls
Finland also moved into recession as GDP fell 0.1% quarter-on-quarter in the fourth quarter after a drop of 0.6% in the third quarter.
Furthermore, Austrian GDP was only flat quarter-on-quarter in the fourth quarter, as it had been in the third quarter.
Greece’s protesting farmers are digging in for the long haul.
Greek farmers: New taxes will kill us
Athens correspondent Helena Smith reports that there are “extraordinary scenes” in the capital, ahead of a major anti-austerity protest later today.
The area outside the agriculture ministry now resembles a war zone after farmers – mostly from Crete – fought pitched battles with police.
Have just spoken to Manolis Gazakis, a farmer from the district of Rethymnon, who told me:
“We said it would be war and we meant it. The government has to understand that it is us or them.
We are not going to back down over measures that amount to our survival. Just the taxes they are proposing would kill us.”
The protestors are threatening to cut off major arteries in and around the city centre. Dozens of units of riot police have been deployed. Concern is such that road checks are even being conducted on trucks for fear that tractors may be hidden inside!
Farmers, now pouring into the capital from other parts of the country, are said to be in negotiation with authorities ahead of a major rally later today.
They are holding a big anti-austerity rally, to urge prime minister Alexis Tsipras to withdraws its proposed social security and pension reform plan.
Those reforms, though, are demanded by Greece’s creditors in return for bailout funds – and eventual debt relief.
Greece falls back into recession
Greece has lurched back into recession following the economic and political crisis last summer which saws its banks shuttered and capital controls imposed.
Eurostat reports that Greek GDP fell by 0.6% in the last three months of 2015. That follows a 1.4% slump in output in the third quarter, and wipes out growth of 0.2% in April-June.
Fourth-quarter GDP was a whopping 1.9% lower than a year earlier, Eurostat says. That’s a serious slump, showing the damage suffered by Greece during the long standoff between Athens and its creditors last year.
Greek companies have been warning for months that capital controls are hurting them badly, and these figures appear to back that up.
Growth of 0.3% is quite mediocre, frankly, given the eurozone benefitted from substantial (and long-awaited) monetary stimulus last year.
Lower energy bills should also have given consumers a lift.
These charts from Eurostat show how eurozone growth remained at 0.3% in the fourth quarter of last year.
Growth also slowed on an annual basis, across both the EU and the eurozone.
Eurozone GDP: Up 0.3%
Breaking: The eurozone economy grew by 0.3% in the final three months of 2015.
Capital Economics isn’t impressed with Portugal’s growth rate:
Portugal’s growth misses forecasts.
Breaking: Portugal also struggled in the last quarter of 2015.
New growth figures from Lisbon show that Portuguese GDP only increased by 0.2% in the final quarter of 2015. Economists had hoped for growth of +0.4%.
On an annual basis, Portugal’s economy only expanded by 1.2% over 2015, below expectations of 1.4% growth.
Italy’s slowing economy will fuel concerns that Europe’s recovery is running out of puff.
Holger Sandte of Nordea Markets has tweeted this graph, showing how the eurozone lost momentum during 2015:
We’re expecting the overall euro area GDP figures to show an increase of 0.3% for the last quarter (they are released in 30 minutes).
There’s a clear downward trend in Italy’s quarterly growth over the last year.
ABN Amro economist Nick Kounis reminds us that Italy has been struggling for a while:
Italian growth slows to 0.1%
Oh deary, deary me. Italy’s economy only grew by 0.1% in the final three months of 2015, new data show.
That’s only half as fast as in July-September, when Italy expanded by 0.2%.
It dashes hopes that growth might accelerate to +0.3%, and underlines the weakness of the eurozone economy.
It appears that poor domestic demand held Italy back.
The FT’s Rome correspondent, James Politi, sounds worried:
A flurry of new GDP data is hitting the wires.
Poland has posted decent-looking growth, with GDP gaining 3.9% in the last year, or 1.1% quarter-on-quarter.
And Bulgaria has grown by 3.1% annually, and 0.8% in the last quarter.
Deutsche Bank is scrambling off the mat – shares are up by around 4%, and the cost of insuring its bonds against default has dipped.
Greece and Italy share the dubious distinction of the worst-performing stock markets in 2016.
Italy’s FTSE MIB has lost a quarter of its value since January 1, while the Athex Composite has plunged by 30%.
Spain, Germany and Austria are also lagging, with losses of around 17% each.
Finland’s recession continues
Back to eurozone GDP, and Finland remains in recession after contracting by 0.1% in the last three months.
That follows a 0.5% contraction in the July-September quarter, and means Finland’s economy is still smaller than in 2008. It has suffered from falling demand for its paper industry, the decline of Nokia, and the impact of sanctions on its neighbour, Russia.
And as a member of the eurozone, Finland hasn’t been able to devalue its currency.
There are remarkable scenes in Athens right now, as farmers protesting against pension cuts and austerity measures clash with riot police.
After weeks of protests, which closed motorways, the farmers have decamped to the Greek capital for a mass rally.
More than 300 famers have made the trip from Crete, to urge Alexis Tsipras’s government not to impose reforms to social security system.
Here’s a video clip which appears to show farmers chasing the riot police down an Athens street:
Tony Cross, market analyst at Trustnet Direct, says we should be cautious about today’s rally:
London’s FTSE-100 is positively flying as the week’s final session gets underway, with almost 100 points having been tacked on already. A late rally on Wall Street and a relatively measured day’s trade across most of Asia – aside from Japan – is helping throw a little confidence into the mix as we run towards the weekend break.
Oil is also working its way a little higher off recent lows, which will be helping sentiment for stocks – but critically the fundamentals haven’t changed. As such, this still looks more like bargain hunting than the market turning its back definitively on the run lower.
London’s shares are surging higher, pushing the FTSE 100 up by 96 points.
The other European indices are also higher, helped by those bank and mining shares.
Financial shares are rallying across Europe, pushing the Stoxx 600 bank index up by 2.7%.
Commerzbank can take some of the credit. Early today the German lender announced its first dividend since 2007, after posting better-than-expected fourth quarter profits.
London stock market bounces back in early trading
Hold onto your hats! Shares are rallying at the start of trading in London.
In London the FTSE 100 has jumped by 62 points, a gain of 1.1%.
Most shares are gaining ground, including mining companies and banks who have been badly hit by this week’s panicky selling.
Rolls-Royce is leading the rally, after sparing investors another profits warning this morning (although it did slash its dividend).
Remember, the Footsie plunged by over 2% yesterday, so this is only a partial recovery after a pretty rough week.
VP Bank Group chief economist Thomas Gitzel says the 0.3% rise in German GDP was “not exhilarating” but also not a reason to worry.
He told Reuters that:
“Slow but steady was the retrospective motto for 2015”
The Financial Times points out that Germans have rarely had it so good:
Back in the markets, gold is on track for its best week since October 2011 as investors scurry for safety.
Gold bugs will be rubbing their hands, after seeing the spot price of bullion jump 6% since Monday. It hit a one-year high of $1,260 per ounce overnight, before dipping a little.
Gold’s failing as investment vehicle is that it doesn’t pay a return. But when capital preservation is the name of the game, people pile in.
Is Germany getting a refugee boost?
ING economist Carsten Brzeski warns that 2016 could be harder for Germany than many people expect.
On top of the well-known risk factor like slowing China and emerging markets or a still struggling Eurozone, low oil prices and the possible weakness of the US economy could give the German economy a hard time.
In particular, any slowdown of the US economy could turn out to be a double whammy for Germany. The direct impact through weaker demand from last year’s most important trading partner and the indirect impact through a stronger euro are in our view currently the biggest risks for the German economy. To some extent, there are similarities between Germany’s showcase soccer team Bayern Munich and the Eurozone’s showcase economy. At first glance, both performances look impressive and flawless.
At second glance, however, weaknesses have emerged recently. These weaknesses have clearly increased the risk for both Bayern Munich and the German economy to surprisingly be knocked off their respective pedestals in the coming weeks and months.
Bloomberg economist Maxime Sbaihi’s eagle eye has spotted something important in the German data (which is online here)
Germany’s trade with the rest of the world weakened in the last quarter.
Destatis reports that:
The development of foreign trade had a downward effect on growth because the exports of goods were down on the previous quarter. Imports decreased, too, though less strongly.
Johannes Gareis, economist at French investment bank Natixis, confirms that this held back growth:
The German economy achieved “moderate growth” in the last quarter, says Destatis.
And it appears that Germany relied on domestic demand.
General government final consumption expenditure was markedly up, while household final consumption expenditure rose slightly again. A positive development was also observed for capital formation.
And this chart shows German growth since the debt crisis began:
German GDP up by 0.3% last quarter
Here we go!
The German economy grew by just 0.3% in the final three months of the year.
That matches economist forecasts – and confirms that Europe’s largest economy is only expanding quite modestly.
It’s not the robust growth that politicians would like to see – on the other hand, Germany is also avoiding being pulled into recession by the global downturn.
Japanese market suffers biggest weekly fall since 2008
Over in Tokyo, traders are catching their breath after riding out the worst week in over seven years.
Today’s 4.8% plunge means that the Nikkei has shed 11.1% this week, the biggest weekly drop since October, 2008.
Recession fears stalked the markets.
Tsuyoshi Shimizu, chief strategist at Mizuho Asset Management, explains:
The markets are clearly starting to price in a sharp slowdown in the world economy and even a recession in the United States.
“I do not expect a collapse or major financial crisis like the Lehman crisis but it will take some before market sentiment will improve,” he added.
Here’s our story on the latest Asian rout:
Eurozone GDP day usually starts with French growth numbers.
But not today, because INSEE actually reported two weeks ago that the eurozone’s second-largest economy grew by only 0.2% in October-December, down from 0.3% in the summer. That weak performance bolstered fears that the French economy was stuttering.
IG are calling the European stock markets slightly this morning:
But given the volatility this week, who knows?
After a wild week, economists hope that today’s eurozone growth figures could provide some relief to the financial markets.
Then again, it could make things worse:
The Agenda: Market turmoil and eurozone growth figures
We’re tracking two important stories today – the ongoing turmoil in the world financial markets, and the release of eurozone growth figures for the last quarter.
Last night, global markets sank into ‘bear territory’, when fresh falls on Wall Street dragged world stocks 20% below their recent high:
And the selling hasn’t stopped. Already today, Japan’s stock market has tumbled by another 4.8%, following Thursday’s big selloff in Europe.
The selloff appears to being driven by continued fears of a global downturn, and the health of the banking sector – as analysts warn that negative interest rates could seriously threaten their business model.
And we’ll get a good insight into the European economy this morning, with a flurry of new growth figures from most of the major EU countries.
Here are the main events to watch out for::
Germany: 7am GMT / 8am CET
Italy: 9am GMT / 10am CET
Portugal: 9,30am GMT / 10.30am CET
Greece: 10am GMT / 11am CET
The eurozone: 10am GMT / 11am CET
Economists predict that eurozone growth remained sluggish at just 0.3%.
We’ll be tracking all the main events though the day….