Bloomberg News - Age of Austerity Nearing End May Boost Global Economy

Pedestrians carry shopping bags across a square in central Athens

The age of austerity may be nearing an end as governments ease the fiscal cuts that restrained economic recoveries.

After three years of slashing budgets bloated by recession and the stimulus deployed to fight it, U.S. and euro-area officials are finding less need to retrench as their previous efforts and improving economic growth help narrow deficits.

This will allow them to tighten policy next year by the least since they began in 2011, according to estimates by the International Monetary Fund. The lender projects the fiscal reduction by Group of Seven nations will be almost half this year’s pace as the average budget shortfall drops to about a quarter of where it was just three years ago.

“The softening of the fiscal drag is likely to play an important role in supporting a pick-up in global growth,” said Jose Ursua, a New York-based economist at Goldman Sachs Group Inc., referring to the negative effect of budget-chopping on an economy.

Economists at Goldman Sachs and Deutsche Bank AG say the relaxation will help industrial economies almost double their rate of expansion next year to 2.2 percent, the most since the recovery from recession in 2010. The Federal Reserve -- including Vice Chairman Janet Yellen, nominated to be its next chairman -- already is taking note as it considers when to curtail its own stimulus.

‘Major Contributor’

Ursua calls the shift a “major contributor” to an acceleration in U.S. growth next year to 2.9 percent from 1.7 percent this year. That in turn helps explain why Goldman Sachs forecasts the Standard & Poor’s 500 Index will climb to 1,900 at the end of 2014 from 1,792.81 (SPX) at 4 p.m. in New York yesterday.

In Europe, signs that the so-called peripheral economies such as Spain and Greece are getting more control over their budgets will reduce the “risk premium” investors demand to hold their bonds over similarly dated securities, according to Bill Street, head of investments for Europe, Middle East and Africa at State Street Global Advisors in London.

The gap between 10-year yields for Spain and Germany (GDBR10) was 2.37 percentage points yesterday, down from 6.5 points in July 2012. “You’ll see spreads coming in, definitely,” Street said.

Reduced austerity would end a period when governments raised taxes and cut public spending, reining in their economies, as they tried to restore the fiscal order they abandoned to fight the worldwide recession.

Employment Gains

Adjusting budgets to ignore interest payments, the IMF says the so-called primary deficit in the G-7 countries reached an average 5.1 percent in 2010 when also smoothed to ignore large economic swings and will fall to 1.2 percent next year.

The unprecedented retrenchments between 2010 and 2013 amounted to 3.5 percent of U.S. gross domestic product and 3.3 percent of euro-area GDP, according to Julian Callow, chief international economist at Barclays Plc in London. For the U.S., Deutsche Bank economists estimate nonfarm payrolls would have gained 400,000 a month this year instead of about 186,000 without fiscal restraint.

The U.S. and Europe also fell victim to uncertainty shocks. First the euro area struggled to tame markets rattled by debt burdens and bailouts. Then American lawmakers partially closed the government for 16 days and squabbled over raising the $16.7 trillion debt ceiling before agreeing on a short-term fix that suspended the borrowing cap until Feb. 7.

Higher Taxes

What matters for economists is the fiscal drag. The greater the tightening, the more restraint as companies and consumers face higher taxes, and there’s less government hiring or spending on programs such as education or roads and other infrastructure. This then feeds through the economy as households and businesses pull back on their own spending.

Even a reduction in the amount of drag can bring relief to an economy, Ursua said. The IMF projects the cyclically adjusted primary deficit for the U.S. will fall to 1.2 percent of GDP in 2014 from 1.9 percent this year and 4.2 percent in 2012. Such a slowing in the rate of decline leads Ursua to calculate fiscal drag will fall by 1.6 percentage points next year. It rose 1.2 points this year.

The room for error lingers. U.S. lawmakers still must agree on a spending plan for the rest of the fiscal year -- which may trigger more automatic spending cuts, including to defense programs -- and they face the Feb. 7 deadline for raising the borrowing limit.

Political Gridlock

A survey of Bloomberg subscribers last month identified political gridlock in Washington as the biggest threat to global growth. Events there are “the cause of many of the problems” with the economy, William Brodsky, executive chairman of CBOE Holdings Inc., the biggest options-exchange operator, told a Bloomberg LP conference on Nov. 20.

Still, neither Democrats nor Republicans have the appetite for more spending cuts, and changes to the tax code probably won’t come soon, according to Nomura Holdings Inc. economists. If the negotiations go smoothly, the economy could accelerate faster toward the 3 percent they project for the second half of 2014 and into 2015, they wrote in a Nov. 25 report.

Not everyone will be tightening their belts. After providing stimulus this year as part of his campaign to defeat deflation, Japanese Prime Minister Shinzo Abe is raising the country’s sales tax to 8 percent in April from 5 percent. Partly to counter the impact, he’s also planning an 18.6 trillion yen ($181.6 billion) spending and loan package.

Austerity Commitment

The U.K. government, which releases new forecasts today, says it remains committed to the austerity it has put at the heart of its economic policy. Goldman Sachs predicts greater restraint in emerging markets, including China, Russia, Brazil and India.

If the U.S. does relax, it would be welcome news for the Fed as it debates tapering its monthly purchases of $85 billion in Treasuries and mortgage-backed securities.

“I would expect if there were less fiscal drag, and I hope there will be less going forward, that the economy’s growth rate is going to tick up,” Yellen said on Nov. 14 as she addressed senators considering her candidacy to replace Ben S. Bernanke as chairman.

“The lack of a shutdown and a stronger fiscal impulse is a net positive for the Fed next year,” said Drew Matus, deputy chief U.S. economist in Stamford, Connecticut, at UBS Securities LLC. The firm is predicting the central bank will begin tapering in January.

State Spending

What also may help the U.S. are state and local governments: Their $1.74 trillion in inflation-adjusted spending is 50 percent larger than the federal sector, and they employ seven times more people, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York. Having declined for three years in a row for the first time since World War II, their spending jumped 1.5 percent in the third quarter, the most since the second quarter of 2009, he said.

“The positive incremental effect from stronger state and local activity is considerable,” said LaVorgna, who predicts the U.S. will expand 3.2 percent next year after 1.8 percent this year.

Driven to austerity by debt crises, Europe also is finding room to relax. The IMF data suggest the region’s adjusted primary budget surplus will grow for a second year, rising to 1.4 percent of GDP in 2014 from 1.1 percent this year and a deficit of 2.6 percent in 2010. Greece’s shortfall will decline to 5.4 percent of GDP from 13.6 percent in 2009.

Longest Recession

The cutting helped deepen the longest recession since the euro began trading in 1999 and led to fatigue among politicians and voters, said Giada Giani, an economist at Citigroup Inc. in London. With less pressure from bond investors to tackle fiscal excesses, countries will take a break and across the continent, fiscal policy won’t be constrictive for the first time since 2009, she said.

“Growth suffered more than originally envisaged,” said Giani in a Nov. 22 report titled “Is This The End of Austerity?” “The slowdown in fiscal consolidation is likely to continue in 2014.”

It still may take until 2015 for the drag to really diminish, given that policies implemented in 2013 have yet to take full effect, according to Laurence Boone, chief European economist at Bank of America Corp. in London.

“It’s important overall the drag disappears, as growth needs to come back,” said Boone, who predicts the euro-zone economy will expand 0.8 percent next year after shrinking 0.5 percent this year.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

BBC News - China markets fall on new share sale guidelines

Chinese stock markets fell on Monday after the regulators issued new rules for reforming the country's share sale market over the weekend.

Analysts said investors were worried that a slew of listings may hurt liquidity in the markets

The rules are likely to see listings resume next year, ending a freeze that has lasted more than a year.

Analysts said investors were keen for the rules to be eased, but there were fears a slew of new listings might not leave enough cash in the market.

The Shenzen stock index fell 4% and the Shanghai stock index dropped 1%.

Zhang Yanbing, an analyst with Zheshang Securities said the guidelines had "sparked worries that a flood of IPOs [initial public offerings] could divert funds from the secondary market".

However, he added that the rules "should be positive to the market in the long run".

Speeding up?

The new guidelines were published by the China Securities Regulatory Commission (CSRC) as part of reforming the country's stock market listing system.

Among the key issues addressed by the new rules are limiting the government's influence over the pricing of share offers and boosting transparency.

According to the state-owned Xinhua news agency, the current system of approving a share listing "can take multiple rounds of reviews and several years before investors receive approval from the securities regulator".

Xinhua said that under new rules, the securities regulator "would only be responsible to decide whether companies fulfil the rules".

"The values and risks would be for investors and the market to judge."

Luke Wang, a vice-president at China Galaxy Securities, said under the new guidelines, "the IPO issuance process will speed up massively".

Deng Ge, spokesman for the CSRC, was quoted as saying by Xinhua that about 50 companies would be able to complete their registration process for IPOs by January next next year.

The securities regulator added that it would also conduct strict checks to ensure that information provided by firms looking to list on the stock exchanges was full and accurate before allowing them to conduct a share sale.

"We will expand the scale of information disclosure and make our review standard and process more transparent," said Mr Deng.

"We will open the IPO process to the public, so that they can have a closer supervision to the issuance process."

Shanghai Composite Index

value	change	%
2207.37	- -13.13	- -0.59

BBC News - Eurozone unemployment falls for first time since 2011

The eurozone's unemployment rate has fallen for the first time since early 2011, according to official data.

The ECB thinks an inflation rate of just under 2% is ideal for economic growth

The jobless rate across the 17 countries using the euro currency fell to 12.1% in October, the first fall since February 2011, the European Union's statistics office Eurostat said.

About 19 million people are out of work across the region.

Meanwhile, the annual rate of consumer inflation rose from 0.7% to 0.9%.

The European Central Bank (ECB) aims to keep inflation just below 2%. - the level it deems right for growth.

The data indicates that the fragile eurozone economy is gradually improving, although there are big disparities between individual countries.

Unemployment in Spain and Greece is at 27%, for example, while Austria's is at 5%.

In a surprise move earlier this month, the ECB cut its benchmark interest rate from 0.5% to a record low of 0.25%.

ECB president Mario Draghi said the decision reflected its view that low inflation and weak economic growth would be the dominant story in the region.

When inflation amongst the 17 countries using the euro currency fell to 0.7% in October - its lowest level since January 2010 - there were fears eurozone growth could be stalling and that some countries could even be moving into deflation.

Bloomberg News - Swiss Economy Grows More Than Forecast on Better Exports

Valentin Flauraud/Bloomberg

A Swiss national flag flies from a flagpole above Lake Geneva in Geneva, Switzerland.

Switzerland’s economy expanded more than economists expected in the third quarter, with exports helping it perform better than neighboring Germany.

Swiss gross domestic product rose 0.5 percent in the three months through September from the second quarter, when it expanded by the same amount, the Secretariat for Economic Affairs in Bern said in a statement today. That beats the 0.4 percent median estimate in a Bloomberg survey of 19 economists.

The Swiss National Bank (SNBN) set a cap on the franc of 1.20 per in September 2011, citing the risk of deflation and a recession. Since then, the Swiss economy has seen a single quarter of contraction, while the debt-plagued euro area only emerged from an 18-month slump in the middle of this year.

If the SNB were to tighten monetary policy reflecting better growth, “it would have immediate negative domestic effects,” said Christian Lips, an economist at NordLB in Hanover. “Looking forward, neither the cap nor the rates can be changed before year-end 2014,” given weak growth in the neighboring euro area, Switzerland’s top trading partner, he said.

The franc, which has slipped two percent against the euro since the start of the year as the bloc’s debt crisis has waned, was trading unchanged at 1.2324 per euro at 8:43 a.m. in Zurich, off an intra-day high of 1.2321.

Better Exports

In the third quarter of 2013, household consumption increased 0.2 percent from the second, construction investment climbed 1 percent and exports of goods increased 0.5 percent.

“Following an extended period of relative stagnation, exports of goods showed a strong increase,” the SECO said in the statement.

Combined with recovering euro area demand, less volatility in the exchange rate due to the currency cap has helped exporters, SNB President Thomas Jordan said in Biel this week.

The 17-nation currency bloc’s economy grew just 0.1 percent in the three months through September. Germany’s, the biggest economy of the region, expanded 0.3 percent in the third quarter

Jordan said this the cap on the franc was still “indispensable” and would stay in place. Jordan has in the past stressed the cap is not a tool for fine tuning -- remarks some economists have taken to mean the cap won’t be shifted to another level.

Jordan’s remarks were “a clear indication that the SNB is unlikely to touch their current monetary-policy framework” at the next policy review on Dec. 12, according to Reto Huenerwadel, senior economist at UBS AG in Zurich.

Manufacturing Output

Compared with a year ago, the Swiss economy grew 1.9 percent in the third quarter, down from a 2.5 percent year-on-year growth rate in the second, today’s data showed. Domestic demand is the biggest component of Swiss economic growth, accounting for about 57 percent of output last year, while exports made up 10 percent.

Switzerland’s manufacturing sector has improved in recent months, according to the forward-looking Procure.ch Purchasing Manager’s Index.

The Swiss economy is expected to outperform that of the euro-area next year too. The Organisation for Economic Cooperation and Development foresees Swiss growth of 1.9 percent this year, accelerating to 2.2 in 2014. That compares with a predicted contraction of 0.4 percent for the euro area in 2013, followed by an expansion of just 1 percent next year.

A high influx of skilled immigrants, many of them from the EU, has helped support Swiss aggregate demand in recent years. Swiss GDP is now 5 percent above its pre-crisis level, though -- contrary to Germany -- in per-capita terms output has not yet returned to its pre-crisis level, SNB board member Fritz Zurbruegg said last week.

Switzerland’s output gap remains negative, meaning there is little inflationary pressure, Zurbruegg said. Swiss consumer prices are expected to fall 0.2 percent this year, and  the central bank doesn’t see a threat to its 2 percent price-stability threshold in the medium term.

By Catherine Bosley

Reuters News - Independent Scotland would keep the pound and the queen, says Salmond

Scotland's First Minister Alex Salmond holds the referendum white paper on independence during its launch in Glasgow, Scotland November 26, 2013.

(Reuters) - An independent Scotland would keep the British pound, the queen and remain in the European Union but have its own defence force and collect its own taxes, First Minister Alex Salmond said on Tuesday.

In a 670-page blueprint aimed at convincing Scots they should vote on September 18 next year to end a 306-year union with England, Salmond said there would be no need to increase taxes if Scotland broke away.

With separatists lagging in opinion polls, his Scottish National Party is hoping the blueprint will win over the many sceptics, answering questions his Scottish National Party (SNP) has been accused of dodging.

"We know we have the people, the skills, and resources to make Scotland a more successful country," said Salmond, head of a devolved government in Scotland, which for now is still part of the United Kingdom.

He said Scottish taxes would not be spent on nuclear programmes and that the United Kingdom's nuclear missiles would be removed from Scotland for good.

"Independence will put the people of Scotland in charge of our own destiny" he added.

Nicola Sturgeon, the deputy first minister, has described the document as "the most comprehensive and detailed blueprint ever drawn up for a prospective independent country".

Scotland's bid for independence is being watched closely internationally, particularly in Catalonia where 80 percent of people favour a vote for independence from Spain.

"If it's feasible in the UK, it should be feasible in Spain," said Albert Royo, secretary general of Diplocat, the Public Diplomacy Council of Catalonia, a public-private body charged with building support for Catalan's independence vote.

WAVERING VOTERS

With 10 months to the Scottish vote, many of the 5 million Scots are still undecided.

The latest poll, published in the Sunday Times this week, suggested the gap had narrowed with 47 percent opposed to quitting the UK, 38 percent in favour and 15 percent undecided.

Britain's three main UK-wide political parties have argued against independence, saying Scotland would be worse off economically on its own and unable to defend itself or project power on the global stage as well as it can as part of the UK.

At stake are British oil reserves in the North Sea while debates over how Britain would split its national debt and the issue of the nuclear weapons are already fraught.

Pro-unionists have been helped in recent weeks by two reports from financial institutions. One warned Scotland would need to raise taxes and cut spending as North Sea oil revenues decline and its population ages and the second said independence would complicate cross-border pensions.

But Alistair Carmichael, the new Scotland secretary in the UK government, is aware of the power of wavering voters who gave the SNP a surprise landslide victory in Scotland two years ago.

New to the role, he has toughened up the rhetoric, saying nationalists cannot make assumptions such as being able to keep the British pound.

A report by the All-Party Parliamentary Group on Taxation, in the UK's parliament in London, said under SNP plans, the UK would dictate Scottish fiscal policy even after independence.

Researcher Marius Ostrowski said keeping the pound would make Scotland dependent on the Bank of England as a central bank and lender of last resort, and on the UK government's lead for its fiscal responsibility rules.

(Additional reporting by Fiona Ortiz in Madrid; Editing by Stephen Addison)

BBC News - Oil prices fall after Iran agrees nuclear deal

Oil prices have fallen after Iran agreed a deal to curb some of its nuclear activities in return for an easing of international sanctions.

The deal has helped ease tensions in the Middle East region

Iran holds the world's fourth-largest oil reserves, but its exports have been hurt by the tough sanctions against it.

Though Iran will not be allowed to increase its oil sales for six months, the deal has eased tensions in the Middle East - a key oil-producing area.

Brent crude fell more than 2% in early Asian trade on Monday.

It dropped by $2.42 to $108.63 per barrel, while US light sweet crude fell 84 cents to $93.64 per barrel.

Fuel-intensive companies, such as airlines and travel firms, received a boost on the stock markets as a result.

International Airlines Group, the owner of British Airways and Iberia, was up 2.87% in lunchtime trading, while Air France KLM rose 3.11%. Travel operator Thomas Cook lifted 3.68%.

"There are a lot of sanctions that have been eased, which will allow Iran to slowly re-enter the global economy," Jonathan Barratt, chief economist at Barratt's Bulletin told the BBC.

"And as for oil - it's a just a six-month waiting period. If they tick all the boxes during that time, they will be back in that sector as well."

Knee-jerk reaction?

World powers suspect Iran's nuclear programme is secretly aimed at developing a nuclear bomb - a charge Iran has consistently denied.

In an attempt to force Tehran to curb its programme, the US and other leading economies have imposed a series of tough sanctions aimed at Iran's oil exports - a key driver of its economy.

In November 2011, Washington threatened to shun foreign financial institutions that conducted oil transactions with Iran's central bank.

That prompted several countries including China, Japan, India and South Korea - some of the biggest buyers of Iranian oil - to cut their imports.

The European Union also imposed a ban on imports of Iranian oil.

"Working with our international partners, we have cut Iran's oil sales from 2.5 million barrels per day (bpd) in early 2012 to 1 million bpd today," afact sheet published by the White House said.

While the deal has raised hopes of a long-term agreement that may allow Iran to increase its oil sales eventually, some analysts believe oil prices are unlikely to fall further.

"This news is hot off the press, and so there is some knee-jerk reaction," said Ben le Brun, a market analyst at OptionsXpress in Sydney.

"The market will probably want to see the nitty-gritty details of the agreement before we see any further significant declines in prices," he added.

BBC News - Help to Buy: Thousands use scheme to buy new homes

The first phase of Help to Buy started in England in April, and later in Scotland

Some 5,375 new homes were bought in six months in England using the initial phase of the government's flagship Help to Buy scheme, figures show.

Of these, 92% were sold to first-time buyers, the Department for Communities and Local Government (DCLG) said.

Help to Buy was launched in April, initially helping those buying newly-built homes with a shared equity loan.

The average price of a property bought under the scheme was £194,167, with an average equity loan of £38,703.

The highest number of Help to Buy sales were in Leeds, Wiltshire, Milton Keynes and Reading, the DCLG said.

The figures cover the six months to the end of September. Since then, the government has begun the second phase of the scheme which is not restricted to new-builds and is UK-wide.

Under this second phase, up to 15% of the value of the home loan can be guaranteed by the Treasury. Critics have argued this could create a housing bubble.

Bricks and mortar

Many house builders have said that their business has been boosted by Help to Buy. A week ago, Taylor Wimpey said it had sold all the homes it was building this year.

The DCLG figures show that, in the first seven months of Help to Buy, 18,050 reservations were made for homes being built.

"Today's figures show we are building at the fastest rate since the crash in 2008, more people are securing a place on the housing ladder, and we are delivering tens of thousands of affordable homes across the whole country," said Housing Minister Kris Hopkins.

"But there's still more to do, and improving the housing market will remain a top priority. That means getting builders back on site, delivering new housing, more jobs and ensuring every hard working family has a place they can call home."

However, the number of new homes completed has been at extremely low levels in recent years. Last year was the lowest number since the 1940s.

Shadow chancellor, Ed Balls, in a speech to house builders, said Labour supported the first phase of Help to Buy, but had misgivings about the second phase. He said there was a danger in focussing on encouraging buyers.

"The fundamental flaw in the chancellor's current plan is to rely on securing lasting recovery by boosting housing demand, while failing to take any action to boost housing supply," he said.

"If Help to Buy merely boosts demand for housing without being matched by action to increase housing supply, then house prices will rise and rise."

Second movers

New homes still represent a fraction of house sales across the UK, which have topped one million in 2013 - the first time the total has reached six figures since 2007.

A report published by the Council of Mortgage Lenders (CML) said that the start of a housing market recovery had been prompted by greater mortgage availability, reinforced by government intervention in the market.

RBS and Lloyds Banking Group are already offering deals through the second phase of Help to Buy. On Thursday, HSBC announced it would join them with new deals on the table for buyers offering a 5% deposit from Monday. Earlier in the week, Yorkshire Building Society launched some products for those offering a 5% deposit, but outside of the Help to Buy umbrella.

Home loans are currently relatively cheap in a historical context. Consequently, there has been a pick-up in first-time buyers and buy-to-let investors in the market compared with the very low levels seen during the financial crisis and credit crunch.

However, the CML said there had been "negligible" signs of buying by those moving on to a second, larger home.

This was the result of the erosion of equity in their properties as house prices fell during the downturn years of 2008 and 2009, and the fact that their incomes were failing to keep pace with inflation.