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Whether you're a 'glass half full' or a 'glass half empty' type of investor, freelance journalist Michael Baxter discusses the latest economic, company and investment news from both optimistic and pessimistic viewpoints.
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17/05/2012 - Bull and bear: As the Eurozone tears itself apart the rip reaches Latin America
Bull and Bear - an optimistic and pessimistic view of investment news. Today's stories: King warns Eurozone "tearing itself apart." Will Portugal be next? Real and peso tumble. King warns inflation to be worse than estimated. Jobs improve, wages not so good
King warns Eurozone "tearing itself apart"
Sir Mervyn King did not mince his words yesterday. In the past central bankers have come under criticism here for couching their speeches in words of such subtlety that the underlying message gets lost. Well you may or may not like the Governor of the UK's central bank, but you certainly couldn't accuse him of being too subtle yesterday.
He said that the Eurozone was: “tearing itself apart.”
And how will that affect the UK? "Well, it won't be unscathed," he said.
Yesterday, much of the focus in the UK media was on the soaring pound. 'Channel Four News' presenter John Snow seemed particularly worried about the plight of our poor old exporters, and quizzed Ed Balls on what should be done. "Should the UK devalue the pound?" he asked somewhat confusingly? Ed Balls did not know quite what to say to that, and for that matter it is hardly surprising.
A good answer might have been to say to the normally astute Mr Snow: "Oh shut up Jon!" Sometimes it does feel as if TV presenters are more interested in trying to confuse the people they are interviewing, than actually getting at the truth.
And the truth is that the pound is still cheap. It just feels a tad strange. A couple of years ago, former stalking horse John Redwood, was warning that the pound was in danger of sinking so fast that it could end up being worth less than the paper it was printed on. Now we worry that our exporters are being priced out of markets. Actually, the pound exchange rate is still favouring exporters to the Eurozone over importers from the Eurozone. It could rise another ten cents before the pound's value is about right.
But at least the rising pound is good for UK inflation, and you can expect that to show up in the stats soon.
But the truth is that the crisis in the Eurozone is a threat to us all. And regardless of whether you believe the best turn of events would be to allow the euro to break apart, or whether you think it needs to be saved at all costs, one thing is for sure; it is not in the UK's interests to see the region to our right descend into economic depression. It is not in our interests to see a kind of opposite of an Arab Spring in Europe; a sort of Eurozone winter. Regardless of whether the euro is allowed to break apart or whether it sticks together, in order to ensure peace in Europe, and that the UK itself does not descend into economic depression, the continent needs some kind of latter day Marshall Plan. And those who worry that the UK may be asked to put its hands in its pockets to stop financial contagion leading to the end of capitalism, really do need to shut up.
Will Portugal be next?
As one domino falls, which one will be next?
Okay, the domino called Greece isn't down yet. Syriza may be bluffing. The political party that holds the second highest number of seats in Greece's parliament is pro the euro but anti austerity. It reckons the money men and women in Europe will cave in, agree to Greek demands, roll over and give Greece lots of money. But when eyeballs meet eyeballs, and TROIKA and Greek negotiators hit an impasse, it may be Greece that blinks first.
But let's assume that the thing that many people have been saying for several years is inevitable actually happens, and we get Grexit. What next?
Portugal is trying hard; its fiscal deficit is falling, and its government seems to be a fully fledged, paid up member of the Austerian party.
But Mark Miller from Capital Economics reckons Portugal will fall in 2013. He said yesterday: "Portugal is fully funded to the end of 2012 under the terms of its bail-out package. But beyond this year, there are still questions about how the government will fund itself amid such weak economic conditions. Portugal's fiscal consolidation plan is challenging, implying a cumulative tightening of around 7 per cent of GDP this year and next. So a second rescue package looks even more necessary. Meanwhile, government projections published in March see public debt peaking at 115 per cent of GDP in 2013 which we find unrealistic given a weakening economy and the extra austerity associated with a second bail-out. But while this makes a case for debt restructuring in Portugal, this may not transpire if, as euro-zone policymakers have suggested, Private Sector Involvement (PSI) is confined purely to Greece. If so, a default – and an exit from the euro-zone – seems likely."
Real and peso tumble
Meanwhile, the Greek fallout has crossed the Atlantic and moved south.
In times of trouble, markets look to safety. In Europe that has meant the UK and Germany. But the US remains the world's biggest safe haven.
And that means money leaving the countries south of the border. In Mexico the peso has fallen 7 per cent this month against the dollar, while further south still, the Brazilian Real is down 5 per cent. The Chilean peso is down 3.5 per cent, but Peru's nuevo has been pretty flat.
It seems that in Latin America the currencies have been following the growth projections. Peru has been looking good for some time now; Chile too.
Brazil's economy has a balancing problem - too much consumption, not enough investment.
Funnily enough, however, the falling real may be want Brazil wants. You will recall that a couple of years agoits Finance Minister warned that we are in the midst of a currency war. At the time he was slating the Fed and its policy of QE that was pushing the dollar down.
King warns inflation to be worse than estimated
Back to Sir Mervyn, it seems the good doctor was out of sorts yesterday. The Bank of England's inflation report was even less cheery reading than normal.
The bank has revised its projection for growth downwards, and admitted that inflation this year is likely to be higher than it previously expected. So once again the Bank of England admits its inflation forecasts were too low.
It now says that inflation will be below the 2 per cent target in about two years. Such is the way it nearly always is. "Inflation will fall back in line toward the end of next year," says the bank, or words to that effect. It is just that when we get to next year, the forecast does not change. It still says: "Inflation will fall back in line toward the end of next year."
And yet, funnily enough some economists reckon the bank is being too cautious.
The 'BBC' quoted Graeme Leach, Chief Economist at the Institute of Directors, as saying: "Actually we think the inflation outlook is probably better than the Monetary Policy Committee (MPC) thinks, with the impact of the euro crisis, declining real incomes and weak money supply growth suggesting inflationary pressures may recede later this year and into 2013.
“After many years of underestimating inflationary pressure let’s hope the MPC is now making the opposite mistake by overestimating it.”
And while the Bank seems to have gone all coy over the prospects of more QE, Capital Economics still reckons the monetary easing breaks will be pressed again during the summer.
Jobs improve, wages not so good
And finally, it is time to rain on a parade. It happened to François Hollande earlier this week, of course - the heavens opened as France gathered to watch him take office.
But this time the rain is more statistical in nature.
Bull: The latest data on UK jobs was good. Unemployment in the three months to March fell by 45,000, the biggest fall in almost a year. There are now a mere 2.625 million people unemployed, or just 8.2 per cent, against 8.3 per cent last month.
Mind you, the 8.4 per cent unemployment the UK suffered earlier this year was a 16 year high, so while it is good to see the numbers fall, they are still way too high.
Bear: But apologies for adding woe to the good news; to rain, as it were, on the parade, but the news on average wages was abysmal. In the year to the three month period ending in March, average wages including bonuses rose by just 0.6 per cent. The news on regular pay, that's excluding bonuses, was a bit better - this was up 1.6 per cent. But with RPI inflation running at 3.6 per cent in the year to March, this means average workers became a good deal worse off over the year.
Yesterday Mervyn King said: "We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.
“The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2 per cent strikes me as wholly unrealistic."
Maybe falling real wages is a sign of this inability to serenely sail through troubled economic waters. But until real wages start to rise, it is hard to see how the UK can enjoy sustainable increases in consumer spending.
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