Bank of Spain figures show 'bad bank' loans rise to new high

June data shows fallout from the country's property crash is still ongoing as bad loans as a proportion of total credit hit 11.6%

Spain's bad bank loans hit a fresh high in June, according to Bank of Spain figures that underscore the continued fallout from the country's property crash.

Bad loans as a proportion of total credit rose to a record 11.6% or €176.4bn (£150.5bn) in June, Bank of Spain data showed on Monday.

That was a rise from 11.2% in May as more households and smaller companies struggled with debt, and exceeded a previous peak of 11.4% in November.

Spain's banks have been hit particularly hard by bad property loans and the country is battling high unemployment, with a jobless rate of 26.3%.

There had been a slight fall in the bad debt ratio at the end of last year, when the country's so-called "bad bank" swallowed up large amounts of the toxic real estate that had brought down several Spanish banks.

The bad bank was set up by the government to fulfil one of the demands made by the eurozone countries providing a loan facility to Spain's banks. It deals with property left over from the housing construction bubble that burst in 2008, just as the credit crunch hit, and that lies at the root of Spain's protracted recession and high unemployment.

The bad bank receives building plots and unfinished developments from developers and will be expected to sell this stock at a profit over the next 10 to 15 years.

Spanish lenders' earnings were gutted last year by steep government-enforced provisions on properties and loans to developers in the wake of the crash. Those unable to cope were bailed out with European funds.

November 2012: A banner advertises houses for sale in Estepona, Spain at the time that a 'bad bank' was opened to purge the country of toxic property assets. Some top lenders, including healthy ones such as BBVA, have said that bad debts with property-related businesses in particular could keep rising into the first quarter of 2014.

While the wider eurozone was confirmed as having emerged from its long recession last week, Spain's economy has continued to contract in recent months. But some economists believe the country could return to growth before the end of the year.

Germany, credited with providing much of the momentum for the single-currency bloc to exit from six quarters of recession, is expected to see a return to "normal and steady" growth rates in the second half of this year, according to an update from the Bundesbank on Monday. That follows the strongest growth in more than a year for Europe's largest economy in the second quarter, when GDP rose 0.7% compared with the first three months of the year.

The Bundesbank said in its latest monthly report that Germany, along with other eurozone member states, would benefit from record low interest rates set by policymakers at the European Central Bank. However, it noted that the ECB's forward guidance indicating rates would remain low did not preclude a rate hike should inflationary pressures build.

Article Source : http://www.guardian.co.uk

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CBI doubles George Osborne's economic growth forecast

Business lobby group cites growing confidence, forecasting UK growth of 1.2% this year and 2.3% in 2014

The CBI has raised its forecast for UK economic growth this year to 1.2% – double the pace predicted by George Osborne in his March budget – as the business lobbying group cited mounting confidence across the British economy.

It becomes the latest organisation to raise its outlook for the UK after a series of surveys and official data have suggested green shoots of recovery are taking hold, prompting the CBI to raise its 2013 growth estimate from 1%. However, the CBI, which has long been a supporter of the government's austerity drive and promises to cut the deficit, sounded a note of caution as it warned that ministers' push for a rebalancing away from consumption is taking longer than expected.

"The economy has started to gain momentum and confidence is picking up, but it's still early days," said John Cridland, the CBI's director general. "We need to see a full-blown rebalancing of our economy, with stronger business investment and trade before we can call a sustainable recovery. We hope that will begin to emerge next year, as the eurozone starts growing again." Government statistics published today show signs of a rebalancing, or at least the impact of austerity measures on public sector jobs, with private sector employment at its highest in 15 years at 24.1 million people.

The CBI said there were "signs of a pick-up in confidence across a broad range of sectors, including services, construction and manufacturing".

For 2014, the group is now pencilling 2.3% growth, up from May's forecast of 2%. Leading thinktank, the National Institute for Economic and Social Research, and forecasters Fathom Consulting both upgraded their outlook for the UK economy earlier this month to 1.2%. That growth is based on a rise in disposable incomes and some support from exports as the eurozone continues to recover following a protracted recession that was finally confirmed over last week.

Official UK data on Friday is expected to add to the tentatively optimistic tone, confirming economic growth accelerated in the second quarter to 0.6%, double the pace in the first three months of this year. That would be unchanged from the number the Office for National Statistics estimated in its first take on GDP for the quarter, which was welcomed by the chancellor as showing the economy has moved "out of intensive care".

A handful of economists believe growth could be revised higher on Friday to 0.7%. Among them, Philip Shaw at Investec, notes that numbers from the construction sector have been revised up since that first estimate on growth and that the performance of the dominant services is also likely to be nudged up.

"Our 2013 GDP forecast is still +1.2%, but we are tempted to upgrade this modestly given the positive data dynamics recorded recently," he added.

But many economists share the CBI's concern that the economy remains overly dependent on consumers, who account for around two-thirds of all spending. They say consumers are not in a strong position to drive a recovery as they grapple with the biggest squeeze on household budgets for decades.

There is fresh evidence of that pressure on Monday. The latest Asda Income Tracker suggests disposable household incomes fell last month as wages failed to keep pace with living costs.

The supermarket chain says the average UK household had £160 a week of disposable income in July, down £1 a week from a year earlier and £5 a week from a peak in February 2010. It blamed energy bills for burning a hole in household budgets after they rose by 8.2% over the past year.

"A 'feel-good' summer has contributed to a boost in retail sales, but we can't ignore the fact that the squeeze on income growth and rising cost of living continue to pull at consumer purse strings," said Asda chief executive Andy Clarke.

But he noted a rise in consumer optimism, nonetheless. That chimes with a separate survey suggesting households spent more in August as they reported that access to unsecured loans improved and they were relatively upbeat about their finances.

Data company Markit, said the measure of financial wellbeing in its Household Finance Index dipped "only slightly" from July's record high. It stood at 40.8 in August, down from 41.5 in July, the highest since the survey was launch in early 2009.

Still, there were contrasting feelings around the country.

"The strains on finances are receding fastest among those in private sector service jobs, while those working in construction, retail and the public sector trail behind. On a regional basis, familiar trends continued in August as people in Scotland and the south of England were the least downbeat about their finances, while those in Wales and the north of England were among the most pessimistic," said Tim Moore, senior economist at Markit.

Growing evidence of a renewed pick-up in house prices has also boosted sentiment among homeowners but at the same time prompted warnings that Britain could be headed for a damaging property boom and bust.

The CBI's director general, John Cridland, said: 'The economy has started to gain momentum and confidence is picking up, but it's still early days.Property website Rightmove is the latest to report rising house price inflation on Monday, adding to a flurry of recent surveys that reignited criticism of government schemes to kickstart the housing market. Average asking prices are up by more than £20,000 so far in 2013 and stood at £249,199 in August, Rightmove said. As is typical for August, that marked a slight dip from July but at 1.8% the holiday season fall was less than in previous years. In annual terms house price inflation accelerated to 5.5% from 4.8% growth in July.

The average asking price for flats hit a record high of £209,652 in August, Rightmove said, as it joined the chorus of warnings over government schemes.

"Flats are most in demand by first-time buyers and buy-to-let investors and we have seen prices for this property type hit their highest ever level as supply fails to keep up with an increase in demand at the bottom of the market," said Rightmove director Miles Shipside.

"Demand is already on the up, and that's before the roll-out of phase two of the Help to Buy stimulus. It is now critical that the supply of property improves so that the goal of a significant increase in transaction numbers is not over-shadowed by an unsustainable boom in property prices."

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Manufacturers see first rise in new orders for a year

CBI survey finds firms have increased production and employment as outlook improves

Manufacturers started the summer in buoyant mood following the first rise in new orders for a year, according to a survey by the business group the CBI.

Firms increased production and employment as the outlook for the sector improved in the three months to the end of July.

The quarterly industrial trends survey also found that firms anticipated a further modest rise in orders and output in the coming three months, while expectations for growth in new domestic orders were at their highest since April last year.

However, the improving situation, which is also reflected in other surveys of manufacturers, failed to persuade firms to increase investment in new equipment.

The CBI said planned capital expenditure on plant and machinery over the next 12 months had deteriorated slightly. "When asked about factors likely to limit investment, manufacturers most often cited uncertainty about demand, which was of slightly greater concern than usual," the CBI said.

The government has waited several years for a strong boost to investment after a severe slowdown in the wake of the financial crash. But the eurozone crisis and the government's own austerity measures have delayed the expected return of consumer confidence, widely seen as a precursor to a rise in investment spending.

The Office for Budget Responsibility, which monitors the economy for its impact on the government's finances, has pencilled in a recovery in investment over the next two years to underpin a return to average growth levels.

Manufacturers' intentions to invest in plant and machinery dipped -1% compared to -9% in the previous quarter.

he production line at Nissan's factory in Sunderland. The CBI said optimism in the manufacturing sector had risen again.The survey's main total orders balance picked up from -18 in June to -12, which is its strongest level since last December. Striking an even brighter note, 32% of firms reported an increase in total new orders against 27% that said they decreased, giving a balance of +5%.

Samuel Tombs, UK economist at the consultancy Capital Economics, said the sector's recovery was gathering momentum, though at a slower pace than the services sector.

"This improvement brings the CBI's survey in line with the relatively upbeat tone of the other surveys. But with demand for exports weak in the UK's largest market, the eurozone, and domestic consumers' real pay still being squeezed, it is hard to see how the manufacturing sector's recovery can gather much more pace in the near term," he said.

Stephen Gifford, the CBI's director of economics, said manufacturers had seen a pick-up in activity across the board, but agreed there was still a degree of nervousness around the boardroom tables of many firms.

"Optimism in the sector has risen again, and demand conditions are expected to improve further in the coming three months," he said.

"The gentle rise in confidence is being reflected in firms' headcount, which is rising at the fastest rate in a year.

"But manufacturers remain concerned about political and economic conditions abroad limiting export orders, which is likely to reflect heightened uncertainty over the global economic outlook."

Article Source : http://www.guardian.co.uk

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Portugal's soaring bond yields spell end of line for austerity

Portugal bond yields are back to 7.5%, after briefly hitting 8%, as ministers resign and coalition government nears collapse

Here we go again. The eurozone crisis is stirring, confounding the boasts of various eurogroup leaders that the worst is past. Their claims have usually rested on the observation that governments' bond yields, and thus their borrowing costs, have fallen. The austerity medicine must be working, it is asserted, and a bright new dawn beckons just as soon as the current recession in the eurozone clears. Just look at Ireland, they say, or even Portugal, to see how bailout programmes can give countries time and space to adjust.

But look at Portugal's bond yields now: they are back to 7.5%, after briefly hitting 8% on Wednesday, as ministers resign and the centre-right coalition government edges towards collapse.

It is a radical turnaround from the position in May, when Portugal was able to raise €3bn (£2.6bn) via a ten-year bond issue at a yield of 5.7%. At that point, it seemed credible that Portugal might be able next year to exit, on schedule, its three-year €78bn bailout programme and start to fund itself in the market. If 7.5%, or worse, is sustained, forget it. The numbers don't work for an economy still deep in recession.

The political crisis in Lisbon is the market's cue to look under the bonnet of the economy. Steep tax hikes have allowed the annual budget deficit to fall but the International Monetary Fund predicted last month that public debt would peak at 124% of GDP next year "on current policies and outlook." Others think that it is too optimistic – 134% in 2015, say analysts at Barclays.

The political crisis in Lisbon is the market’s cue to look under the bonnet of the economy.One problem is lack of competitiveness. "Improvements in external competitiveness indicators remain limited," said the IMF report, noting that only a quarter of the rise in unit labour costs since 2000 has been reversed. Thus the export recovery is weak, not helped by lack of demand from neighbouring Spain. In the meantime, domestic demand has collapsed amid pay freezes and an unemployment rate of 18%. "Economic recovery is proving elusive," commented the IMF. You bet: output contracted by 3.25% last year.

The IMF's other concern was that the "social and political consensus" behind the bailout programme was weakening. It was right to worry: austerity fatigue is the cause of the current political crisis, with the coalition split over how much reform the economy can bear. It seems highly unlikely any Portuguese administration could deliver the package of cuts and tax rises that the IMF and eurozone leaders are currently demanding.

For now, the crisis is not at boiling point since Portugal can fund its next big debt repayment in September. But even at current temperatures some form of compromise between Portugal and its lenders will be necessary since it should now be clear to all that the austerity programme has run out of road.

Logic says a Greek-style write-off should happen as part of another bailout, this time with softer austerity conditions. But experience says the road to that point will be long – it always is in the eurozone. Complicating factors include: the fact that the terms of the 2011 bailout have already been tweaked twice in Portugal's favour; the IMF's anxiety for the eurozone partners to fill any funding shortfall; and Angela Merkel's election fight in September.

What happened to Mario Draghi's bond-buying pledge? Forget that, too. As the European Central Bank has always made clear, it applies only to countries that can also raise some money from the market under their own steam. Portugal, at present, doesn't fit the bill.

It's the job of the bailout lenders to get it to that point – and it means that the IMF and eurozone leaders should admit that an overload of austerity is a self-defeating strategy in Portugal.

Article Source : http://www.guardian.co.uk

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