Bloomberg News - China Hard Landing War-Gamed for World Economy

A hard landing in China would hobble global growth and buoy the dollar, saysSociete Generale SA in a study that war-games the international implications of a steep decline in China’s expansion.

A plunge to 2 percent from more than 10 percent in 2010 would be enough to slash 1.5 percentage points from worldwide economic growth in the first year as China’s troubles are transmitted through trade, banking and financial market channels, the French bank said in a Feb. 11 report.

Among the reasons to expect such reverberations from what the authors called the “worst reasonable case:” China’s imports are equivalent to 30 percent of its gross domestic product. Asian and commodity-producing nations would be the hardest hit, according to Michala Marcussen, global head of economics research in London.

The impact could be aggravated by China’s bias toward investment, which accounts for half of its GDP. Less worrisome is the risk of China hurting the world through banks, given that total foreign claims of banks on the country are just 3.2 percent of the total, according to data from the Bank for International Settlements cited in the report.

Some multinational companies would be hurt by their exposure and the dollar would also rise 10 percent against the yuan in the first year, according to Societe Generale.

At the same time, a 30 percent drop in the price of oil as China slowed would aid growth elsewhere, as would an easing of monetary policy by foreign central banks, said Marcussen.

Chinese growth wouldn’t have to slow all the way to 2 percent to become a problem for developed markets, according to equity strategists at Credit Suisse Group AG in a Feb. 5 report.

They say growth of 5 percent would be enough to start hurting, although they note such a slump is unlikely given that government debt of 80 percent of GDP gives China’s leaders scope to respond.

Worrisome elements include the third biggest bubble in private sector credit of recent decades and a real estate construction sector equivalent to 20 percent of GDP. Still, even if Chinese growth fades to 6 percent and U.S. expansion to 2 percent, the world could still grow almost 3 percent this year, they said.

Societe Generale forecasts Chinese growth of less than 7 percent this year, below the 7.5 percent targeted by the government and anticipated by the International Monetary Fund.

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Switzerland’s vote to impose quotas for newcomers will have long-term implications for its economy, according to Commerzbank AG.

If net annual immigration increases were to fall to 0.3 percent from the recent rate of about 1 percent, that would reduce the economy’s growth potential by 0.75 percentage point, said Johannes Werner in a Feb. 12 report. The reasoning: the productivity of foreigners probably isn’t lower than that of Swiss citizens, and therefore the influx is positive for growth.

In recent years more than 45 percent of all immigrants have held a post-secondary degree, greater than the 37 percent of local residents, Frankfurt-based Werner said. The Swiss population already can’t meet demand for workers, adding further pressure on the economy.

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The ability of emerging-market central banks to drive their economies may be determined by how free of political meddling they are.

In a bid to discover which ones are most independent, Alexander Kazan, director of emerging markets strategy at the Eurasia Group in New York, asked his colleagues to score keydeveloping countries on the strength of the legal and institutional framework governing monetary policy and the actual independence and conduct of interest-rate policy.

They determined Colombia, South Africa, Chile, Mexico, Peru and Poland were the most independent. Less so were China, Argentina and Ukraine.

Politics may be particularly prickly this year given that 44 emerging nations are holding elections. That’s the most since 2007, Eurasia calculates.

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European policy makers may have a new tool to deploy if they want to encourage the decline in bond yields across their cash-strapped nations.

Analysts at Citigroup Inc. looked at the European Reward System, a policy initiative proposed by Christian Dargnat, president of the European Fund and Asset Management Association.

It posits that most of the highly rated sovereign bond issuers have benefited from a flight to safety during the crisis and so been able to issue bonds and borrow at low rates. They thus should be willing to share some of the rewards from such flows by transferring money to those who have met the commitments of their bailouts.

Recipients of such support would be those economies that stick to budget cuts and who have paid more to fund themselves than the average of those countries willing to participate.

The proposal has a “reasonably good chance of being accepted by member states” because it doesn’t require treaty changes, limits the size of budget transfers and supports the restoration of debt sustainability, the Citigroup economists said in a Feb. 7 report.

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Quantitative easing in the U.S. was a success. Between 1870 and 1913, at least.

During that period, the Treasury made a lot of large open market purchases of Treasury securities, according to Benjamin Chabot and Gabe Herman of the Federal Reserve Bank of Chicago.

While not conducted with the aim of stimulating the economy, the buying narrowed the yield spread between Treasury bonds and riskier assets, they said in a report this week.

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The main channel through which emerging markets could roil developed economies is the financial system, now that international capital markets have become more integrated, according to UBS AG.

The conclusion comes as investors are suggesting there will be no repeat of the crises witnessed in economies from Thailand to Brazil in the late 1990s. Stephane Deo, head of asset allocationat UBS, says stress in developing nations could still be transmitted elsewhere given the rise of financial connections since then.

Emerging-country stock markets now account for 20 percent of world market capitalization, up from 8 percent in the late 1990s. Cross-border lending has also jumped. Turkey is one concern given that German bank loans to the country have quadrupled since 2000.

“If investors (including banks) react swiftly to perceived emerging risks by quickly reversing capital flows, emerging economies could see sharp falls in output, which could materially impact DM recovery,” said London-based Deo in a Feb. 11 report. “Therein lies the chief risk to the global economy and capital markets.”

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Handing control of a company’s cash to a woman results in more conservative financial-reporting policies.

A study published by the Bank of Finland found female chief finance officers are more likely to back less stock-price-based compensation, lower dividend payouts and smaller company risk.

The report was based on a sample of 1,500 U.S. companies from 1988 to 2007 and aimed to discover whether, following a change in CFO, there was a large shift in accounting conservatism attributable to gender.

“Overall the study provides strong support for the notion that female CFOs are more risk averse than male CFOs,” said the report’s four authors, among them Iftekhar Hasan of the Finnish central bank and Fordham University in New York.

By Simon Kennedy

BBC News - The debt ceiling crisis that ended with a whimper

The US Congress has agreed to raise the debt ceiling until March 2015, averting another crisis that almost four months ago threatened to trigger a default on US debt and plunge the global financial markets into chaos.

John Boehner - a dose of realpolitik or "giving in"?

Raising the debt ceiling is the only way the US government can raise more money to pay off its debts. Without agreement, it runs the risk of default.

The issue has been an on-again-off-again headache for almost three years. But this time, it never really had the look of the honest-to-goodness end-of-capitalism crisis that came to a head last October.

Back then, just a couple of weeks short of defaulting on its debt, with the markets in crisis alert and the government in shutdown, Congress finally agreed to a temporary solution delaying the problem until this month.

Rather than the bang that some were expecting, it has now vanished with little more than a whimper.

This crisis had none of that drama: much of the fire has gone out of the Republican fight to keep the debt ceiling where it is.

Instead, mid-term elections in November have become their focus, and reluctantly they allowed the ceiling to be raised until March 2015.

The problem was that the "habit of governing by crisis" as President Barack Obama called it, was hurting the Republicans more than the Democrats. House Speaker John Boehner had tried to attach conditions to the bill, but simply couldn't get agreement from his party.

Drawing a line

Instead, accepting the realpolitik of an election year, he agreed to vote with 27 other Republicans for a "clean bill", no strings attached, to let the bill through.

He's been pilloried by right-wing groups of the GOP, most specifically the Tea Party, for "giving up".

But a lot of people breathed a sigh of relief, not least Mr Boehner himself, who, according to Reuters, was seen strolling from a news conference afterwards singing "Zip-a-Dee-Doo-Dah".

Now that a political line has been drawn under the debt ceiling debate, there is the question of where it leaves the economy. Republicans would argue that it leaves it with an ever-escalating debt.

But it has restored some faith among investors.

The deal in the House of Representatives came after the US markets had closed, but Asian and European equities rose - though they were also reacting to strong economic numbers out of China and optimistic comments from the new head of the Federal Reserve, Janet Yellen.

Madhur Jha, senior global economist at Standard Chartered, said: "The problem of the debt ceiling will of course keep coming back, but the economy has a year in which to recover, and by 2015 there may well be a real recovery taking place, which will help the economy fiscally."

Dangerous debts

Even with the start of the painful and unpopular sequestration last year, which is aiming to knock $1.1tn off the budget over the next eight years by forcibly cutting billions off spending each year, debt levels are only really going to come down as the economy grows.

Madhur Jha says: " Debt is not a problem if your economy is growing. There is a lot of debate as to what the proper level of debt should be for a developed economy, say 70%.

"The economists Carmen Reinhart and Kenneth Rogoff wrote a paper saying historically, growth has not suffered significantly until debts reached 90% of a nation's GDP. But it's still not clear. However, once you get over 100%, it really does begin to have structural effects on the economy."

However, Justin Urquhart Stewart, co-founder of Seven Investment Management, believes the US could be at a turning point. He says that there are signs that the annual budget deficit is coming under control.

He says: "If they can get it down to around 2% of GDP, then they will be able to hold the overall debt levels steady, and who knows, even reduce it. The sequestration helped last year on the spending side, but it is really the growth that is doing the work."

If that happens, there may not need to be another raising of the debt ceiling - a distant, if not forlorn hope. But there is a growing belief that the debt ceiling process is itself doing little to help the economy.

Faith in US economic governance has taken a real battering over the last three years, as the debt ceiling issue has been a circus for political fights between Republicans and Democrats.

Meanwhile, the rest of the world has looked on, knowing that if no deal was done and the US defaulted, the result would be, in the words of the US Treasury, "catastrophic economic consequences".

Who needs a debt ceiling?

So why not just do away with the whole political palaver? There are few other countries in the world where total debt is monitored in such a single-minded way.

Proponents of the process say it keeps Congress accountable. Opponents say it dates from a period when the President had far more influence in spending, and that a responsible Congress should be able to control spending as and when it was needed.

Mr Urquhart Stewart says: "The system is unable to distinguish between debt investment, long-term debt for the building of infrastructure, like power networks and bridges, and short-term "household" debt.

"Each should be judged on its own merits and the debt ceiling process doesn't do that."

By Jamie Robertson

BBC News - Business optimism highest for 22 years, says BDO survey

Business optimism in the UK is at its highest level in 22 years, a survey by business consultants BDO has found.

The BDO survey is the latest in a line of reports suggesting the economic recovery is gathering pace

The monthly report incorporates results of surveys from the CBI, the Bank of England's Agents and data from business information providers, Markit.

BDO said its optimism index, which predicts performance two quarters ahead, pointed to further improvements in the next six months.

It is the latest in a string of reports pointing to a strengthening recovery.

Last week, the National Institute of Social and Economic Research think tank, forecast the UK economy would grow by 2.5% this year, saying the recovery had become "entrenched".

Other forecasters, including the Office for Budget Responsibility, the International Monetary Fund and the Organisation for Economic Co-operation and Development have all become increasingly optimistic about the UK's economic prospects.

Muted pressures

BDO said the improving mood pointed to further falls in unemployment, with businesses' hiring expectations at their strongest since August 2008.

The latest figures showed unemployment fell to a rate of 7.1%.

A strengthening economy can lead to higher inflation, which can usher in higher interest rates to combat it.

But BDO said its survey suggested inflation pressures were muted, with its inflation index at its lowest level since November 2009.

There were few signs that wages would start to recover, with wages growth running at 0.9% last year, well under the rate of inflation.

Peter Hemington, a partner at BDO, said: "An interesting feature of the recovery so far has been the way in which UK productivity remains at levels last seen in late 2005. Looking at this optimistically, this means that the UK can continue to grow for some time by increasing productivity before wage-related inflationary pressures begin to kick in."

The findings echo those of a survey last week from the accountancy industry body, the ICAEW, which recorded its highest reading yet.

However, ICAEW also said there were concerns about the structure of the economy as export growth had failed.

Bloomberg News - Italy Banks May Face Up to $20 Billion Capital Gap, ABI Says

Italian banks, which have raised money, sold assets and cut costs to boost capital, may face a shortfall of as much as 15 billion euros ($20 billion) as regulators scrutinize their balance sheets this year.

“We are confident that the Italian banks will pass the stress test exercise without major problems,” Giovanni Sabatini, general manager of the Italian banking association, said in an interview in Rome. He agrees with an estimate made by the Bank of Italy of a potential capital shortfall of 10 billion euros to 15 billion euros. “That’s manageable.”

Assets of 15 Italian lenders, includingUniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), are being reviewed by the European Central Bank as part of a comprehensive assessment before it takes over banking supervision for the euro area in November.

“There are several options for lenders to fill the eventual capital gap found during the scrutiny and most will depend on the timing imposed by the ECB,” said Sabatini, 54. Those alternatives may include share sales, disposals and additional deleverage, he said.

The stress test is the third and final stage of the ECB’s Comprehensive Assessment, an evaluation of whether lenders can survive a downturn. The first phase identified potentially problematic loans and the second stage is the Asset Quality Review to identify any capital shortfalls.

Bad Loans

“It’s possible that lenders, whose capital ratio is about an 8 percent threshold, could consider strengthening their capital base,” according to Sabatini.

Banco Popolare SC (BP), Italy’s fourth-largest bank, said last month it will sell as much 1.5 billion euros of stock after it reported bad loans in the fourth quarter of about 1 billion euros. Banco Popolare is the third lender in Italy to announce a share sale before facing the ECB balance sheet review, following Banca Monte dei Paschi di Siena SpA and Banca Popolare di Milano Scarl.

The nation’s banks are bolstering finances after Italy’s longest recession in two decades and low interest rates squeezed profit margins. The asset quality review and higher capital requirements are also forcing banks to trim balance sheets, pare lending and set aside more money to cover risky loans.

Asset Quality

“Italian banks have been under strong pressure from the Bank of Italy to anticipate the results of the asset quality review and to do their homework well in advance,” Sabatini said. “So, we will probably see some additional provisioning in the fourth-quarter results.”

Italian banks’ non-performing loans are among the highest in Europe. Non-performing loans as a proportion of total loans rose to 9.1 percent in December, almost 7 percentage points higher than at the end of 2008, Bank of Italy Governor Ignazio Visco said in a speech Feb. 8.

While some analysts expects a new wave of merger and acquisitions among medium and small banks to increase efficiencies, Sabatini is skeptical.

“We have to wait for results of ECB stress tests and more clarity in the regulatory framework,” he said.

By Sonia Sirletti and Flavia Rotondi

BBC News - UK economy to grow by 2.5% this year, says NIESR

The UK economy will grow by 2.5% this year and 2.1% in 2015, the National Institute of Social and Economic Research (NIESR) has forecast.

Consumer spending is expected to keep driving UK growth this year

The think tank said the UK's economic recovery has become "entrenched".

The estimates are broadly in line with those of other forecasters, including the UK's Office for Budget Responsibility.

NIESR also said it expected unemployment to fall below 7% before the end of the year.

Last year the Bank of England said it would consider raising interest rates from their current historic lows if unemployment fell below the 7% threshold, though it has since played down expectations of rate rises in the near future.

NIESR's forecast follows similar raised UK growth forecasts from the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), which are also increasingly optimistic about the UK's economic prospects.

Bank of England 'questions raised'

Falling unemployment and rising house prices have helped encourage consumers to spend more, fuelling the recovery.

More sluggish sectors of the economy such as construction are also now showing signs of strengthening.

But concerns remain - particularly levels of business investment, which remain low, and stagnant wage growth which means prices are continuing to rise faster than many people's salaries.

"The UK's economic recovery is entrenched," the NIESR said in a statement. "Above trend growth returned in 2013, while the remarkable performance of the labour market persists."

"We expect consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market."

It added that the rapid fall in unemployment seen in recent months had "raised questions over the credibility" of the Bank of England's forward guidance, which saw 7% unemployment as an important threshold.

The NIESR said it now forecasts a rise in interest rates as early as the second quarter of 2015, though this is expected to be a year after the 7% threshold is breached.

The Bank of England opted to keep rates at 0.5% again on Thursday. They have been at the historic low since 2009.

BBC News - Eurozone manufacturing grows strongly in January

Eurozone manufacturing grew strongly in January on the back of new orders, a closely-watched business survey suggests, with Germany leading the way.

Eurozone manufacturing activity is at its strongest since mid-2011

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 54 in January, its strongest month since May 2011 - a figure above 50 indicates growth.

This compares to December's figure of 52.7 and reflects the overall pickup in eurozone economic activity.

But France failed to break the 50 mark.

"The eurozone manufacturing recovery gained significant further momentum in January, with final PMI readings for Germany, France and the region as a whole all exceeding the earlier flash estimates," said Chris Williamson, Markit's chief economist.

Germany's manufacturing PMI rose to a 32-month peak, said Markit, while France's rate of contraction slowed, but it still failed to move into growth territory.

Greece's PMI was 51.2 - the first time it has been above 50 since 2009 - joining Italy, Spain, the Netherlands, Austria and Ireland in the growth stakes.

All the countries in the survey reported an increase in exports.

New orders across the 18-country region rose at their fastest pace for nearly three years, Markit said, encouraging manufacturers to take on new staff.

As a result, the employment index rose from 49.9 to 51 in January - the first time it has moved into positive territory for two years.

Despite this, eurozone unemployment remains stubbornly high at 12%.

Reuters News - Australia central bank shuts door on rate cuts, A$ surges

A construction crane is reflected on the Reserve Bank of Australia (RBA) building in central Sydney April 2, 2013.

CREDIT: REUTERS/DANIEL MUNOZ

(Reuters) - Australia's central bank kept its main cash rate at a record low of 2.5 percent on Tuesday as widely expected but surprised some by saying further cuts were not in the cards - dropping its bias towards easing policy.

The Australian dollar surged over half a U.S. cent after the Reserve Bank of Australia (RBA) also toned down its rhetorical campaign for a weaker currency, saying only that a recent decline would assist the economy if sustained.

"In the Board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," RBA Governor Glenn Stevens said in a brief statement.

"On present indications, the most prudent course is likely to be a period of stability in interest rates."

It had previously stated that it remained open to the possibility of another cut if needed. However, signs of an improving economy combined with a surprisingly high inflation reading last quarter had sparked speculation it would skip the easing bias this time.

"I think the most significant aspect in the statement is the fact it ends with the comment that 'the most prudent course of action is through stability in interest rates' so they seem to have moved more firmly into the neutral camp than they have been," said Shane Oliver, chief economist at AMP Capital.

"They do seem to have watered down the $A comment."

A Reuters poll of 21 analysts had found all expected the RBA to hold steady, while many argued the next move would be up rather than down, albeit not for many months yet.

The market had priced in almost no chance of a move this week and trimmed the probability of a further cut to just one-in five.

The central bank will have scope to expand on its reasoning in its quarterly economic outlook due on Friday.

NOT SO UNCOMFORTABLE

The RBA also dropped a reference to the Australian dollar being "uncomfortably high", which had been part of a long verbal campaign to pull the currency lower to benefit the trade-exposed sectors of the economy.

On Tuesday it stated only that: "The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy."

The change could in part be due to a surprising acceleration in underlying inflation last quarter to an annual 2.6 percent, well above the 2.25 percent the central bank had forecast.

Stevens noted that the fall in the local dollar was feeding through to inflation more quickly than anticipated.

Yet, he added that while inflation was now likely to be somewhat higher than first thought, it was still expected to remain within the bank's 2 to 3 percent target over the next two years.

Low interest rates have been filtering through to higher house prices and home building, while boosting household wealth and giving consumers the confidence to start spending again.

The RBA started lowering rates all the way back in November 2011 and its last move was in August 2013.

Stevens made only passing reference to the recent turmoil in emerging markets and the recent slide in stocks.