Category Archives: Economics

Settling Accounts?

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I don’t know how many of you have seen the film The Insider, but Caesar Alierta, boss of Spain’s telecommunications near-monopoly Telefonica, has always seemed to me to fit the bill perfectly. Now the Financial Times announce that he is finally to be charged with an old insider-trading scandal:

“C?sar Alierta, executive chairman of Telef?nica, the Spanish telecommunications group, has been charged with insider trading in connection with alleged improper share trades when he was chairman of a tobacco company. The public prosecutor’s office is seeking a four-and-a-half-year jail sentence for Mr Alierta, the most senior executive ever charged with insider trading in Spain. The prosecutor’s office is also requesting the seizure of ?1.86m ($2.27m) of profits Mr Alierta is alleged to have made from trading in Tabacalera shares when he was chairman of the Spanish tobacco group in 1997.”

As the FT notes, the case also has a political dimension, since it forms part of the ongoing ‘feud’ between PSOE and PP. The reality is that ‘justice’ is still a very political issue in Spain. Still, you have no idea how happy it would make me to see Alierta finally convicted of something. Adding-on a few racketeering charges might not go badly amiss either.

More Evidence Of UK Slowdown

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The UK National Institute of Economic and Social Research suggest in a report published today that the U.K. economy may have grown at the slowest pace in almost four years in the second quarter.

Growth was probably 0.3 percent in three months through June, compared with 0.4 percent in the first quarter, the London-based institute, whose clients include the U.K. Treasury and the Bank of England, said in an e-mailed statement. That’s the slowest pace since the third quarter of 2001, according to government figures.

U.K. economic growth in the first quarter lagged expansion in the euro area for the first time in more than four years as manufacturing production shrank and consumer spending stalled, the government said on June 30. NIESR said the Bank of England, which meets today, should lower its benchmark interest rate from 4.75 percent, the highest in the Group of Seven Industrialized Nations.

The BoE which meets today is not expected to lower rates – although this move is not entirely excluded. Most likely a reduction will be in the offing soon.

Eurozone Outlook

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There is a pretty mixed bag of numbers coming in at the moment. The German economy shows some signs of a recovery of activity (here), as is the French one (here). It is important to understand however that trend growth in Germany is now extremely low, and the economy is very export dependent. The underlying performance of the Frech economy is essentially much better. However, the sick man of Europe continues (and will continue) to be Italy (here)

Levels of business activity in the Italian services economy continued to fall in June. However, rising from 47.3 in May to 48.9, the seasonally adjusted NTC Research/ADACI Business Activity Index indicated that the rate of contraction had eased and was only marginal.

A month-on-month decline in new business to Italian service providers was recorded for the third successive month. Furthermore, the rate of decline quickened again and was the sharpest in the survey history. Panel companies reported that demand for their services had continued to suffer as a depressed domestic economy led to subdued client spending.

Service providers reported that diminishing levels of new business had freed up capacity, leading to the sharpest reduction in backlogs of outstanding work in the seven-and-a-half years that data have been collected.

Employment levels in the Italian service sector fell for the fourth straight month in June. The rate of job shedding was again only marginal, although slightly sharper than in May.
Source NTCResearch

British Retail Sales Continue to Decline

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The latest survey by the British Retail Consortium suggests that retail sales declined in the UK for the third month in a row in June. This is definitely one to watch carefully.

Sales in stores open at least a year fell 0.5 percent compared with June 2004, the London-based lobby group said today. The drop followed a 2.4 percent slide in May and a 4.7 percent drop in April. Same-store sales declined 2.4 percent in the three months through June from a year earlier.

Fitch and Sovereign Debt

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Sorry if I’m belabouring a rather obscure and generally ‘non-sexy’ issue: government debt in the eurozone. If I am doing this it is because I think something important is happening. I missed this point during the week.

Fitch Ratings on Wednesday lowered to negative its credit rating outlooks for Italy and Portugal ? both among the three weakest countries in the eurozone ? amid concerns about their deteriorating public finances.

The negative outlooks could herald future credit rating downgrades, adding to concerns about economic divergence within the eurozone.

That’s the second time in a week (See the S&P post) that a ratings agency has done this to eurozone government debt. There are three economies in the ‘particularly at risk category: Italy, Greece and Portugal. They are ‘at risk’ not simply because they have substantial debt and/or deficits, but becuase they have this *and* important structural economic problems about the kinds of economic activities they engage in, they have a lack of international competitiveness that a drop in euro value of the order of magnitude we are seeing won’t resolve, that they are going to be forced to reduce their deficits during an ongoing economic ‘growth slowdown’, and that given their ageing populations their mid-term fiscal outlook is between poor and not-sustainable. Maybe we aren’t noticing much evidence of it yet, but the landscape beneath our feet is changing, even while we talk.

Incidentally, Italy has found another big one-off:

Italy’s government will raise as much as 4.1 billion euros ($4.9 billion) selling up to 10 percent of Enel SpA, Europe’s fourth-biggest utility, in the world’s largest share sale so far this year, the Finance Ministry said.

Italy will sell Enel shares at 7.18 euros each to institutions, Finance Ministry Director General Vittorio Grilli said at a press conference in Rome today. That’s 0.7 percent below Enel’s closing share price yesterday. Shares will be sold to individual investors at 7.07 euros each.

The thing is, you can try selling-off the furniture when you have problems paying the mortgage, but you can’t keep doing it forever.

The Dangers Of A Housing Boom

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Last year 700,000 new homes were built in Spain. A record number, and one which seems disproportionately high for Spains real future housing needs. In all likelihood the Spanish property market will one day crash, and prices drop considerably from their current highs. But what if they don’t? What if we ‘merely’ get a soft landing. This is a question the FT puts today in the US context, but what it says may be even more applicable to Spain. The economy is driven by the construction and property sector, simply slowing-up is going to have repercussions.

As property values have soared so has the level of interest in working in real estate. The number of realtors in the US has jumped by 45 per cent over the past four years to 1.1m, and many have left blue-chip companies or even delayed college to join the property jamboree. More joined the profession last year than at any time since records began in 1975.

Add in jobs in residential construction, furniture and DIY stores and mortgage finance, and the buoyant property market emerges as the main driver of employment growth over the past four years. Economy.com, the consultancy, estimates that about a third of the 2.6m jobs created in that period were in housing-related sectors.

This raises the question of what happens to these workers when the housing market cools.

FDI in France and Germany

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John Snow obviously had had sight of the document ( and here pdf ) when he went round lecturing us that Europe may become a non-favoured environment for US FDI:

“Foreign investment in France and Germany fell sharply in 2004, reinforcing concerns that inflexible labour practices and weak domestic demand are driving investors elsewhere.

In France, inward investment almost halved from $43bn (?35.44bn) to $24bn, according to figures released yesterday by the Organisation for Economic Cooperation and Development, the group representing the world?s most industrialised countries“.

But as much as the facts, the reasons behind the facts are interesting.

“Mark Zandi, chief strategist at Economy.com, the consultants group, said the data showed US companies the main source of direct investment funds in 2004 were spending their cash piles mainly on Asian investments.

?US companies are attracted to Asia partly because the currencies remain competitive, but also as low cost bases for production destination and as growing markets in their own right,? he said.”

Actually there is little realistic way that the EU or the US can reasonably expect to compete with China for FDI on China’s own terms, we both have to find another way.

More Bad News From Italy

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Italy’s crisis rumbles on, and I don’t expect it to get much better any time soon. This week we learn that Italian retail sales fell sharply in April,

After adjustment for seasonal factors, retail sales in April were down 0.8 percent on the previous month ? the steepest month-on-month fall since May 2004. Compared with a year earlier, sales were 3.9 percent lower – the sharpest decline in the series? history.

and that consumer confidence in Italy fell in June to its lowest since last September:

The ISAE institute reported that its consumer sentiment index fell to 102.9 in June, from 104.3 in May. The index has now fallen in six of the past eight months.

ISAE noted that the index measuring expectations about the general economic situation declined to its lowest level for ten years, largely due to concerns about job security.

Also Italy posted a trade deficit with non-EU countries of 487 mln eur in May compared with a 109 mln surplus a year earlier:

Exports rose 10.3 pct year-on-year in May to 10.647 bln eur, while imports rose 16.6 pct to 11.134 bln.

In the five months to May, the trade deficit widened to 5.225 bln eur from 1.732 bln, as exports rose 7.6 pct and imports increased 15 pct.

Spanish Hotel Prices

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Hotel prices in Spain remained in May at 2004 levels according to a National Statistics Institute (INE) report today. This could be a significant reading if price inflation in fact is disappearing from the sector. As the report notes, most of the recent increase in business has come from Spanish nationals.

Spain is running a large trade deficit. Tourism is one of the key ‘exports’. The combination of a high euro, and continuing domestic inflation has been hitting this badly. The non-increase is obviously a measure of the pain reading. Hotel and tourism prices have been rising at an annual rate of 5% plus since the start of the century.

Now For Some Real Medicine

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Paul Krugman has on occassion suggested ironically that Bagdad was only for the boys, that the ‘real men’ would go to Teheran. Well here’s another of those ‘real men’ in the economics field: Paul Betts writing in the FT, with one of those delicious ‘wingnut’ arguments:

“A dose of sado-monetary policy from the European Central Bank could force long overdue structural reform in Europe. Rather than follow Sweden’s example by cutting interest rates, the ECB should consider pushing them higher.

Politicians, especially in Berlin and Paris, would hate it. Wolfgang Clement, Germany’s finance minister, applauded the Swedish decision as showing how a central bank could support general economic policy without upsetting its price stability strategy.”