It's not just the disaster of the Doha collapse that dominates the
economic news today.
Ambrose Evans-Pritchard who , as some of you know, I see as the most
wide-awake economist around, has further problems to outline here.
in Europe it's Italy and Spain with France looking shaky. Australia
and New Zealand are turning into perhaps the worst basket cases of
all. In Australia's case they have little excuse as the mining
sector is booming as never before.
With all this who needs the lunacy of Doha?
Who says nothing happens in July/August ?
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TELEGRAPH 30.7.08
1. Growth slump may force Italy out of eurozone
By Ambrose Evans-Pritchard
Italy is sliding into a deep structural crisis and risks being forced
out of Europe's monetary union as the region's economic downturn
gathers pace, according to a new report by Capital Economics.
Over the last decade, the country has failed to reform its labour
product markets sufficiently to cope with the rigours of euro
membership and is now caught in a spiral of decline as the working
population starts to shrink. Productivity growth has slowed to 0.5pc
a year.
"An ugly combination of weak GDP growth, poor international
competitiveness, and rising government borrowing costs could lead to
renewed calls for Italy to leave the euro," said the report, written
by Julian Jessop and Roger Bootle.
"As things stand, not only will Italy lose ground to the rest of the
eurozone, it could soon start to do so at an even more rapid rate,"
they said.
Italy has lost roughly 40pc in labour competitiveness against Germany
since 1995, according to Eurostat data.
Capital Economics said Italy - now on the cusp of its fourth
recession this decade - faces a "demographic time bomb" as the
workforce starts to shrink at an accelerating rate over the next 30
years, making it ever harder to finance the biggest national debt in
Europe (107pc of GDP).
There is a risk that the spreads between German Bunds and Italian 10-
year bonds could widen quickly from 58 basis points today to over 100
if the question of euro membership creeps back onto the table.
Italy set off a minor scare in mid-2005 when two cabinet ministers
from the radical Northern League called for a return to the lira. It
was suggested that the political pain threshold in a major economic
crisis may be lower than widely assumed.
The country regained momentum during the final upswing of the global
credit boom, helped by Fiat's remarkable comeback. This has entirely
faded. "Italy's upswing has unravelled at an alarming pace," said the
report.
Business confidence has fallen to the lowest since October 2001,
following the 9/11 terrorist attacks. The country is
disproportionately hit by the high euro because it relies heavily on
"mid-tech" exports that compete toe-to-toe with Asian goods.
Italy can at least take some comfort that other euro members are
feeling the strain too, reducing the risk of EMU break-up. France's
Insee consumer confidence plunged to a 21-year low in July.
The epicentre of the unfolding crisis is Spain, where the number of
houses built this year is expected to collapse by half from the
760,000 constructed in 2007 at the peak of the bubble. Spanish
unemployment is rising by almost 70,000 a month, touching 10.6pc at
the end of the fourth quarter. However, Spain has a much smaller
public debt than Italy.
Most studies on the risk of an EMU break-up conclude that it cannot
occur because the costs would be too high. But this overlooks that
markets could set in motion a chain of events that forces a country
to leave.
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AND --->
2. Australia faces worse crisis than America
By Ambrose Evans-Pritchard, International Business Editor
The world's financial storm has swept through Australia and New
Zealand this week amid mounting signs of contagion across the Pacific
region.
Financial shares were pummelled in Sydney on Tuesday after investor
flight forced National Australia Bank (NAB) to slash a £400m bond
sale by two thirds.
The retreat comes days after the Melbourne lender shocked the markets
by announcing a 90pc write-down on its £550m holdings of US mortgage
debt, an admission that it AAA-rated securities are virtually worthless.
In New Zealand, Guardian Trust said it was suspending withdrawals
from its mortgage fund owing to "liquidity difficulties in the market".
Hanover Finance - the country' third biggest operator - last week
froze repayments to investors. The company said its "industry model
has collapsed" as the housing market goes into a nose dive. Some 23
finance companies have gone bankrupt in New Zealand over the last year.
It is now clear that the Antipodes are tipping into a serious
downturn. Australia's NAB business confidence index fell to its
lowest level in seventeen years in June. New Zealand's central bank
began to cut interest rates last week on fears that the economy may
have contracted in the second quarter, and is now entering recession.
Housing starts slumped 20pc in June to the lowest since 1986.
Gabriel Stein, from Lombard Street Research, said Australia could
prove vulnerable once the global commodity cycle turns down. It has
racked up a current account deficit of 6.2pc of GDP despite enjoying
a coal, wheat, and metals boom, effectively spending its resources
bonanza in advance. Household debt has reached 177pc of GDP, almost a
world record.
"It is amazing that in the midst of the biggest commodity boom ever
seen they have still been unable to get a current account surplus.
They have been living beyond their means for 10 years. What worries
me is that productivity growth has been very low: they have coasting
after their reforms in the 1990s," he said.
Australia's Reserve Bank has had to grapple with vast inflows of
Asian capital, especially Japanese money fleeing near zero rates at
home. Short of imposing currency controls, it would have been almost
impossible to stop the inflows.
"The easy money went straight into real estate," said Hans Redeker,
currency chief at BNP Paribas.
"Australia will now have to generate 4pc of GDP to meet payments to
foreign holders of its assets," he said. This is twice as high as the
burden faced by the US.
Both the Australian and New Zealand dollars have fallen hard in
recent days and now appear to be breaking down through key technical
support against major currencies, including the US dollar. "The
Aussie is going down, big time," said Mr Redeker.
The picture is darkening across the Pacific Rim. The Bank of Japan's
deputy governor, Kiyohiko Nishimura, said its economy may now be
falling into a "technical recession". Household income dropped 2.1pc
in June compared to a year earlier and manufacturers are the
gloomiest since the deflation crunch in 2003.
The decision by National Australia Bank to make drastic provisions on
its US mortgage debt could have ramifications in the US itself. It
opted for a 100pc write-off on a clutch of "senior strips" of
collateralized debt obligations (CDO) worth £450m - even though they
were all rated AAA. No US bank has admitted to such fearsome loss rates.
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