Daily Buzz
Record sterling oil price sparks fears
Oil consumption in Europe has been in decline for sometime as a result of falling consumption of oil by the power-generation sector, increased efficiency and conservation and relative saturation in the regional automotive market. However, weak consumer sentiment was an additional factor that lead to a sharp drop, estimated at 2.1%, in consumption in 2011. The Economist Intelligence Unit is forecasting a contraction in regional GDP this year which will further depress regional oil consumption, particularly as real incomes are expected to suffer from fiscal austerity, weak property markets and high rates of unemployment. The recent strength of the US dollar, the currency in which crude oil is traded, and the sharp rise in the oil price is likely to lead to further rises in the retail price of fuel in Europe and the UK and consumers can be expected to respond by trying to use fuel as efficiently as possible or by cutting back on non-essential travel. Even assuming that consumption growth remains strong in Asia, the overall picture is for unexciting oil consumption growth this year suggesting that international oil prices would be markedly lower were it not for the escalation in geopolitical tensions in the Middle East.
Retailers to meet with government over Get Britain Working scheme
It's unsurprising that retailers are reviewing involvement after the public relations disaster and backlash Tesco experienced recently. Whether or not the firm was genuinely mistaken in advertising night shift work at "jobseekers allowance plus expenses" the anger it prompted has shown the scheme itself to be unpopular for many consumers. Whilst there is merit to an initiative that offers valuable on the job work experience and opportunities for employment, critics point to how it can be exploited to supply cheap unskilled labour with little future prospects. It is this PR risk that retailers have to balance when evaluating involvement.
Read more on the retail sector at EIU.com
Greece races to meet bail-out demands
Although the second, €130bn bail-out for Greece has been agreed in principle, many challenges still lie ahead for Greece - both in the short term and in the long term.
In the short term, Greece needs to pass wide-ranging structural reforms such as a tax reform, further reduction in wages and liberalisation of certain sectors. The country has until late February to pass these reforms in parliament. Greece does not only need to get these reforms passed in parliament (which has shown its reluctance to pass government-endorsed proposals in the past) but there will also be even more intense social unrest against the tough fiscal austerity agenda. It is also far from certain that the other euro zone parliaments will approve the huge bail-out package even if Greece does. There is already growing resistance in parts of the parliaments in countries such as Germany, the Netherlands and Finland.
Even if Greece can pass the reforms within only a bit more than a week, severe doubts remain over the country's ability to actually implement the tough fiscal austerity agenda. Even the 'troika' (European Commission, European Central Bank and IMF) that monitors Greece's fiscal austerity measures doubts that Greece will reach the arbitrary target of reducing its debt burden to 120.5% of GDP by 2020 from 160% now, according to reports leaked during the bail-out negotiations.
Finally, we continue to see a self-defeating logic in the euro zone's efforts to solve the Greek debt crisis: tough fiscal austerity measures have already contributed to the economic depression in Greece, and without measures to generate economic growth (which would raise tax revenues and lower social welfare costs) Greece is unlikely to reduce its debt to sustainable levels (which would be around 60-80% of GDP rather than the arbitrary number of 120% chosen by the troika). More attention should therefore be paid to attempts to spur growth in Greece, for example the idea of a new 'Marshall Plan' for Greece advocated by the new president of the European Investment Bank.
Oil, Iran and renewable energies
Tension in the Gulf will remain high until there is a confirmed return to talks between the West and Iran over its nuclear programme. Even then, there has been a serious loss of faith on both sides in recent months as the Iranians will resent the new harsher sanctions and the US and its allies will highlight any indications from the IAEA on a possible weapons dimension to Iran's nuclear programme as cause for isolating the Islamic Republic from diplomatic and economic openings.
Were the Iranians to make some concessions on the nuclear issue, perhaps slowing its enrichment or allowing a fuel swap then we would expect that the West may ease some sanctions (particularly on Iran's oil sector) and would encourage a return to comprehensive talks. While there hasn't been any indication that either side is pushing hard for a return to talks the stakes are so high at present that quiet diplomatic meetings may be possible without either side looking like they've given away too much.
In the still unlikely event that Iran blocked the Strait of Hormuz, the Gulf Arab states would be most exposed as they would lose their main export channel for crude oil and liquefied natural gas. Saudi Arabia and the UAE have been speeding up their work on alternative pipeline routes, adding delays to shipments and contributing to further spikes in oil prices. For a country like Qatar, that lacks pipeline access out of the region, its exports would effectively be stuck in the Gulf. We still expect all parties to be committed to avoiding a military clash but misinterpretation between naval movements could cause a minor confrontation to escalate, possibly leading into more direct conflict between US warships and their Iranian counterparts or their shore-based support facilities.
The Middle East renewables market is one of two halves. There still doesn't appear to be much strong interest in developing renewable energy in the energy resource rich countries in the Gulf as they maintain investment in oil and gas and fuel intensive infrastructure projects. However, for countries in North Africa, real leg work has been done to make a dent in some countries energy deficits. Morocco is committed to spending up to US$9 on renewable energy. Algeria too has expressed some interest in developing renewables to allow more hydrocarbons for export.
Eurozone agrees second Greek bail-out.
Euro-zone finance ministers have finally agreed a second, €130bn bail-out plan for Greece. The bail-out package includes an agreement with private sector investors on a Greek debt-swap deal. The deal will cut the value of Greek bonds held by the private sector by 53.5% rather than the 50% agreed earlier, reducing Greece's debt burden further.
The aim is to bring Greece's public-debt-to-GDP ratio to 120% by 2020. For this purpose, euro zone leaders also agreed to lower the interest rate on the loans provided to Greece. Moreover, the profits made by the European Central Bank on its holdings of Greek government debt will be returned to Greece. Finally, the central banks of the member states will also pass on to Greece the income that they make from their holdings of Greek government bonds.
The deal is likely to ease investor concern about an imminent Greek default. Without the bail-out Greece would have faced the prospect of defaulting on a €14.5bn bond redemption due by March 20th.
However, many challenges remain. Particularly, the target of reducing Greek debt to around 120% of GDP is still optimistic. First, the target depends on the Greek government fulfilling its part of the deal by continuing to implement sharp budget cuts in the next couple of years. There is a general election likely to take place in April this year, and it is far from certain that the new government will remain committed to the bail-out conditions despite written pledges by party leaders. Opposition to fiscal austerity has been growing significantly in the country amid high unemployment (particularly youth unemployment), which will continue to fuel social unrest against austerity measures. The Greek government has already implemented deep public spending cuts and sharp tax increases, but has a record of missing targets and deadlines.
Second, the 120%-of-GDP target also depends on the Greek economy returning to growth, thus boosting tax revenues for the government and reducing social welfare payments. However, we expect the economy to remain extremely weak in 2012 and beyond (exacerbated by the deep fiscal-austerity measures), which may turn out to be the biggest obstacle to reaching the ambitious target.
- Finally, even if Greece were to achieve the 120%-of-GDP target , it is far from certain that this would constitute a sustainable level of debt. Economists regard a level of 60-80% of GDP as more suitable because it would allow debt interest payments to remain manageable.
Overall, the latest deal shows once again that Greece's international creditors focus primarily on debt repayment, highlighted also by the requirement for Greece to have a special escrow account for debt repayment and the requirement for Greece to change its constitution to prioritise debt repayment. We believe the country's ability to generate economic growth has been neglected so far, which is likely to keep Greek debt levels at unsustainable rates and may require another default (in addition to the private sector involvement), including by Greece's public lenders such as the ECB and euro zone governments.
Oil at new high after Iran moves
The UK and France are not major markets for Iran - Iranian oil only accounts for about 3% of French oil consumption and even less of UK consumption; the UK has not actually imported any oil from Ian in the last six months.Thus this latest move by Iran has not led to a price rise because it is going to lead to shortages of fuel in the UK and France, the price rise is more a reflection of concerns about the further escalation in tensions between Iran and the West. There are also countries in Europe that receive far larger amounts of oil from Iran - Italy and Greece, for example - and fears that Iran will extend its oil export ban to those more dependent countries. However, this seems unlikely. Oil revenue is the single factor sustaining Iran's economy at the moment and if it cuts off large export markets, it is not guaranteed that it will quickly find alternative markets for its oil. In contrast, banning the tiny quantities of exports to the UK and France involves very little risk for Iran- indeed quite the opposite, it catches the headlines and leads to a higher global oil price, which is something Iran is very keen to encourage.
UK retail sector forecast
The closure of over 5,000 stores last year will certainly be distressing news for retailers and for the economy in general. Especially since the news comes alongside ONS figures reporting a 0.4% drop in retail sales volumes in December and January. However, neither is unexpected given the recent highs in unemployment and the weakness of consumer sentiment in the economy. Encouraging more 'retailer friendly' conditions as the BRC suggest may certainly ease the pain for retailers a little, but the issue of mass closures is structural as well as cyclical. The explosive growth of online retail, the diversification of large retailers into non food and intensifying price competition have all squeezed the high street hard. Peripheral measures such as 'free parking ' in town centres as suggested by the Portas review may help in some cases but it seems unlikely that any action could restore the high street to its former glory as consumer habits evolve.
German president announces his resignation
The German president, Christian Wulff, has resigned after having seemingly weathered a scandal since late 2011 that had brought a series of unflattering revelations. The involvement of state public prosecutors in the affair proved to be a step too far Mr Wulff had already lost the trust of many Germans following the disclosure that he had leant on a popular tabloid, Bild, in a heavy-handed attempt to prevent it publishing details about a controversial mortgage that the president had taken out. The presidency is a largely ceremonial role, so the effect on policymaking is negligible. However, the position of federal president is considered to have a moral component as well, so the missteps with the press and other improprieties became a heavy burden that Mr Wulff could not ultimately relinquish.
