Eurozone economy grew tepid 0.3 pct in 4th quarter

By PAN PYLAS
AP Business Writer

(AP:LONDON) Europe's economic recovery failed to gather pace in the final three months of 2010, official figures showed Tuesday, amid heavy snow in a number of countries and a ramp up in austerity measures across the single currency bloc.

Eurostat, the EU's statistics office, reported that the 16 countries that were using the euro at the end of 2010 _ Estonia only joined in eurozone in January _ grew by 0.3 percent in the fourth quarter from the previous three month period.

Eurostat said that's below the 0.8 percent equivalent rate in the U.S. but better than the 0.3 percent decline in Japan.

The eurozone's growth rate was the same as the previous three month period and in line with forecasts. Germany and France, Europe's two biggest economies, grew less than anticipated _ Germany's 0.4 percent increase was modestly below expectations but France's 0.3 percent was half what was expected.

Further weighing on overall activity was the fact that two eurozone countries, Greece and Portugal, saw their economies contract as their governments imposed harsh spending cuts and tax increases to get their public finances into shape.

Greece, which received a euro110 billion ($148 billion) bailout from its partners last May, remained in a deep recession as its economy shrank by a further 1.4 percent during the fourth quarter. Figures for Ireland, the other eurozone country to need financial rescue, were not yet available.

Portugal, which is widely perceived to be the next most likely bailout candidate, posted a 0.3 percent decline, its first negative figure for a year. A country is not technically classified as being in recession unless it reports two consecutive quarters of falling output.

Despite the declines in Greece and Portugal, economic activity across the whole of the eurozone is expected to accelerate in the first quarter of 2011, if recent surveys are to be believed.

In its February survey, the ZEW institute reported Thursday that investors in Germany remain buoyant with more forecasting improving economic conditions over the coming six months than a renewed deterioration.

Eurostat also found that the wider 27-country EU grew by only 0.2 percent in the fourth quarter. The lower rate can be largely attributed to the surprise 0.5 percent contraction in Britain, reported last month.

BoE's King: Inflation Likely To Pick Up Further

Deficit is biggest as share of economy since 1945

(AP:WASHINGTON) Not since World War II has the federal budget deficit made up such a big chunk of the U.S. economy. And within two or three years, economists fear the result could be sharply higher interest rates that would slow economic growth.

The budget plan President Barack Obama sent Congress on Monday foresees a record deficit of $1.65 trillion this year. That would be just under 11 percent of the $14 trillion economy _ the largest proportion since 1945, when wartime spending swelled the deficit to 21.5 percent of U.S. gross domestic product.

The danger is that a persistently large gap in the budget could threaten the economy. Investors would see lending their money to the U.S. as riskier. So they'd demand higher returns to do it. Or they'd simply put their cash elsewhere. Interest rates on mortgages and other debt would rise as a result.

And if borrowing turned more expensive, people and businesses might scale back their spending. That would weaken an economy still struggling to lower unemployment, revive real estate prices and restore corporate and consumer confidence.

So far, it hasn't happened. It's still cheap for the government to borrow money and finance deficits. But economists fear the domino effect if all that changes.

" The moment when markets react negatively to our budget deficit cannot be known in advance, but we are absolutely in the danger zone," says Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business.

Higher interest rates would also raise interest payments on the federal debt. It would be costlier for the government to finance its operations. The interest payments themselves could then make the deficit increase, creating a vicious cycle.

Under the projections in Obama's budget, the deficit as a share of the overall economy would narrow from 10.9 percent this year to 7 percent next year and eventually to 2.9 percent by the 2018 fiscal year.

But after that, in the remaining years of this decade, the deficit would widen slightly as a percentage of the economy. It would average about 3.1 percent because of escalating costs for programs like Social Security and Medicare as baby boomers age and receive benefits.

Economists generally say cutting the deficit to about 3 percent or less of the economy would be healthy. Deficits at that level are considered " sustainable" _ meaning they could be easily financed and wouldn't make investors nervous about the government's finances.

Most economists don't think the deficit should be cut deeply now. They say the economy remains so fragile _ unemployment is at 9 percent _ that it needs big government spending to invigorate growth.

In this camp is Federal Reserve Chairman Ben Bernanke. He's argued that now isn't the time to slash government spending or raise taxes. Instead, Bernanke has urged Congress and the White House to preserve federal stimulus _ including tax cuts _ in the short run but draft a plan to reduce the deficit over the long run.

A presidential commission last year made recommendations that Bernanke and other economists say could help curb the deficit over the long term. Its suggestions included raising the Social Security retirement age and reducing future increases in benefits. It also proposed increasing the gasoline tax and eliminating or scaling back tax breaks, like the mortgage interest deduction claimed by many Americans.

Obama embraced none of these proposals in his budget. But his plan is designed to cut $1.1 trillion from the deficit over the next decade, two-thirds of it from spending cuts. The rest would come from tax increases, such as limiting the deductions for high-income taxpayers.

In Bernanke's view, a long-term plan to reduce future deficits would mean lower long-term interest rates and increased consumer and business confidence.

For months, though, longer-term rates have been creeping up, driven by prospects of stronger growth and concerns about higher inflation. The yield on the 10-year Treasury note is now 3.61 percent. That's up sharply from 2.48 percent in early November.

That increase is making other loans, including mortgages, more expensive. The average rate for a 30-year fixed mortgage just rose above 5 percent for the first time since April.

Rates are still extremely low by historical standards. In 1983, during Ronald Reagan's first presidential term, the deficit soared to $208 billion, about 6 percent of the economy at the time. The rate on the 10-year note topped 10 percent. And getting a 30-year mortgage meant paying 13 percent.

Economists say that if investors trust that Congress and the White House will curb budget deficits over the long haul, interest rates could stabilize _ even if deficits exceed $1 trillion over the next year or two. But if investors lose confidence that Washington policymakers can curb the deficits, rates could rise sharply.

" It's all about perception," says Lou Crandall, chief economist at Wrightson ICAP, a research firm.

So far, China, the biggest buyer of U.S. debt, and other countries have maintained their appetites for Treasurys. Foreign demand for Treasury debt has helped keep U.S. interest rates historically low.

The reason is that the United States is still considered a haven for many foreign investors. That point was underscored by Europe's debt crisis last year, when money poured into dollar-denominated Treasurys.

If the United States had to finance its debt through U.S. investors alone, the government, along with American companies and consumers, would have to pay higher rates.

Last year's budget deficit totaled $1.3 trillion. That was just under 9 percent of U.S. economic activity. The first time the deficit topped $1 trillion was in 2009.

The growth of U.S. budget deficits has reflected the costs of the wars in Iraq and Afghanistan, the continuation of broad tax cuts, the worst recession since the 1930s and a surge in spending on Social Security, Medicare and the military. The recession prompted higher government spending to stimulate the economy and cushion the effects of the downturn. It also reduced tax revenue.

The Organization for Economic Cooperation and Development estimates that the United States' deficit as a share of the U.S. economy will be smaller _ around 8.8 percent_ than the president's budget estimates.

Still, that would be a higher figure than for other major industrialized countries. The OECD projects, for example, that Britain's deficit this year will be about 8.1 percent of its economy. Germany's deficit is expected to make up 2.9 percent of its economy, Japan's 7.5 percent.

" So far, investors haven't been bothered by large U.S. budget deficits," says Jim O'Sullivan, economist at MF Global, an investment firm. " The fear is that could suddenly change. It's not clear whether investors will remain patient once the U.S. recovery is on track."

UK consumer inflation rate rises to 4 percent

By ROBERT BARR
Associated Press

(AP:LONDON) Britain's key inflation rate rose to 4 percent in January, according to official statisticians Tuesday, making it double the official target and adding pressure on the Bank of England to hike interest rates sooner than expected.

The report of higher consumer prices was in line with market forecasts and up from 3.7 percent a month earlier. The Bank of England's governor, Mervyn King, has argued that higher interest rates would be ineffective against inflation which he attributes to external factors including rising prices for energy and commodities.

However, at least two members of the nine-member rate-setting Monetary Policy Committee _ which got an advance glimpse of the figures for last week's policy meeting _ backed a modest hike in the key lending rate from a record low of 0.5 percent to 0.75 percent. King will have to write a letter to the government, to be published later Tuesday, explaining why the inflation rate remains above target.

The largest factors in the latest increase were the higher price of oil and an increase in the broad-based sales tax from 17.5 percent to 20 percent, the Office for National Statistics said. Excluding the tax hike, consumer inflation rose from 2 percent in December to 2.4 percent in January, the agency said.

Other upward pressures came from restaurant meals, furniture, alcoholic beverages and the cost of vehicles, the agency said. Downward pressures came in the prices of recreation and culture, banking services, clothing and footwear.

" The data do nothing to change the dilemma facing the Bank, whereby short-term price pressures are encouraging some members of the Monetary Policy Committee to hike interest rates, but others fear a rate rise will threaten the fragile recovery," said Chris Williamson, chief economist at Markit.

Worries grew about the recovery following a recent report that the economy shranky by 0.5 percent in the fourth quarter.

" The fact that the MPC held rates last week despite seeing these numbers suggests that, for now, the majority of committee members are still of the same mind," said Jonathan Loynes, chief European economist at Capital Economics. He added that analysts will be looking for further clues on Wednesday when the Bank publishes its quarterly report on the inflation outlook.

The ONS said the wider retail prices index rose from 4.8 percent in December to 5.1 percent in January. The RPI excluding mortgage interest payments rose to 5.1 percent from 4.7 percent.

Ahead of the Bell: Business Inventories

(AP:WASHINGTON) Businesses likely added to their inventories for a 12th consecutive month in December, signaling further gains in production at U.S. factories.

The consensus of economists is that businesses increase their inventories 0.6 percent in December. The Commerce Department is scheduled to release the new report at 10 a.m. EST Tuesday.

Inventories were up 0.2 percent in November, which had been the smallest gain since last May. But total business sales were up 1.2 percent in November after an even bigger 1.5 percent October increase.

Economists believe inventories will keep rising as long as sales remain strong and businesses have confidence that demand for their products will remain high. The rising demand is encouraging businesses to keep restocking store shelves and this activity has supported increased product at the nation's factories.

The November rise in inventories pushed them to $1.42 trillion, up 7.7 percent from the recent low of $1.32 trillion hit in September 2009.

Strong gains in both inventories and sales over the past year have been good news for many industries, which have been able to boost production and hire more workers.

Manufacturing has been one of the standout performers since the recession ended in June 2009.

 

Rio Tinto Chief sees no dip in Copper price for now

Rio Tinto PLC (NYSE:RIO) 74.27, +0.18, +0.24%, CEO, Tom Albanese forecasts continued volatility in Iron Ore prices, but said extra supply coming on line starting in Y 2013 should stabilize the market in the future, according to an interview over the weekend with the Australian Broadcasting Corp.’s Inside Business program.

Albanese also said he expects Copper prices, which have been at record levels this year, to remain high. “I think we will see a continued period of strong copper pricing, largely because many of the large mines, including our own, are seeing declining grades, and deepening pits,” Albanese said.

“But you will see new mines like our own in Oyu Tolgoi in Mongolia come on line. We are working on several new projects around the World and I know, certainly our competitors are working on their own projects too. So we will see new Copper supply coming in and that will begin again balancing out with demand.” —Paul A. Ebeling, Jnr. www.livetradingnews.com