Greek Austerity: a not so silent movie - Economics Weekly


Greek Austerity: a not so silent movie - Economics Weekly

The 2012 BAFTA best film, The Artist, was set around the time of the Great Depression. This may chime with a Greek population that fears it will suffer something similar as it strives to deal with its debt.

14 February 2012

But another BAFTA nominee, The Help, seems more relevant right now. Greek politicians passed the austerity package required to secure the help it needs to avoid default. And it’s not before time. Talks have been going on since July. There will be a sigh of relief at the agreement, but it’s too early to relax just yet. The austerity measures are tough and are already causing severe social unrest. With elections expected in April, it will take the will of another nominee, The Iron Lady, to achieve the reforms in practice. The risk of a default at some future date remains. But how much more help will be available if that situation arises, is yet to be seen.

UK interest rates stay on hold, but quantitative easing is increased

Even though there was some brighter economic news from business surveys last week, the Monetary Policy Committee didn’t think that this would be enough to keep the economy warm. Chilly economic headwinds, from Europe in particular, were strong enough for it to stoke up the boiler with £50bn more quantitative easing and keep interest rates frozen once again. The action wasn't a surprise, but the question is, will it be enough? This extra stimulus brings the total size of the asset purchase scheme to £325bn and when the purchases are complete, the Bank’s holdings will account for almost one third of the market in government bonds.

Good news from the UK’s manufacturing sector

Manufacturing production in the UK increased by 1%y/y in December, five times more than was expected. On top of last week’s survey data, policy makers will have regained some confidence in the sector. But things are still fragile. Factory output declined by 0.8% in the last quarter of the year and the overall index of production, which includes mines, utilities and oil and gas, dropped by 1.4% between October and December.

UK trade deficit falls to its lowest level since April 2003

The UK’s deficit on seasonally adjusted trade in goods and services was £1.1bn in December - narrower than the gap of £2.8 billion in November. Goods imports were still bigger than exports, but the deficit on the seasonally adjusted trade in goods fell to £7.1bn in December, from £8.9bn in November. Trade in services deteriorated a bit, but stayed in surplus at an estimated £6bn, compared with £6.1bn in November.

UK mortgage arrears and possessions stay remarkably low

UK mortgage arrears and possessions improved in 2011 compared with 2010. 1.4% of mortgages outstanding were in arrears of more than 2.5% of the outstanding balance, while possessions accounted for 0.3%. Both are at their lowest rate since 2007, before the financial crisis and when the housing market and the economy were much more buoyant. This is remarkable given the rise in unemployment and fall in real incomes. Low interest rates and lower unemployment among the home-owning age groups seem the likely explanations.

European Central Bank left rates unchanged

The ECB kept rates at 1% for the second month in a row and there was no discussion of a rate cut at the meeting. The ECB is in “wait and see” mode, and it’s no wonder given all of the changes going on. Some better economic data in January was tempered by disappointing bank lending figures and signs of a credit crunch in parts of the Eurozone. The next offer of unlimited three year loans to banks becomes available in late February. President Draghi is not alone in hoping that this will boost credit to households and businesses.

The U.S. trade deficit increased to 2008 levels in 2011

The US trade deficit increased to its highest level in six months in December. At $48.8bn it brought the trade gap for 2011 as a whole up to $558bn. This is up 11.6% from $500bn in 2010 and is the biggest deficit since 2008. Exports of goods and services grew 14.5% to a record $2.1 trillion, but imports also broke a record at $2.7 trillion. The fact that the dollar has appreciated by more than 6% since August (in trade weighted terms), will not make it any easier for the US to redress this balance.

China's inflation rises unexpectedly, but is expected to fall back

China's CPI increased sharply to 4.5%y/y in January from 4.1%y/y in the previous month, against expectations that prices would continue to moderate. A seasonal spike in food prices due to the Chinese New Year was the reason, and there is little evidence that it was more than this. Non-food inflation fell to 1.8%y/y in January, its lowest reading since October 2010.

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