IMF increases its growth projections

The Japanese population declined by -0.2% to 127.8mn as of 1st October
2011. Japan is the worlds oldest society – the average age is 44, as
reported by the UN in 2009. Over 65’s represents 23.3% of the
population, up from 23.0% a year earlier. Social security expenses is
forecast to amount to 52% of total spending in this year’s budget –
starting 1st April;

Chinese home prices declined in a record 46 out of 70 cities tracked
by the government in March, lead by Wenzhou where prices have declined
by -9.0%. New home prices in Shanghai, Beijing, Shenzhen and
Guangzhou, declined for the 6th straight month. In reality prices have
declined much further;

Credit Suisse’s Andrew Garthwaite has an interesting note on France.
France has one of the worst records in Europe on deregulation, which
is likely to worsen given the upcoming elections, especially as the
(extreme) left are gaining ground;
Corporation tax is likely to rise;
Labour costs are the highest amongst large Euro area countries. The
non wage costs of employment are roughly double Germany’s – since
2000, unit labour costs have risen by 20% relative to Germany. This
differential is also likely to increase, especially if they reduce the
work week;
France is the 2nd most closed economy in the Euro zone, just ahead of
Greece and, as a result, will benefit less from a weaker Euro and/or a
global economic rebound;
France’s fiscal position is closer to the PIIGS in many ways. The
primary budget deficit is -3.4% of GDP, the current a/c deficit is
-2.0% of GDP and net foreign debt is 11% of GDP;
Government spending is high at 56% of GDP.
I can add that France’s economy depends on autos, defence and
consumption – all looking dodgy. Interestingly, President Sarkozy is
trying to talk down the Euro in recent days and, in addition, is
suggesting that the ECB become more accomodative – he had previously
agreed with Merkel that he would not talk about the ECB. OK clearly
election related, but this rhetoric is unlikely to change no matter
who wins in France.
Mon Dieu.
You should read the note.
Basically, Oats spreads will widen against German bunds and, I for one
will stay away/short their equity markets, which are relatively more
Me thinks it’s time to concentrate on France, far, far more.
It looks as if there are going to yet more great French restaurants in
London, as the Channel Tunnel train is crammed full of people voting
with their feet;

Spanish banks raised their holdings of their sovereign debt by +26% in
the 2 months ended this January to E220bn. Italian banks increased
their holdings of their sovereign bonds by +31% in the 3 months to
February, to E267bn. Irish and Portuguese banks have increased their
holdings in their sovereign debt by 21% and +15% respectively in the 3
months to February. On the other hand, German and French banks (and I
suspect a number of the core EU countries) have, in some cases, cut
their holdings in PIIGS bonds by 50% since 2010. PIIGS banks have
accessed ECB funding (including LTRO’s) to the tune of E715bn.
Spanish, Irish and Portuguese banks holdings of their sovereign debt
amounted to 35%, 20% and 12% respectively of their total assets at the
end of 2011. Essentially, Sovereign debt credit problems are being
repatriated, though the ECB’s risk (which involves the core EZ Central
Banks) has increased (Source Bloomberg);

Spanish NPL’s rose to 8.16% (7.91% in January) of total lending at the
end of February, the highest level since 1994, from less than 1.0% in
2007. The Bank of Spain reported yesterday that Spanish banks would
face additional requirements for provisions and capital requirements
amounting to E53.8bn. Certainly will not be enough by a long shot,
given rising unemployment (near 24%) and a weakening economy – the IMF
increased its forecast for a contraction of GDP yesterday. The Bank of
Spain reports that their banks hold E176bn of “troubled real estate
assets” and that 21% of the E298bn of loans to property developers are
non performing !!!!. Spanih property prices declined by -3.0% in the
1st Q 2012 on a Q/Q basis and by -7.2% on a YoY basis;

The Spanish central bank governor reported that Spain was back in
recession. The EU is to review Spain’s proposed budget deficit targets
– expect them to be raised, in particular the ludicrous target of 3.0%
for 2013. However, what does that do to the recent fiscal compact
agreed by the EZ and other EU countries. Basically, it was a load of

The Governor also warned that Spanish banks could face further
problems. Personally, I cant see how the Spanish banks can raise the
finance they need other than from the EFSF/ESM;

The Bundesbank reported that the German economy is in “remarkably good
shape”. They have warned against looser fiscal and monetary policy in
the EZ. Once again, the same old, same old;

UK jobless claims rose by just 3.6k, less than the 6.0k expected in
March. The unemployment rate fell to 8.3% from 8.4% previously;

Minutes from the last BoE meeting reveal that all 9 members of the MPC
voted to keep rates on hold. However, 1 member (Adam Posen) reversed
his previous dovish view and has suggested an end of the QE programme.
The BoE reports that inflation would be higher than expected. GDP in
the 1st and 2nd Q’s is expected to be weak (indeed, a recession is
possible), with a pick up in the 2nd half of the year. The UK’s 1st Q
GDP estimate is released on the 25th April;

US March housing starts came in at a 5 month low of 654k on an annual
rate, lower than the 705k starts expected. However, building permits
rose to 747k on an annual basis, versus 710k expected, the highest
since September 2008;

US industrial production remained unchanged in March, lower than the
+0.3% growth expected. Manufacturing (makes up 75% of total
production) declined by -0.2%, the most since April 2011. Capacity
utilisation came in at 78.6%, slightly lower than the 78.7% reported
in February;

President Obama proposes to strengthen supervision of oil markets and,
in addition, to increase penalties for market manipulation. The
measures will require Congressional approval. One of the proposals
involves increasing the margin on trades.;

The IMF has raised its global growth forecast to +3.5% this year and
to +4.1% next, from +3.3% and 4.0% previously. They suggest that the
US will grow by +2.1% this year and +2.4% next, up from +1.8% and
+2.2% respectively, from January’s forecast. On the other hand, the EZ
is expected to decline by -0.3% in 2012, though better than the -0.5%
previously forecast. China is expected to grow by +8.2% this year
(+8.8% next), with Japan up by +2.0%. Whilst overall, the growth
numbers are better, the IMF has forecast that inflation will rise to
+1.9% this year and +1.7% next in advanced economies (US, EZ, Japan,
UK and Canada), higher than the +1.6% and +1.3% previously reported.
Inflation in EM’s is forecast at +6.2% and +5.16% in 2013.

The IMF has suggested that the EZ recapitalise their banks (using the
bail out funds), warning of “excessively fast deleveraging” otherwise
and to introduce growth measures, including that the ECB cuts rates.
They also suggested the introduction of Euro bonds in the EZ. On the
downside, they cite possible increased problems in the EZ as the main
risk to the global economy. All very sensible stuff, but the German’s
believe they know better !!!!!.

Interestingly, the IMF forecast that oil prices would rise by +10.3%
this year, having predicted that they would fall in January.

Finally, the IMF suggests that the Chinese current account surplus
would rise in coming years to +4.0% to +4.5% “at most” over the medium
term, having previously forecast that it would rise to +7.2% in 2016.
The current account surplus was +10.1% of GDP in 2007 and dropped to
+2.8% last year. Personally, I believe that the Chinese current
account surplus will be far, far less, with a possibility of a
deficit. However, the lower Chinese current account forecasts will be
welcomed by Chinese authorities as it eases pressure on them to
revalue the Yuan;


Strong European and US markets yesterday, with a follow through in
Asia today. However, weaker numbers from IBM and Intel seems to have
soured the mood in Europe and US futures indicate a weaker open. The
Spanish IBEX is down near 3.0% at present, its low for the day.

The Euro is back below E1.31 – currently E1.3087.

Spot Brent is trading at US$117.76, with Gold at US$1647.

Still see no reason to buy these markets.

An US fund manager on CNBC yesterday stated that the problems in Spain
are contained. Hmmm. Me thinks he may need to think about getting a
new job.

Have fun.

Kiron Sarkar

18th April 2012

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