Last week, we learned that the British economy grew at its
fastest pace in over four years, with a +1.1% rise in
second-quarter GDP, much stronger than economists' consensus
estimate of a +0.6% rise. Also, Germany's Ifo business sentiment
survey surged to 106.2 in July, up from 101.8 in June. Economists
had expected a sentiment decline in July, so this surge shocked
the pundits. In a similar surprise, the ISAE Italian consumer
confidence index rose to 105.6 for July, vs. a revised 104.5 for
June and an analysts' consensus forecast of just 103.9. For icing
on the cake, Europe aced its banking "stress test" on Friday:
Only 7 of 91 banks (5 of them in Spain) failed to survive the
"worst imaginable" scenario.
This is an amazing turnaround for a continent that had been
relegated to the economic trash heap last spring, due to riots in
Greece and troubles in Spain. The continent once maligned as
"socialist" has re-embraced government austerity as the
old-fashioned solution to its debt problems. Despite recent
credit downgrades in both Ireland and Portugal, the euro has
soared lately - defying the skeptics once again.
There's another reason why Europe is happy these days. There's
only one week left in July! I must admit that my European friends
tell me that sentiment tends to be on the rise in late July,
since August is right around the corner and many Europeans take
their traditional month-long vacation in August!
Maybe the European Central Bank (ECB) President, Jean-Claude
Trichet, is entitled to a little crowing. In a
article on Thursday, he said that public spending cuts and tax
increases should be imposed immediately throughout the
industrialized world. Trichet argued that policymakers who want
to keep "stimulating" (i.e., running higher deficits) are
mistaken. He said that cutting borrowing would not hinder growth.
Trichet also took a shot at the Obama Administration and the
International Monetary Fund (
) by criticizing the results of their 2009 push for budgetary
stimulus, saying, "With the benefit of hindsight, we see how
unfortunate was the oversimplified message of fiscal stimulus
given to all the industrial economies under the motto:
'stimulate', 'activate', 'spend.'" It is highly unusual for the
ECB to criticize U.S. policies, but Trichet is clearly emboldened
by the success of Europe's austerity programs.
Meanwhile, the debt picture isn't so rosy in the U.S. as
deficit projections have been increased. Turning a deaf ear to
Europe's pleas, the White House raised its forecast Friday for
the fiscal 2011 federal budget deficit to $1.4 trillion, or about
9.2% of GDP, up from its previous projection of $1.267 trillion.
Not only are the federal budget deficits for 2009, 2010 and 2011
well above $1 trillion, but the White House is projecting $8.5
trillion of additional debt over the next decade. Also, the White
House expects the U.S. unemployment rate to only decline to 8.1%
by 2012. This is after saying (last year) that the 2009 stimulus
(spending) package would help keep the jobless ratebelow 8% for
the foreseeable future.
The White House budget office's higher projected deficit
numbers reflect the expected impact of the new healthcare law,
the financial-regulation bill, the new student loan laws and
other measures enacted since the fiscal 2011 budget was first
drafted. Ironically, the White House budget office said the
healthcare law, which was initially promised to cut deficits (or
at least be budget-neutral), is expected to add $51 billion in
debts from 2010 to fiscal 2012 - even before the plan takes full
effect. While Europe prospers, despite austerity cuts, the U.S.
is continuing to add new federal programs to balloon our deficits
Last Wednesday, Federal Reserve Chairman Ben Bernanke told
Congress that plans for further easing were still in the
preliminary phase. Bernanke also told Congress that the economic
outlook remains "unusually uncertain" and that he saw no
immediate relief for the weak job market. Wall Street sold stocks
on the assumption that the Fed was running out of policy bullets
to stimulate the U.S. economy.
However, Chairman Bernanke must have slept well Wednesday
night, because he said on Thursday that the Fed was "ready to
take further steps" to stimulate the U.S. economy if growth turns
out to be weaker than expected. This seemed to reassure Wall
Street, as the S&P 500 rose by 2.25% on Thursday. Also, since
the Fed promised to keep interest rates extra low for an extended
period of time, stocks will appear more attractive, since
investors are increasingly getting frustrated with earning
near-zero interest rates.
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