INSIGHT: US economy cooling in anticipation of new European winter

14 June 2012 15:36  [Source: ICIS news]

By Joe Kamalick

EU and US economies may turn on Greek vote SundayWASHINGTON (ICIS)--As Greeks head to the polls this weekend for a pivotal election that could doom the euro and eurozone unity, the already sluggish US economic recovery seems to be cooling further in anticipation of a new European winter.

As perhaps everyone in Europe and the US knows, Greece will hold a do-over parliamentary election on Sunday – a vote that is widely regarded as a referendum on the nation’s continued participation in the eurozone.

The Greek New Democracy Party, which favours the European bailout package and its attending austerity measures – which have been broadly and sometimes violently opposed by the Greek man in the street – is said to be in a dead heat with the anti-bailout Coalition of the Radical Left (SYRIZA).

Fuelled by popular discontent over EU-imposed austerity, lay-offs and wage cuts, SYRIZA rose to unprecedented prominence in the inconclusive 6 May parliamentary election, promising to end the austerity deal.

In a lengthy speech earlier this week, SYRIZA leader Alexis Tsipras declared that if his party wins the most votes in Sunday’s election and can form a government, “[SYRIZA] will cancel” the bailout agreement and its attending austerity measures.

Tsipras has also said that his party would not necessarily want to abandon the euro and exit the eurozone, but if a SYRIZA-led government cancels the EU bailout deal, Athens would likely be forced out of the eurozone anyway.

However, German finance minister Wolfgang Schauble warned that a new Greek government cannot have it both ways – keeping the euro and dumping the bailout agreement.

“If Greece, and this is with the will of the great majority, wants to stay in the euro, then they have to accept the [bailout] conditions,” Schauble said, adding: “Otherwise, it isn’t possible.”

No one really knows what might happen if Greece, willingly or not, abandons the euro, but horror stories abound that the Greek blow to the euro could set off a domino effect that could quickly topple the already tottering economies of Spain, Portugal and Italy – and perhaps Ireland too.

In that collapsing currency scenario businesses in Europe and elsewhere would pull back, with those who have capital sitting tight on whatever cash they have, and those without liquidity likely unable to get credit.   

Some forecasters warn that in a chaotic Greek exit from the eurozone – and the collapse contagion spreading elsewhere – Europe would tip into a severe recession, with contraction approaching double digits.

That in turn would all but dry up the major market for US exports, which have played a principal role in sustaining the wobbly US recovery, such as it is.

The outcome of Sunday’s Greek election could shape the EU and US economies for years to come.

In testimony last week before Congress, US Federal Reserve chairman Ben Bernanke indicated that fears among American businesses over a possible financial conflagration in Europe have already rattled the US economy.

“Concerns about developments in Europe, US fiscal policy and the strength and sustainability of the recovery have left some firms hesitant to expand capacity,” or hire more workers, he told the Joint Economic Committee of Congress.

“Concerns about sovereign debt and the health of banks in a number of euro-area countries continue to create strains in global financial markets,” Bernanke told the panel. “The crisis in Europe has affected the US economy by acting as a drag on our exports, weighing on business and consumer confidence and pressuring US financial markets and institutions.”

Putting it mildly, Bernanke said: “The situation in Europe poses significant risks to the US financial system and economy.”

Worries about possible knock-on effects of a deepening EU financial crisis have contributed to increased anxiety among American business owners, who as a consequence are holding back on capital spending and new hiring.

The National Federation of Independent Business (NFIB) said this week that its index of small business optimism fell marginally in May to a reading of 94.4, which is “historically low”.

NFIB chief economist William Dunkelberg said that the record low index is “consistent with the sub-par performance of GDP and employment growth”.

US GDP growth in the first quarter of this year was 1.9%, down from the fourth quarter 2011 GDP performance of 3%, and the US unemployment rate inched up to 8.2% in May.

“In the last year, small business optimism has limped along, and today the sector is no better off than it was just over a year ago,” Dunkelberg said. “The lack of progress is discouraging, producing no signs that economic activity will pick up this year at all." 

The wellbeing of US small businesses is critical, because it is small firms – defined as those with fewer than 500 employees – that generate most new jobs across the country.

Dunkelberg said that in making spending and hiring plans, small business owners must consider likely future sales, tax rates, credit availability and interest rates, labour costs, health care expenses and regulatory compliance costs – “all of which are very uncertain”.

“Investments in jobs or plants and equipment are not the priority when people are still bracing for the worst,” Dunkelberg said.

“Levels of hiring and spending remained depressed in May, as did plans to do more in the near future,” he said, adding: “Expectations for increasing future sales continued to be weak, far below readings recorded in any other recovery period since 1973.”

The NFIB said that the percentage of business owners who expect better business conditions in six months was a negative 2%.

In addition, the group said: “More owners still expect the economy to deteriorate further than those who anticipate improvement.”

Hard on the heels of the decline in small business confidence, the Commerce Department reported that US retail sales – a key measure of consumer spending and sentiment – fell by 0.2% for the second month in a row in May from April.

In its monthly report, the department said that retail sales last month were $404.6bn (€319.6bn), down by 0.2% from the April figure of $405.3bn. April also saw a 0.2% decline from the March figure of $406.2bn.

Consumer spending is a critical element of the US economy, accounting for as much as 70% of all commercial activity and production.

Jack Kleinhenz, chief economist at the National Retail Federation (NRF), said the two-month downturn in retail sales suggests that “the economy thus far is working like an old machine with many fits, starts and even some sputtering.”

Some economists worry that the two-month decline in consumer spending, while marginal, suggests that households are getting more cautious and concerned about the viability of the still-sluggish US recovery.

In parallel with the April-May decline in retail sales, a key measure of consumer confidence also saw downturns in the same two months, according to US-based business analysis firm Conference Board.

With only 1.9% GDP growth in the first quarter this year, unemployment edging up again, confidence waning among small businesses and consumers and retail sales in decline, the US economy already is highly vulnerable to any major shock.

That blow could be delivered by Greek voters on Sunday.

($1 = €0.79)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy


By: Joe Kamalick
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