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ECONOMIC DATA ANALYSIS - EURO RISKS BACK TO THE FOREFRONT
ECONOMIC DATA ANALYSIS FRIDAY 22 MARCH 2013
EURO RISKS BACK TO THE FOREFRONT
• Weekend of major uncertainty as Cyprus scramble to secure a bail-out
• Renewed uncertainty comes at bad time for euro area where growth indicators have weakened
• UK outlook vulnerable to deterioration in euro area
Cyprus ... It is coming up to nine months since ECB President Draghi promised to do “whatever it takes”. Over much of this time the perceived ‘tail-risk’ to the euro area economy fell markedly. But this last week has seen it rise again. Although markets are holding their nerve for now, the flaring up of tensions in Cyprus could pose the biggest challenge to the stability of the euro area since last year’s Greek elections. If tensions escalate, it threatens a much more negative market reaction over the coming days. A successful resolution to the Cypriot bailout negotiations are crucial.
A moving feast ... Proposals to split its second largest lender into a ‘good ’ and ‘bad’ bank and supplement write-downs from the ‘bad’ bank by securitising other national interests have been thrown into disarray by the Troika’s rejection of the securitisation plans. All parties will need to go back to the drawing board in a process that is likely to stretch across the coming weekend. However, the clock is ticking. The ECB stated that if an agreement was not in place by the end of Monday (ahead of the proposed re-opening of Cypriot banks on Tuesday), it would cease providing funding (Emergency Liquidity Assistance) to Cyprus’s banking system. This would materially raise the stakes, increasing the possibility of Cyprus defaulting on its debt and having to leave the euro area. The potential repercussions of such an outcome provide hope that an eleventh hour deal will be struck. But even if this worst-case scenario is avoided, recent actions threaten to cast a lasting shadow over the wider euro area economy after a period of relative calm.
Coming at a bad time ... The events in Cyprus come at a bad juncture so soon after the disappointing Italian election and in the midst of a spate of weak economic data. The economic calendar in the coming week is relatively light, with Wednesday’s euro area confidence indicators likely to mirror the recent softening in some of the national indicators. With Q4 GDP having posted its biggest drop since 2009, the weakness of the PMIs threaten to keep the region in recession in Q1. Renewed economic weakness coupled with heightened political
tensions provide understandable reasons for market concern.
Domestic growth vulnerable ... Alongside recent events in the euro area the UK Budget cast a cloud over the outlook for growth (and borrowing). The OBR’s downward revision of 2013 GDP growth to just 0.6% underscores the challenges facing the economy. In the coming week, the final estimate of Q4 GDP is expected to be left at -0.3%. Within this, the focus is likely to be on the Q4 income accounts. We expect these to show that households drew on savings to support spending in Q4. The outlook for consumer spending this year is likely to hinge on whether they continue to do so in 2013. Q4 current account data are also released. We expect the deficit to remain broadly unchanged at £13bn (3.3% of GDP). Reducing the current account deficit, including the growing dependence on energy imports, is likely to be one of the UK’s biggest challenges over the coming years.
US GDP revisions ... The US faces a relatively quiet week for economic releases. We forecast Q4 GDP will be revised higher on Thursday, to 0.5%. Weekly jobless claims will be watched to see if the recent improvement continues. Housing starts and durable goods orders are also expected to be firmer over the coming week. Fed Chairman Bernanke joins Governor King at the LSE on Monday to discuss what policymakers have learned from the financial crisis.
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