Friday’s GDP numbers confirmed that the US economy ended last year on a decent footing (up 2.8% on annualised basis), even though growth fell short of expectations. However, the pattern of growth was perhaps a little more concerning. Inventory accumulation accounted for nearly three-quarters of the increase in output.
Meanwhile, government consumption took nearly 1% from headline growth, with net exports also detracting, although only a small 0.1% negative contribution. The extent of the inventory correction and (less so) disappointment with the level of consumption suggests that the US will struggle to maintain this level of output in the first quarter.
This view is also backed up by the fact that savings were run down in the fourth quarter in order to achieve this consumption growth. Not a healthy pattern for a sector that still needs to deleverage. The Fed largely anticipated this with its extension of the timeline for which it sees rates at zero (from mid-2013 to the end of 2014) and hints that more quantitative easing may well be on the way.
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As we pointed out last week, this activism sits in strong contrast to the relative inertia at the ECB, even though most believe the eurozone is heading for a recession. The Fed recognises that the balance sheet adjustment in the household sector is ongoing and, as such, whilst the numbers look good on a relative basis, there’s little room for complacency regarding the outlook for this year. The dollar was understandably softer on the release, adding to the 2.7% decline seen on the dollar index from the peaks of earlier this month.
Commentary
Beware false Greek hopes. The phrase ‘under-promise and over-deliver’ is not one that the EU has any knowledge of, given that not for the first time we are being led to believe (this time by EU’s Rehn last week) that a deal on the restructuring of Greek debt is near, “if not today, then over the weekend”. There’s little point in speculating on the amounts and terms because what became more interesting last week was the IMF’s position on the situation. Following Lagarde’s comments earlier in the week (intimating that the ECB may have to take a hit if the private sector contribution was insufficient), the IMF suggested that it took no position on the level of private sector involvement. That may be true on one level, but it matters to the IMF, especially when the ECB is digging its feet in and saying that it does not feel it should take a hit on its holdings of Greek debt and that, in doing so, it could be breaking the ‘no bail-out’ clause of the founding treaty’s clause to which it must adhere. So an outcome from the private bond-holders involved in the current negotiations that falls short of that required would mean that either the ECB will have to take some of the strain or the IMF will have to loosen its conditions (120% debt/GDP by 2020) or somehow taken a more optimistic view on the economy. The latter would be without much justification. Furthermore, Greece is already falling short on structural reforms. Since the peak in employment in Q3-08, total employment has fallen 11%. Employment in the public sector has barely fallen (less than 30k), compared to the half a million fall in totally employment. So the deal does matter for the IMF. A poor one, combined with the ECB sticking to its guns, will place the IMF in a position of needing to lend more to a country which is still on a precarious path to fiscal sustainability. Furthermore, having been asked twice, the private sector is not going to take any more pain by itself.
Yen excitement likely to be short-lived. Some excitement has been generated in recent days by the strength of the Japanese currency, with USD/JPY declining from a high of 78.28 mid-week to a low of 76.65 overnight. One possible explanation being put forward by a few commentators is that the yen is attracting safe-haven demand because of those intractable Greek debt talks. More likely is that both the dollar and the pound have fallen out of favour after the Fed and the BoE intimated last weekthat more quantitative easing may be required. In addition there have been some aggressive purchases of the yen by local corporates which are natural buyers. Also, the dip from above 78 to its current level simply reverses the jump witnessed on Tuesday and early on Wednesday. USD/JPY has essentially been trapped in a 76-78 range for the past six months. With the BoJ ready and able to protect further yen strengthening using its enormous war-chest of intervention money, only the foolish would take it on. USD/JPY has been dull for a very considerable time, and it is likely to remain that way.
More meaningful moves from Monti. Italy finally has a Prime Minister who is prepared to implement structural reform in a country that has been blighted with inefficiency and bureaucratic sclerosis for decades. Mario Monti’s cabinet is about to pass a law which will cut through many of the administrative burdens weighing on the private sector in the hope of boosting productivity. Hundreds of laws will be abolished and many others will be re-drafted with the aim of simplifying life for the corporate sector. The Prime Minister has been a busy man. Last month, he implemented budget cuts worth EUR 20bln in an attempt to stabilise concerns over Italy’s public finances. He has also passed a major piece of legislation which opens up to competition within various (formerly) closed professions such as taxi-drivers and notaries. His government is also talking to the big unions about relaxing Italy’s archaic and restrictive labour laws. Although the economy is suffering it is definitely the case that Monti is moving Italy in a positive direction.
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