“The Italian economy shrank by 0.2% during the quarter for the three months to December of 2018, following a 0.1% contraction in the previous period. This was slightly more than market expectations of a 0.1% decrease. It marked the second consecutive quarter of contraction so throwing the country into recession.
“Just to be clear; a recession is defined by economists as gross domestic product (GDP) falling for two consecutive quarters…
“Brexit is an issue for the wider EU, not just the Eurozone, however, one cannot overlook the fact that Italian economy has become a mounting reason of concern over the past few months. Just look at the movement of the 10-year spread of Italian government bonds over the German equivalent.
“This morning the spread is +242.3 basis points or 2.423%. The rolling 12-month average is just +217 basis points. The market is expressing its concern in the spread of Italian debt over the Eurozone benchmark.
“The EU Commission knows that with a debt to GDP ratio of 131.8%, Italy has the second largest debt burden in relative terms…second only to Greece. However, the Italian economy is eight times as large as that of Greece and given the Eurozone is still haunted by the memory of the debt crisis that required bailouts for several countries it has insisted that the Italian government rein back on its spending plans. To be blunt, Italy could not be bailed out. It is so large; a crisis would cripple the Eurozone…”
[Actually it would crippled the global economy. The Italian economy is the eighth largest in the world by nominal GDP and has the world’s third largest sovereign bond market].
“Nearly one in three British businesses are planning to relocate some of their operations abroad or have already shifted them to cope with a hard Brexit, according to a leading lobby group.
“The Institute of Directors (IoD) warned that 29% of firms in a survey of 1,200 members believed Brexit posed a significant risk to their operations in the UK and had either moved part of their businesses abroad already or were planning to do so.”
“Fears of a Eurozone slowdown have mounted after the economy stagnated at the end of 2018, growing just 0.2 per cent between the third and fourth quarters.”
“Instead of having goods delivered to their homes, consumers in China gain mianzi [face/kudos] by having shopping delivered to their offices, so their colleagues can see.
““Receiving the purchase at one’s office address may enhance one’s face and thus result in a positive emotional response, which compulsive buyers crave and strive to achieve,” the authors write.”
“The danger occurs because lower oil demand growth [from a weakening economy] in China comes just when independent refining capacity there is rising. The capacity growth has been financed primarily by debt, most likely supplied by China’s alternative lenders.
“As demand slows, these refiners will turn to international markets, dumping products in Singapore, the Americas, or Europe to earn hard cash. In doing so, they could plunge the global refining industry into a serious recession and drive crude prices down sharply.”
“Home prices in Hong Kong fell 2.4 per cent in December, practically wiping out virtually all of last year’s gains, according to government data released on Thursday.
“Last month’s decline means house prices have slipped 9.2 per cent since they reached a peak in July. Some small flats have lost up to 20 per cent of their value because of falling property prices, causing the negative equity trend to reappear.”
“Property prices in Sydney and Melbourne dropped sharply again in January as the decline in the once-booming housing market continues to gather pace.
“Prices in the Melbourne market fell by a huge 1.6% in the first month of the year, eclipsing even Sydney’s 1.3% fall, researcher CoreLogic said on Friday in its regular monthly release.”
“Factory activity shrank across much of Asia in January, falling to the weakest in years in several countries and adding to worries that trade tariffs and cooling demand in China pose an increasing threat to global growth.
“The weak Purchasing Managers Index (PMI) readings reinforce expectations that central banks in Asia will put any further interest rate hikes on hold this year.”
“The political and economic crisis requires Zimbabweans to have frank dialogue among themselves. Sadly, no amount of brutality by the state or noise on the streets by the opposition can resolve this crisis.
“As powerful and appealing as they are, the rhetoric of pan-Africanism, anti-imperialism, sanctions and boycotts will not bring stability and prosperity to Zimbabwe.”
“Iran, squeezed by punishing American sanctions, is confronting its most severe economic challenge in 40 years, President Hassan Rouhani said on Wednesday…
“Ordinary Iranians are feeling the pinch. There have been sporadic protests by laborers, retirees, truck drivers and teachers that have occasionally led to clashes with security forces. In a year, the national currency, the rial, has lost 70 percent of its value compared to the dollar. Inflation is over 35 percent.”
“Venezuela’s economic ruin poses a health threat to the Americas and potentially beyond, as diseases like measles and diphtheria re-emerge and spread to neighbouring countries, academics have warned.
“The country’s meltdown has been so profound its health system resembles that of a war-shattered state and people are no longer vaccinated for common infectious diseases.”
“Greg Ip of the Wall Street Journal thinks the Fed is signaling not a pause, but a complete halt in interest rate rises. And he has a theory about why the Fed has suddenly decided to end monetary tightening:
“”In the last six weeks Mr. Powell does seem to have shifted his views on inflation risk. He seems to have concluded that the lowest unemployment in 50 years isn’t going to push inflation back above 2% anytime soon, and that would be a prerequisite to tightening again.
“”If real rates above 0.5% are a threat to both economic growth and 2% inflation, then that suggests the economy is fundamentally more fragile than in the past.
“And he goes on to argue that the economic fragility that renders higher interest rates unsustainable is not confined to the U.S., but is a global phenomenon. Something has fundamentally changed since the 2008 financial crisis.”
“New research now shows that when central banks push rates below zero, it can have bad effects on the economy.
“”[…] we showed that a negative policy rate was at best irrelevant, but could potentially be contractionary due to a negative effect on bank profits,” states the paper titled: “Negative Nominal Interest Rates and the Bank Lending Channel,” by researchers at Harvard University, Brown University, and Norges Bank. The authors include Lawrence Summers, former U.S. Secretary of the Treasury and one-time president of Harvard.”
“For almost 40 years, we’ve lived in an era of low rates and easy money. It let governments and businesses worldwide run up piles of debt.
“Global debt could easily reach $500 trillion in a few years. And yet everyone acts like that is normal and can continue.
“Just like subprime mortgage debt triggered the last recession, corporate debt will trigger the next one. This will start a liquidity crisis and create havoc in all sorts of “unrelated” markets.”