Sky News - Swiss Bank Secrecy Veil Falls Over US Fine Fear

Switzerland once had immense pride in its strict banking secrecy laws, but now they have become a major international liability.

Switzerland was proud of its banking secrecy but is now under pressure

Notorious Swiss banking secrecy laws are to be circumvented as part of a resolution to a long-running battle with US officials over tax evasion.

The Swiss government said it will let banks circumvent strict client secrecy laws as part of the effort.

Finance minister Eveline Widmer-Schlumpf said that Switzerland is acting because US patience is running out with the country's banks suspected of aiding American tax cheats.

The aim, she said, is to "restore stability" to the Swiss banking industry.

The banks will decide for themselves if they want to negotiate with US authorities to settle legal disputes over suspected American tax evaders.

Calling it a pragmatic solution, Ms Widmer-Schlumpf acknowledged the talks with American negotiators have been difficult but said that Switzerland wanted to avoid a retroactive law.

The deal was agreed to by the Swiss Cabinet and will go to parliament for approval later this year.

She declined to provide further details of the agreement, but dismissed reports that the Swiss government will pay billions of dollars upfront to cover fines the country's banks can expect to receive from US authorities.

In a statement, the Cabinet said it "wants to create the legal basis for resolving the tax dispute with the United States" by enabling banks to make their own agreements with the US justice department.

"The solution chosen will allow legal closure to be achieved without having to enact new legislation with retroactive effect or indeed applying emergency law," the statement said.

Banks that cooperate with US authorities, it added, would be obliged to provide maximum protection for their employees against discrimination or dismissal.

UBS agreed to pay $780m (£515m) to the US in 2009 over secret accounts held by Americans.

The country's oldest bank, Wegelin, which was established in 1741, agreed to pay a fine last January over similar secret accounts.

Reuters News - How the Fed could ruin your summer holiday

Federal Reserve Board Chairman Ben Bernanke testifies before the Joint Economic Committee in Washington May 22, 2013.

Credit: Reuters/Gary Cameron

By Luciana Lopez

NEW YORK | Sun May 26, 2013 9:28am EDT

(Reuters) - Have your summer vacation all booked? Hoping to ignore your phone for a while, feeling safe in your investments and secure in the knowledge that the world's financial authorities aren't planning any surprises just yet?

Think again.

U.S. Federal Reserve Chairman Ben Bernanke made it clear in congressional testimony this week that the central bank could very well entertain a change in policy sooner than many had predicted. That would mean providing less stimulus to the economy by cutting back on its bond buying program.

The result was an unsettling bout of volatility, with Treasury yields jumping while stocks slid, as investors feared the Fed's support might start to recede.

And that means this could be a summer when investors may find the waves are not only on the beach.

While Fed-watchers are hard-pressed to see a turning point at the bank's June policy meeting, there are plenty of other spots this summer when the Fed could start to prepare markets for change.

Besides the June meeting, there is a policy meeting in July and the release of minutes from both those meetings that will follow. There are three Fridays where monthly jobs data will be released, and plenty of inflation readings and other, lesser economic datapoints.

And of course, there are other potential flashpoints. Will an heir to Bernanke emerge? Will the annual monetary policy symposium in Jackson Hole, Wyoming, this August matter without Ben Bernanke?

Here's what to watch for this summer on the Fed front.

FED MEETINGS AND MINUTES

Fed policymakers meet twice more before the September 2 Labor Day holiday this year: June 18-19 and July 30-31. In addition, the minutes of those Federal Open Market Committee meetings will be released three weeks later.

The June meeting is likely "as good a target as any" for a signal from the Fed about their future plans, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.

The Fed doesn't want to startle investors, because that would be disruptive. Expect plenty of flags, through meeting statements and minutes, before policymakers make any movements.

DATA DELUGE: JOBS VS INFLATION

The Fed's dual mandate means that both jobs and inflation data will be key. Labor data has been more encouraging of late, with the unemployment rate down to 7.5 percent. The Fed has said it wants to see the rate fall to 6.5 percent before it raises interest rates.

The data has been spotty enough that policymakers could want more consistency. Nonfarm payrollgrowth has averaged about 208,000 monthly over the past six months but has dipped below that level in some months. Chicago Fed President Charles Evans said he would like to see growth of 200,000 each month before cutting back on bond purchases, also referred to as quantitative easing.

Also far from target is inflation. The Personal Consumption Expenditures index, which is the measurement most watched by the Fed, was only at 1 percent in March. The April reading is due on May 31.

"They would be more comfortable with inflation at 2, 2.5 percent," said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund in Baltimore.

With inflation hardly threatening, there are few price pressures to argue for ending the flood of easy money, and the data only goes to underscore the relative weakness of the economy, Stith noted.

THE NEXT FED CHAIR?

Bernanke hasn't officially bid adieu to the Fed, but he is clearly eyeballing the door. His second term ends in January, and there has been no official announcement about his future at the Fed.

"I don't think that I'm the only person in the world who can manage the exit (from quantitative easing)," he said earlier this year.

WITH OR WITHOUT BEN: JACKSON HOLE

Bernanke may be opening the way for possible successors by skipping the Jackson Hole gathering later this year due to an unspecified scheduling conflict.

While Fed Vice-Chair Janet Yellen is emerging as the favorite to hold the position next, Bernanke and company have so far been quiet.

The Fed honcho's absence could mean Jackson Hole offers little in the way of news, in which case, head to the beach and read that trashy novel you've been meaning to get through.

But maybe not.

Bernanke's absence on the schedule could open up a spot for an heir-apparent to take the spotlight instead.

If that is Yellen, "perhaps that is going to be the platform for her to gain even more recognition nationally," Stith said.

DEBT CEILING DEBATES - YES, THIS AGAIN

One thing investors and traders may not have to worry about is a debt ceiling crisis in Washington. The government probably won't breach its congressionally authorized borrowing limit until at least Labor Day.

The perfect bookend to summer, in other words.

Bloomberg News - Gold Bets Cut to Five-Year Low as Prices Whipsawed: Commodities

Dario Pignatelli/Bloomberg

Gold’s 60-day historical volatility touched the highest since December 2011 last week and a gauge of price swings for the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund, surged 73 percent this year.

Hedge funds are the least bullish on gold in more than five years as speculation about the pace of money printing by central banks whipsawed prices, driving volatility to a 17-month high.

Money managers cut their net-long position by 9 percent to 35,686 futures and options as of May 21, the lowest since July 2007, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts rose 6.7 percent to a record 79,416. Net-bullish wagers across 18 U.S.-traded commodities slid 2.1 percent, as investors became more bearish on coffee and wheat.

Gold’s 60-day historical volatility touched the highest since December 2011 last week and a gauge of price swings for the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund, surged 73 percent this year. Bullion see-sawed as Federal Reserve Chairman Ben S. Bernanke testified before Congress on May 22. Two days later, Bank of Japan Governor Haruhiko Kuroda said he’s done enough to spur growth.

“Gold has so many drivers that it leads to a lot of getting pushed around by one thing or another,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “It makes it impossible to determine a direction.”

May Returns

Futures dropped 5.3 percent in May, poised for a second monthly decline. The Standard & Poor’s GSCI Spot Index of 24 commodities is little changed while the MSCI All-Country World of equities rose 7.1 percent. A Bank of America Corp. Index shows Treasuries lost 1.3 percent.

Increasing price swings have made gold the fourth-most volatile commodity in the GSCI index since March 29, data compiled by Bloomberg show. Silver topped the ranking for raw materials tracked by S&P, followed by natural gas and corn. Investors sold 467 metric tons of gold through exchange-traded products this year, contributing to $45.3 billion of value being erased from global holdings, as some lost faith in the metal as a store of wealth.

Futures traded in New York rose 0.5 percent as of 10:45 a.m. after earlier slipping as much as 0.3 percent.

Gold rose as much as 2.6 percent and dropped as much as 1.8 percent on May 22, the day Bernanke told Congress that raising interest rates or curbing bond buying too soon would endanger the recovery, while also saying the bank may slow its asset purchases if there are signs of sustained economic growth. Kuroda said May 24 the Bank of Japan had announced enough monetary easing and would implement flexible money-market operations.

Temporary Volatility

Volatility in gold prices will be temporary and investors will return to buy the metal as a hedge against inflation, said Nic Johnson, who helps manage $30 billion of commodity assets at Pacific Investment Management Co. in Newport Beach,California.

While price swings increased this quarter, gold was the third-least volatile commodity in the past five years. Cattle and feeder cattle were the most stable and natural gas and crude oil had the most variations. Bullion surged 57 percent since the end of 2008 as central banks printed money on an unprecedented scale to boost growth.

The U.S. Mint sold 209,500 ounces of gold coins last month, the most since December 2009. Central banks may buy as much as 550 tons this year after adding 534.6 tons in 2012, according to the London-based World Gold Council. Twelve analysts surveyed by Bloomberg expect prices to rise this week, with nine bearish and eight neutral, the highest proportion of bulls since April 26.

‘Diversifying Element’

“Gold is a diversifying element to people’s portfolios,” Johnson said. “The liquidation is more institutional in nature, so I think investors very much view gold in the same light as they did before. Volatility will decline back to historic levels.”

Money managers pulled $1.57 billion from gold funds in the week ended May 22, according toCameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.89 billion, according to EPFR.

Investor sentiment is “negative towards gold,” and physical demand has started to slow, Suki Cooper, a New York-based analyst at Barclays Plc, said in a May 24 report. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said inLondon on May 16.

Crude Wagers

Bets on a rally for crude oil climbed for a fourth week to 231,794 futures and options, the highest since March 2012, the CFTC data show. Investors are holding a silver net-short position of 187 contracts from a net-long holding of 1,413 a week earlier. Bullish platinum wagers fell 17 percent to 19,713, the biggest drop since February.

China’s manufacturing is contracting in May for the first time in seven months. A Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics released May 23 showed a preliminary reading of 49.6 for May, below the level of 50 separating growth and contraction and missing analyst estimates.

A measure of net-long positions across 11 agricultural products slumped 15 percent to 228,870 contracts, the first drop in six weeks. Speculators held a coffee net-short position of 11,695 contracts, compared with 172 a week earlier. Wagers on a decline for wheat expanded to 40,447 from 17,225. Bullish corn holdings fell for the first time in four weeks.

Coffee prices tumbled 7 percent last week, the most since July. Inventories monitored by ICE Futures U.S. soared 79 percent in 12 months. Farmers will harvest the biggest grain and soybean crops ever this year as U.S. fields recover from last season’s drought that was the worst since the 1930s, the U.S. Department of Agriculture estimates.

“I would be underweight the commodities at this point until we start seeing a pickup in global growth and a self-sustaining recovery here in the U.S.,” Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $130 billion. “The global economy has been decelerating, and China is struggling.”

By Tony C. Dreibus

Reuters News - Germany reports sluggish first-quarter growth of 0.1%

Germany's economy barely grew in the first quarter of 2013 as exports and investment shrank, figures show.

Consumption, not exports, helped support the German economy

But higher domestic consumption - thanks to rising wages - helped offset the declines in foreign trade and capital investment, raising hopes it will help drive a sustained recovery.

Gross domestic product rose 0.1% from the previous quarter, but contracted 1.4% compared with a year earlier.

The figure showed the economy narrowly avoided falling into a recession.

In the previous quarter, Germany's annual economic output shrank by 0.7%. A recession is defined as two consecutive quarters of economic contraction.

In the latest GDP data, which confirmed a preliminary estimate, only household spending was positive, growing 0.8%. Imports fell by 2.1% and exports dropped 1.8%,

"Germany's consumers ride to the rescue," said Christian Schulz, senior economist at Berenberg Bank.

'Normal' effect

"In 2013, Germany will have to rely largely on domestic demand for growth. With consumption showing signs of strength and some bounce-back in investment after the long winter, the outlook for domestic demand is brightening," he said.

"Strong fundamentals such as low unemployment, rising wages and low inflation are starting to have their 'normal' effect. And more growth is in store,"

A separate survey of 2,000 households by market research group GfK showed consumer sentiment rose for the sixth month in a row.

GfK pointed to "the favourable and stable framework conditions in Germany. The high level of employment, favourable wage agreements and slowing inflation are buoying sentiment."

Business sentiment also showed a surprise rebound this month after two consecutive months of declines, according to the closely-watched Ifo business climate index released on Friday.

But some analysts still warned that the recovery was fragile.

Germany's economy lost steam last year as the eurozone crisis and weakness in China hit exports.

"The data also hold an inconvenient truth," said Carsten Brzeski, senior economist at ING.

"Without its exports, the German economy is currently only like a sports car without sixth gear."

Reuters News - IMF urges Britain to do more to boost growth

Shoppers watch the opening ceremony at the Trinity Leeds shopping centre in Leeds, northern England March 21, 2013.

Credit: Reuters/Nigel Roddis

By William Schomberg and David Milliken

LONDON | Wed May 22, 2013 12:08pm BST

(Reuters) - The International Monetary Fund called on Britain's government on Wednesday to do more to speed up slow economic recovery, hinting that the country might be able to afford to borrow more to fund investment.

The report is unlikely to spur Chancellor George Osborne to deviate from his flagship austerity programme, and does not directly urge him to defer planned spending cuts.

The IMF expressed concern that a new government programme to boost the housing sector might simply push up prices and called for a "clear strategy" on returning state-controlled Royal Bank of Scotland (RBS.L) and Lloyds Banking Group (LLOY.L) to private ownership.

In an annual review of Britain's economic policies, the Fund said Britain had shown "welcome flexibility" in its push to fix one of the biggest budget deficits in the European Union and noted "encouraging" signs that the economy was on the mend.

"The UK is, however, still a long way from a strong and sustainable recovery. Per capita income remains 6 percent below its pre-crisis peak, making this the weakest recovery in recent history," it said.

It said "planned fiscal tightening will be a drag on growth" and called for several measures to bring about a speedier recovery that would help fix the deficit, urging Britain to take advantage of low borrowing costs to fund more investment.

"Given the tepid recovery, policy should capitalize on nascent signs of recovery to bolster growth, notably by pursuing measures that address supply-side constraints and also provide near-term support for the economy," the IMF said in a statement.

"In the current context in which labor is under-utilized and funding costs are cheap, the net returns from such measures are likely to be particularly favorable."

Osborne has long said that making a conscious choice to borrow more than planned - rather than just reacting to a weaker economic environment - would damage Britain's credibility with the financial markets that fund Britain's debt.

On Tuesday, a spokesman for Prime Minister David Cameron said the government was on track to return the economy to health, and Osborne has previously said he would not take on board IMF recommendations that he disagreed with.

(Editing by Catherine Evans)

Reuters News - Falling petrol prices drive first drop in UK inflation since Sept

Fuel pumps are seen at a Shell petrol station in London May 15, 2013.

Credit: Reuters/Stefan Wermuth

LONDON | Tue May 21, 2013 9:47am BST

(Reuters) - British consumer price inflation fell last month for the first time since September, giving incoming Bank of England governor Mark Carney more leeway to support the economy should the recovery weaken.

Inflation eased to 2.4 percent in April from 2.8 percent in March, official data showed on Tuesday, a better reading that the 2.6 percent rate economists had forecast.

The main downward thrust came from petrol and diesel, which accounted for almost half the drop in the annual rate.

Inflation has been above the Bank of England's 2 percent target since the end of 2009 but the recent weakness in commodity prices has made policymakers more confident it will ease over the next two years.

Core inflation, which strips out volatile food and energy components, dropped to 2.0 percent in April, the lowest since November 2009.

Separate data on producer prices mirrored the picture of easing price pressures. Annual factory gate inflation slowed to 1.1 percent in April from 1.9 percent in March, a much bigger drop than analysts had forecast.

Carney, currently head of Canada's central bank, replaces Mervyn King at the helm of the Bank of England in July. He has a reputation for monetary activism and has previously said he wants Britain's recovery to achieve "escape velocity".

(Reporting by Olesya Dmitracova and Christina Fincher)

Bloomberg News - Swedish Banks Get No Mercy as EU Agenda Ignored: Nordic Credit

By Peter Levring & Johan Carlstrom 

Swedish Finance Minister Anders Borg

Andrew Harrer/Bloomberg

Swedish Finance Minister Anders Borg said he won’t cave to pressure from banks or the European Union to harmonize standards and insists capital ratios in the largest Nordic economy need to be higher than those elsewhere.

“We will push ahead with higher capital requirements,” Borg said in an interview in Stockholm. “We won’t take any risks regarding the Swedish economy; we have a large banking sector and highly indebted households, so we need to be sure what’s ahead.”

Some of Sweden’s biggest banks have argued the government’s approach is hurting their ability to lend. Without harmonized capital rules, banks will suffer competitive distortions, Nordea Bank AB Chief Executive Officer Christian Clausen has repeatedly warned. Clausen, who is also president of the European Banking Federation, said in February lenders need “one rule book.”

Yet Borg’s tougher stance is supported by debt markets, which have rewarded Sweden’s banks with some of Europe’s lowest funding costs and default risks.

Svenska Handelsbanken AB (SHBA), the EU’s best-capitalized major bank, boasts credit-default swaps on level with the government of Japan, at about 60 basis points, according to data compiled by Bloomberg. Its five-year swaps also trade about 17 basis points lower than similar contracts on JPMorgan Chase & Co., the biggest U.S. bank by assets.

Basel III

Sweden’s four biggest banks need to hold at least 10 percent core Tier 1 capital of their risk-weighted assets this year, and no less than 12 percent by 2015. That compares with Basel III’s 7 percent requirement by 2019 and a 9 percent minimum standard for some European banks.

“All of Europe will benefit from having a harmonized system and less discretion,” Nordea CEO Clausen said in an interview in Dublin last week. “One thing is regulation. The other is the market -- the market is putting more demand on banks for more capital.”

Sweden’s biggest banks already exceed the country’s capital requirements. Nordea reported a 13.2 percent core Tier 1 ratio of risk-weighted assets for the first quarter, under Basel II rules. AtSwedbank AB (SWEDA), the ratio was 17.3 percent while SEB AB had 15.3 percent, by that measure. Under Basel III regulation, Svenska Handelsbanken AB had a 17.5 percent ratio while Swedbank and SEB had 16.4 percent and 13.4 percent, respectively.

Financial Markets Minister Peter Norman, who oversees banks, argues harmonized capital rules make no sense because each country has its own financial risks to deal with.

Bank Concentration

“The bank concentration is so different across Europe,” he said in an interview. “It’s not reasonable that Swedish taxpayers be exposed to higher risk in a financial crisis than other taxpayers in Europe.”

Sweden’s government has backed the U.K. in its calls to give individual EU members the freedom to set their own capital rules. Sweden’s banking industry has combined assets that are more than four times the $500 billion economy.

Speaking in Stockholm in February, Chairman of the U.K.’s Financial Services Authority Adair Turner said setting individual standards is each country’s “right.” Nations that design their own rules will “get advantages from it in the longer term, rather than disadvantages,” he said.

Europe’s crisis has been exacerbated by the link between its under-capitalized banks and over-indebted governments. After three years of fiscal turmoil, only four of the euro area’s 17 member states will comply with the bloc’s 60 percent debt rule this year, according to European Commission estimates published May 3.

Cyprus Debt

Germany’s debt will reach 81.1 percent, while the euro area’s average will swell to 95.5 percent of GDP. Greece’s debt burden will be almost three times the bloc’s targeted limit, at 175.2 percent, the commission estimates. Cyprus will see its debt swell to 109.5 percent.

Commission data also show euro-zone governments have injected 1.7 trillion euros ($2.2 trillion) into their banking systems since 2008 as the fates of nations depended on the survival of their financial industries.

To avoid such costs, some of Sweden’s most influential economists have argued in favor of requiring banks to hold 20 percent capital relative to their risk-weighted assets. Assar Lindbeck, a research fellow at the Research Institute of Industrial Economics and one of the main architects behind Sweden’s budget surplus rule, said in an interview last month existing capital requirements should be “raised substantially.”

According to Norman, Sweden’s banks are lobbying against stricter rules in vain.

“There are no doubts that we will be able to have higher capital requirements than other countries,” he said.

Reuters News - ECB eyes supervisor role to squeeze weak banks

Outside view shows the Euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt September 18, 2008.

Credit: Reuters/Alex Grimm

By John O'Donnell

BRUSSELS | Fri May 17, 2013 2:12am EDT

(Reuters) - The European Central Bank could use its new supervisory role from next year to single out weak banks and make it harder for them to get its financial support, people familiar with the matter say.

Such a hardening of approach would keep ECB funding flowing to Europe's most important lenders but compel laggards to beef up their capital buffers, prod national central banks to take on the problem or even force some banks to go to the wall.

The thinking denotes a growing concern at the ECB, which bankrolls much of the financial system, about the risks of backing banks with often only weak collateral as security.

It follows an unprecedented public threat by the euro zone's central bank to cut emergency financing to Cypriot banks, in the middle of the Mediterranean island's crisis which led to the closure of one as part of a stringent bailout.

"Central banks provide liquidity against collateral. But what do you do for addicted banks?" said one person familiar with ECB thinking.

"If a bank returns continuously to get liquidity, (the ECB) will make it more difficult. You will have to pay a higher price. You will have to change the rules for provision of liquidity."

The ECB declined to comment. It gave 1 trillion euros of cheap three-year loans to banks last year and has offered further unlimited support since.

The possible use of such tactics is also a response to the constraints the ECB may face when it takes on bank supervision next year. German opposition could mean there is no separate agency to close problem banks although it is unclear if the ECB would accept this and take on supervision nonetheless.

THREADBARE COVER

Currently, the ECB relies on national regulators for information about banks that borrow from it but that will change when it takes over as overarching regulator next year.

Once it has this power, the ECB could use its knowledge to identify banks with threadbare capital, demand they beef up this cushion or face expulsion from its financing operations, said another person familiar with the new supervision scheme.

Such a move could effectively close a bank, putting a question mark over the notion that there will be a strict division between ECB's role as supervisor and as guardian of monetary policy.

"The supervisor can say this bank's collateral is not of the required standard and that it needs more capital," said that person, adding that a bank could be disqualified from ECB finance if it did not recapitalize within months.

Such a step would not erode wider support for the banking sector but would mark a shift to a more targeted approach, focusing help on those strong enough to thrive.

"Being supervisor allows the ECB to discriminate between zombie banks and those that are sound and make sure that its lending targets those banks that lend to the economy - not to the zombies," said Daniel Gros of think tank, the Centre for European Policy Studies.

Many at the ECB are concerned about the problems lurking in banks, which have piled up billions of euros of bad loans during years of runaway lending.

And yet the necessity to support the sector has led to a loosening of collateral rules which means that banks are often allowed to borrow with second-rate security - sometimes as little as a car loan.

This leaves the ECB with threadbare cover should any sizeable chunk of the almost 850 billion euros it has lent not be repaid.

As it stands, any euro zone bank that has the collateral required qualifies to borrow from the ECB. But this could change if it were to penalize certain banks, by charging them more.

The move would reinforce the ECB's stamp of authority as supervisor, the first step to creating a banking union or system for policing, controlling and supporting banks in the euro zone.

In its new role, the ECB may have to slug it out with national regulators over whether troubled banks should be kept alive. By choking off liquidity, it can avoid a protracted political tangle and shut the bank or force national central banks to shoulder the burden of financing it.

(Additional reporting by Paul Carrel and Annika Breidthardt. Editing by Mike Peacock)

BBC News - Eurozone and US inflation falls back on weaker oil price

Inflation in both the 17-strong eurozone bloc and the US has fallen to its lowest level in years.

Prices rises are weak in both the US and Europe thanks to low oil prices and weak employment growth

The eurozone figure, for April fell to 1.2% - a three-year low. US inflation was running at 1.1% - a two-year low. Both countries target inflation at 2%.

In both cases the prime cause of the fall was a lower oil price, which is down from just less than $120 a barrel in March to about $93 a barrel now.

Weak demand across both economies was also a factor.

The sharp fall in the cost of fuel caused the US monthly inflation rate to fall at its sharpest pace since December 2008.

The US economy is growing more strongly than most of Europe, but remains patchy, while high unemployment has put downward pressure on wages, making it harder for retailers and other firms to raise prices.

Deflation

Figures on Wednesday showed that the eurozone was still in recession, as weak growth in some parts was offset by budget cuts and unemployment in others.

Inflation fell in France, which was reported to have slipped back into recession this year, and in Germany, which grew by an anaemic 0.1% in the first three months of this year.

Greece saw overall deflation - on average, prices were actually lower than previously - instead of what is seen in normal economic conditions, in which some prices rise and some fall.

Earlier this month, the European Central Bank (ECB) cut interest rates to a record 0.5%, a move designed to spark growth.

Low interest rates can also unleash inflation, but when economic growth is very weak, authorities worry more about deflation. This can depress economic activity, as consumers hold off buying goods in the expectation they will become cheaper in coming months.

There are few signs that inflation is likely to be a threat in the near future, it is well below the ECB's target rate of 2% in any case.

The highest price rises were found in Romania, Estonia and the Netherlands.

BBC News - Australia forecasts budget deficit

The Australian government is forecasting a deficit for its current financial year, despite promising a surplus a year ago.

Australian Treasurer Wayne Swan presented his sixth annual budget

Unveiling his budget, Treasurer Wayne Swan said the deficit would be 19.4bn Australian dollars (£12.6bn; $19.2bn).

Much of the shortfall is due to a slowdown in the mining boom, which has sustained the economy in recent years.

Mr Swan also announced increased spending on defence and foreign aid.

The budget predicted a smaller deficit next year and a return to surplus in 2015.

Australia's central bank predicted economic growth of 2.5% for 2013.

Slower cuts

A year ago Mr Swan had predicted a A$1.5bn surplus for the current financial year.

Addressing the Australian parliament in the capital Canberra, he defended his government's decision not to take the path of serious austerity in an effort to balance the nation's books sooner.

"To those who would take us down the European road of savage austerity, I say the social destruction that comes with cutting too much, too hard, too fast is not the Australian way," he said.

"Cutting to the bone puts Australian jobs and our economy at risk, something this Labour government will never accept."

Demand for the country's raw materials has kept the economy buoyant in recent years. But analysts expect the mining boom to peak this year and the prices of several commodities are already falling.

A 30% tax on iron ore and coal miners' profits above a certain level was supposed to raise A$3bn this year. The latest estimate shows that the tax will only feed A$200m into the nation's coffers this year and A$700m next year.

Government spending in Australia has been increasing since 2009, with an initial flurry at the height of the financial crisis which was aimed at keeping the country out of recession.

Defence spending is growing, despite the fact that Australian troops are being withdrawn from Afghanistan, East Timor and the Solomon Islands.

Defence spending over the next four years is now planned to be A$113bn. A year ago that figure was A$103bn.

Australia will also increase its foreign aid spending by 9.6% from the current year to A$5.7bn next year.

Nonetheless, ratings agency Moody's was unperturbed by the further delay in returning to surplus and kept the country on the top-notch triple-A rating with a stable outlook.

"Although the government budget is now forecast to remain in deficit through the 2014-15 fiscal year, the projected deficits are relatively small as a percentage of GDP," said Steven Hess, senior vice president at Moody's.

The budget is predicted to be the last by the centre-left Labour Party government, which is expected to lose elections in September.

Bloomberg News - German Economy Barely Expands While France Contracts

German Economy Expanded Less Than Forecast in First Quarter

Krisztian Bocsi/Bloomberg

Construction cranes are seen rising into the sky as pedestrians cross the Palace Bridge in Berlin. Germany’s first-quarter growth was driven “almost exclusively” by household spending, the statistics office said.

The German economy expanded less than forecast in the first quarter and France’s slipped into recession, increasing pressure on the European Central Bank to do more to stimulate growth.

German gross domestic product rose 0.1 percent from the fourth quarter, when it fell a downwardly revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.3 percent gain, according to the median of 41 estimates in a Bloomberg News survey. The French economy contracted 0.2 percent in the three months through March after shrinking the same amount in the final quarter of last year.

The weaker-than-forecast GDP results in Europe’s two biggest economies highlight the risks to the outlook and indicate that the 17-nation euro region is almost certainly still stuck in recession. The ECB cut its benchmark interest rate to a record low of 0.5 percent this month and President Mario Draghi said the bank is ready to act again if needed.

“The worse-than-anticipated start to the year will clearly worry policy makers at the ECB,” said Chris Williamson, chief economist at Markit in London. “Today’s data will add to calls that more action is required beyond what many see as a token gesture of a rate cut.”

The euro dropped more than a quarter of a cent after the German report and traded at $1.2904 at 8:47 a.m. in Frankfurt.

‘Almost Exclusively’

Germany’s first-quarter growth was driven “almost exclusively” by household spending, the statistics office said. Investment declined and net trade barely contributed, it said. A detailed breakdown is due on May 24. From a year earlier, the economy shrank 0.2 percent when adjusted for working days.

“The fact that investment, exports and imports declined isn’t nice and signals weak domestic demand,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “The cold winter played a role and there will be something of a rebound in the second quarter but with weaker sentiment, some people might have to think about how realistic current full-year growth forecasts are.”

Commerzbank AG today lowered its German 2013 growth forecast to 0.2 percent from 0.5 percent.

Long Winter

Germany’s recovery may have been delayed by an unusually long winter, which damped construction and business confidence, the Bundesbank has said. It predicted in December that the economy will grow 0.4 percent this year and 1.9 percent in 2014, with inflation averaging 1.5 percent and 1.6 percent respectively.

The Frankfurt-based ECB in March projected the euro economy will contract 0.5 percent this year before expanding 1 percent in 2014. It forecast an inflation rate of just 1.3 percent next year, well below its 2 percent target.

“We will be looking at all the data that arrives from the euro-area economy in the coming weeks and if necessary, we are ready to act again,” Draghi said in a speech in Rome on May 6. “Monetary policy will remain accommodative.”

Euro-region GDP probably fell 0.1 percent in the first quarter after a 0.6 percent decline in the final quarter of 2012, according to another Bloomberg survey. That report is due from the European Union’s statistics office in Luxembourg at 11 a.m. today. Austria’s economy stagnated in the first quarter.

Euro-Area Drag

“The euro area is a drag on the economy and certainly a handicap for German companies,” saidAndreas Scheuerle, an economist at Dekabank in Frankfurt. “The overall outlook still speaks for a recovery, but for the recovery to gain momentum, it’s important for investment to pick up again. That’s what drives job creation.”

In France, President Francois Hollande is struggling to reduce the number of jobseekers from a record 3.22 million and lift his popularity rating from a record low.

With the sovereign debt crisis set to cause a second consecutive year of economic contraction in the euro region, Hollande has been pushing to slow the pace of deficit reduction in the currency bloc in favor of more pro-growth policies.

German business confidence fell for a second month in April and investor confidence rose less than economists forecast in May. The ZEW Center for European Economic Research in Mannheim said yesterday that its index of investor and analyst expectations, which aims to predict economic developments six months in advance, edged up to 36.4 from 36.3. Economists forecast a gain to 40.

German Stocks

At the same time, Germany’s DAX index climbed to a record high this month as companies reported better-than-forecast results.

Infineon Technologies AG (IFX), Europe’s second-biggest chipmaker, gained the most in almost four years on May 2 after projecting revenue for this quarter that would top analysts’ estimates.

HeidelbergCement AG (HEI), the world’s third-largest maker of cement, said on May 8 that first-quarter earnings rose 3.3 percent as North American growth and job cuts helped offset harsh winter conditions that impeded building in Europe.

“Germany is one of the few euro countries that grew at the beginning of the year,” saidAlexander Koch, an economist at UniCredit Group in Munich. “Robust demand from the U.S. and Asia bode well for exports and the domestic economy continues to be solid, with private consumption a stable growth pillar.”