2012-07-18

Escalation of banking crisis dampens economic development in Europe

In the last few weeks and months, an escalation of the banking crisis has seen financial crisis return to Europe. The situation in Spain demonstrates just how closely the fate of a country is linked to that of its banks. The EU has approved a €100 billion bailout for the government in Madrid in order to rescue its financial institutions. Greece and Ireland have also already received billion-euro bailouts for their banks. The worse the situation is in a country, the more critical it also becomes for its banks. This correlation has been reinforced by the crisis. On the one hand, financial institutions are supporting their troubled governments by purchasing government bonds. And, on the other, governments are stepping in when things become critical for their banks. If a country’s financial sector is in poor shape, sovereign debt essentially rises. As a result, rating agencies are quick to downgrade the rating for that country, as recently happened to Italy.

At the EU summit in Brussels at the end of June, European leaders agreed an expansion of the rescue package to support those eurozone countries that are potentially on shaky ground. In future, the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) will have greater flexibility for implementing their existing rescue fund measures in order to stabilize government bond markets. Crisis countries will now have easier access to euro rescue funds and will have to comply with fewer conditions. Italy and Spain are currently suffering from high interest rates and are really struggling to raise new money on the markets. The ESM crisis fund will be able to offer direct support to banks in future. This was not previously possible under the ESM Treaty. The money is to be transferred to the respective country, which would increase the sovereign debt of the countries, although, there were objections from Italy and Spain, who demanded that these funds were given directly to the rescued banks in order to preserve the national balance sheets. However, a prerequisite is that uniform banking supervision is established in the eurozone, in which the European Central Bank will play a central part. In addition, an economic recovery program of €120 billion was approved. Reactions from the markets to the fast track actions have so far been positive.

Whether these measures successfully reduce the severity of the financial crisis and prevent the breakup of the eurozone remains to be seen in the coming months. The willingness of affected national governments and their citizens to implement reforms will be decisive.

USA: Americans hope for economic recovery

The economy in the USA has so far struggled to really gain momentum. Experts think that it may currently be experiencing a second economic trough. In order to help stimulate growth, the government recently extended its lower payroll tax rate of 4.2 percent through 2012, a reduction of 2 percentage points was implemented in January 2011.

Americans are, however, noticeably more positive about the future of their economy overall than Europeans. In addition, they are hopeful about a recovery on the labor market in the coming months. At 8.1 percent in April, the unemployment rate dropped to its lowest level since January 2009. Part of this decrease in unemployment is due to many older workers entering early retirement because they have not been able to find new jobs. Since August last year, the economic expectations indicator has steadily increased from -3.9 points to its present level of 21.2 points. The average value for the previous survey period is nine points. Many US citizens are considerably less positive when it comes to the future of their own financial position. Income expectations are currently at 14.7 points and the average is 20 points.

The buying mood of consumers is weak and retail sales in the US fell again for the second consecutive time in May. Accordingly, the willingness to buy of American consumers has fallen further in the past few months. In June, the indicator value was a low -9.6 points and the average is -7 points. Americans have long since fallen back into old habits. While wages and salaries have hardly increased, consumers are once again buying on credit. In the past few months, the rate at which Americans borrowed money was the highest it has been in a decade. Conversely, the savings rate reached the lowest level since the end of 2007.

The real estate market may have bottomed out. Expensive rent and record low mortgage interest rate levels are motivating US citizens to purchase property again. The market is still some way from being in a strong position though and experts predict that it will not return to normality before 2016. The banking sector has also not yet recovered from the US mortgage crisis. Many major banks have been downgraded by their rating agencies in recent weeks. On top of this, the European financial crisis has caused stock markets worldwide to drop, inspiring lower confidence in the markets. In light of this situation, American consumers are keeping a watchful eye on their spending. Experts predict that they will not be consuming more in the medium term either.

Economic expectations:           21.2 points       Average:          9 points
Income expectations:    14.7 points       Average:          20 points
Willingness to buy:       -9.6 points        Average:          -7 points

Germany: crisis causes falling economic expectations

At the time of the survey, turbulence in the eurozone due to an unknown Greek general election outcome and rescue packages for the Spanish banking sector put a considerable damper on the economic optimism of German consumers. The worsening international climate is now also evidently having an impact on Germans’ economic outlook. Citizens think that the ongoing debate on the future of the single currency and the provision of financial aid to stabilize the Spanish banking system harbor risks for the German economy too. Consumers are apparently concerned that sooner or later Germany will be affected by the downward trend in the eurozone. The development of exports, above all, is at considerable risk in key European sales markets. This is also reflected in the attitudes of business. Companies fear a growing negative impact on their business due to the euro crisis. However, both rising employment and noticeably improved salary agreements on previous years have fueled expectations of further positive income developments. On top of this, inflationary pressure also appears to have abated recently. In May, price rises for living costs dropped below the psychologically crucial margin of two percent. Consumers therefore consi-
der their purchasing power to be strengthened. As a result of deficient trust in the financial markets and historically low interest rates, many consumers do not think it is sensible to put their money in the bank and are instead making higher value purchases.

Economic expectations:           3.0 points
Income expectations:    40.1 points
Willingness to buy:       32.7 points

You find the complete press release with more information about the GfK Consumer Climate Europe and USA here: http://www.gfk.com/consumer_climate_europe/press_release/index.en.html

Information about the company: GFK Sverige AB

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