Mon Nov 19, 2012 1:00am EST
* Euro zone in fresh crisis talks over Greece
* Budget wrangling in US, EU could sour sentiment
* Euro area set for poor PMIs; China’s might pick up
By Alan Wheatley, Global Economics Correspondent
LONDON, Nov 18 (Reuters) – With every year that passes,
fewer and fewer people lead a life that is poor, nasty, brutish
and short. So it is only right to step back, as America does
this Thursday, to appreciate the bounties bestowed by economic
Yet this Thanksgiving, with the impact of the 2008 global
financial crisis refusing to fade, will not feel like a time to
In Europe, another week brings another meeting of finance
ministers to try to ‘save’ Greece as well as another set of
surveys likely to show the euro zone heading for another quarter
And in the United States, despite warm words after talks on
Friday, worries about the capacity of politicians to put the
public finances on a sustainable footing are sure to persist.
Ward McCarthy, chief financial economist at Jefferies in New
York, said he was sceptical of the consensus that Democrats and
Republicans would strike a budget bargain by the year-end
deadline for the two sides had painted themselves into corners.
He said it was important to distinguish between the
compromises needed to dodge the immediate ‘fiscal cliff’ – a mix
of tax increases and spending cuts set to take effect in January
– and a long-term deal to slash the deficit.
“It’s virtually impossible to get a long-term budget deal
done before the end of the year. The fiscal cliff doesn’t end
the process; it’s just the beginning. So we still have the
threat of another credit downgrade hanging over our head,”
Joe Carson, an economist at AllianceBernstein in New York,
shares those concerns; a short-term fix would not provide the
clarity that businesses and consumers need.
“And without a legislative solution to the federal deficit
and ever-rising federal debt problem, the U.S. runs the risk of
another credit rating downgrade, with the added costs and
uncertainty that could also weigh on economic growth prospects
for years to come,” Carson said in a note.
Leaders of the 27-member European Union will hold a two-day
meeting in Brussels this week to try to thrash out a long-term
budget of their own. Tempers can be expected to fray.
Of greater immediate importance, however, will be talks on
Tuesday among euro zone finance ministers to try to agree with
the International Monetary Fund on a stop-gap financing
programme for Greece.
Athens is drowning in debt and needs a new write-off, the
IMF and virtually all private economists say. But that is
politically taboo before German elections next September. Hence
the need to keep drip-feeding aid to Athens – something the Fund
is reluctant to do on the basis of debt sustainability
projections it considers unrealistic.
The European Central Bank has reduced the risk of a
disorderly break-up of the euro by promising in principle to buy
the bonds of big indebted countries such as Spain and Italy.
But the wrangling over Greece is a constant reminder of the
single currency’s shaky foundations, and that weighs heavily on
“The financial stability that has been created by the
measures that the ECB has taken over the summer is not
translating into a better economic outlook,” said Bert Colijn,
an economist in Brussels with the Conference Board, a research
GIVING SOME THANKS
The euro zone went into the fourth quarter with industrial
output slumping, and a November survey of the area’s purchasing
managers due on Thursday is likely to offer scant relief.
Economists polled by Reuters expect the index derived from
the survey to tick up to just 45.8 from 45.7 in October – still
well below the boom-bust threshold of 50.
A parallel poll of procurement executives from German
industry is forecast to show no change, while on Friday Munich’s
IFO institute is expected to report a deterioration in the
business climate in Europe’s biggest economy.
Colijn said concern over the prospects for China, a big
customer, was affecting Germany. “You see in declining orders
and business confidence that the global weakening in
manufacturing is a concern to Germany as well,” he said.
But there should also be reasons this week to give some sort
of thanks. Several banks expect China’s HSBC/Markit purchasing
managers’ index (PMI) to regain the neutral mark of 50 after a
reading of 49.5 in October.
And even the dark cyclical cloud enveloping the euro zone’s
PMIs has a silver structural lining, according to a Goldman
Sachs study. Although pointing to a second straight quarter of
recession, the recent surveys are consistent with the economic
rebalancing that the single currency area needs, the bank said.
Germany is gradually stimulating domestic services, while
Spain’s export sector is faring better at the expense of
construction and public services.
In sum, Goldman suggests, “Spain is an economy where the all
too obvious pain of the current recession may be obscuring an
ongoing, necessary and broadly effective restructuring.”
As for the United States, October data on housing starts and
building permits due on Tuesday might show some payback after a
But McCarthy with Jefferies said he was confident that
housing was in the early stages of a long-term rebound.
“What I like about it is that it’s balanced and a gradual
process, not a boom, which means it’ll probably have longer
legs. Housing typically leads recoveries. This time it has
lagged, which means as a consequence that the recovery itself
could have longer legs,” he said.
Amen to that.