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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (until 2.15) and Nick Fletcher

US economy contracts thanks to strong dollar and poor weather -as it happened

A National Bank branch in central Athens.IS
A National Bank branch in central Athens.IS Photograph: Yannis Kolesidis/EPA

European markets fall back

The continuing uncertainty over Greece as talks to resolve its financial crisis continue over the weekend has pushed shares sharply lower once more. The usual conflicting comments from various parties unsettled investors, with an increasing number of insiders now talking about a possible Greek exit from the eurozone. Added to the downbeat mood were US figures showing GDP contracted by 0.7% in the first quarter. The final scores showed:

  • The FTSE 100 fell 56.49 points or 0.8% at 6984.43
  • Germany’s Dax dropped 2.26% to 11,413.82
  • France’s Cac closed 2.53% lower at 5007.89
  • The Athens market lost 1.44% to 825.38

On Wall Street, the Dow Jones Industrial Average is currently down 54 points or 0.3%.

On that note it’s time to close up for the evening. Thanks for all your comments, and we’ll be back next week.

More optimism from Greece:

Back to Greece, and the country could still stay in the euro even if it defaults (remember it has €1.6bn to pay to the IMF next month.)

That’s the view of Moody’s ratings agency in a note seen by the Financial Times. It quotes Moody’s saying: “A Greek exit from the euro is not an inevitable consequence of default. The decision to split would be a political act.”

The FT report is here (£):

Here’s our story on the US GDP figures:

A harsh winter, a strong dollar and falling oil prices took their toll on the US economy in the first quarter, the Commerce Department revealed on Friday.

US gross domestic product (GDP) – the broadest measure of economic growth – shrank at an annualized rate of 0.7%. The Commerce Department had previously estimated output grew 0.2% from January through March.

The quarterly economic decline is the first since the economy shrank by an even sharper 2.1% annual rate in the first quarter of 2014. A bleak winter also contributed to that decline as consumers stayed home and some businesses closed.

Business investment fell at a 2.8% pace and exports declined 7.6%, hurt by the strength of the dollar. Consumer spending, which accounts for more than two-thirds of economic output, grew by 1.8% on an annual basis. In the fourth quarter – traditionally the best quarter for consumer spending – it grew 4.4%.

The full report is here:

And to make a trio of disappointing US numbers, consumer confidence fell to a six month low in May.

The University of Michigan consumer sentiment index fell to 90.7 from a revised 95.9 in April, the biggest decline since the end of 2012.

But it was an improvement on the preliminary May figure of 88.6 and economist expectations of a 89.9 reading.

More downbeat numbers from the US.

The Chicago Purchasing Managers Index came in at 46.2 in May, compared to 52.3 the previous month and forecasts of a figure of 53. This is the lowest level since February.

Updated

Wall Street has opened lower after the revision of the US GDP figures to show a contraction in the first quarter.

The Dow Jones Industrial Average is curently down around 50 points or 0.28%. But analysts are not getting too concerned about the US numbers. Dr Harm Bandholz at Unicredit said:

Now we have it in writing: The US economy had another dismal start into the year, with real GDP shrinking an annualized 0.7%. This marks the third time in the past five years that first-quarter GDP growth in the US was negative. As there has been no other quarter with negative GDP growth during that time, the debate about potentially flawed seasonal adjustment procedures has been heated. The Federal Reserve, however, did not find any evidence of material residual seasonality, and blamed instead “statistical noise, unusually harsh weather, and other idiosyncratic factors” for this recurring pattern. We agree and think that transitory factors, such as the inclement weather and the port strikes, played the major role.

The fundamentals for a solid acceleration of the US economy all remain in place. This holds true in particular for consumer spending, the main growth engine. In addition to a continuation of solid payroll gains and an ongoing acceleration in wage increases, we expect the savings rate to reverse its latest increase. This gives another boost to consumer spending. Moreover, the Federal Reserve highlighted in its latest minutes that “business contacts in several parts of the country continued to be optimistic and expected sales, investment, and hiring to expand over the rest of the year.” To be sure, while the anticipated rebound in the data is beginning to materialize right now, it started some weeks later than we originally thought. This may affect the quarterly growth pattern (with slightly weaker growth in the second quarter of 2015, and stronger gains in the second half of 2015). But overall, we remain confident that real GDP growth between the second quarter of 2015 and fourth quarter of 2015 will average 2¾% to 3%.

Back with Greece, and could there really be hopeful signs that things could finally be resolved? Or is any optimism still on the Greek rather than the creditor side?

And it’s not just the US and Canada:

Canadian GDP shrinks too

Canada’s economy also struggled in the last quarter.

New data shows its GDP shrank by an annualised rate of 0.6% in January-March, the biggest contraction since 2009.

The mining, quarrying, oil and gas extraction, construction, wholesale trade and manufacturing sectors all suffered a drop in output, according to Statistics Canada.

Updated

US consumers still drove the economy forward, as this breakdown shows:

Bad weather, less investment in oil exploration, and a port strike all drove the US economy into contraction, says Nancy Curtin, chief investment officer at Close Brothers Asset Management.

She agrees that growth should now be picking up:

“Confidence has rebounded, the job market is buoyant and robust housing market data of late offers a much brighter outlook than the first quarter figures suggest. Equally, lower oil prices should contribute to an uplift in consumer spending, further boosting growth as the year progresses.

Thanks to the fundamental strength of the economy, the Fed seems resolved to hike rates this year, although this will be patient and incremental, rather than drastic.”

The US economy is expected to bounce back in the current quarter, avoiding a recession.

Chris Williamson, chief economist at Markit, says recent data has been encouraging:

“The decline has already been largely shrugged off as a temporary blip by policymakers, linked to extreme weather, port closures and what looks to be a regular pattern in the official data of the economy weakening at the start of the year. Survey evidence is already pointing to a second quarter pick-up.

Markit’s flash PMI data, for example, have signalled robust growth, especially in the service sector. The monthly data are running at levels broadly consistent with 2-3% annualised GDP growth in the second quarter. Job creation has also held up surprisingly well.”

Should we panic that economic activity across America fell last quarter?

Dennis de Jong, managing director at UFX.com, says no.

He blames some one-off factors for the poor performance, plus the wintery weather, and reckons the broader outlook is still bright

“Fed Chair Janet Yellen will know that particularly poor winter weather, a strong dollar and an unstable energy sector weighed heavily on the data and all signs point to an immediate and strong turnaround.

Once consumers start to spend the extra cash generated by cheaper gas prices as expected by many, Yellen and Co. will start to think seriously about raising interest rates.


As I was saying...

Strong dollar eats into US growth

The US economy is suffering from the strength of the dollar.

This new data shows that exports shrank by 7.6% during the quarter, while imports rose by 5.6%. The resulting trade gap is a drag on GDP.

And corporate profits also took a hit -- down by 8.7% after tax.

The fall in US GDP isn’t quite as sharp as feared, but it still shows the world’s largest economy hit a soft watch over the winter.

US economy contracts

BREAKING: The US economy contracted in the first three months of the year.

Revised data shows that US GDP actually shrank by 0.7% on an annualised basis (or around -0.17% in true quarter-on-quarter terms).

That’s down from an initial estimate of 0.2% annualised growth (0.05% q/q), which was already quite meagre.

Updated

Lunchtime summary: Greece in recession as bank deposits bleed away

Time for a very brief recap, before we get the US growth (or non-growth?) figures at 1.30pm BST.

Greek bank deposit levels have fallen to their lowest level in over a decade, as fears intensify that it could face capital controls or a default without a deal with creditors soon.

The country is also officially back in recession, after GDP shrank by 0.2% in the first three months of 2015.

German finance minister Wolfgang Schäuble has warned that the optimistic news from Greece does not match what he hears from its creditors.

Speaking at the G7 meeting in Dresden, Schäuble also said that Greece must get a deal by 30 June.

German Bundesbank President Jens Weidmann (R) and German Finance Minister Wolfgang Schaueble address a news conference at the G7 finance ministers and central bankers meeting in Dresden, Germany, May 29, 2015. Positive indications from Athens on reaching an agreement on a cash-for-reforms deal are not reflected in talks with its creditors, Schaeuble said on Friday. REUTERS/Fabrizio Bensch
German Bundesbank President Jens Weidmann (right) and German Finance Minister Wolfgang Schaueble address a news conference at the G7 finance ministers and central bankers meeting in Dresden, Germany, May 29, 2015. Photograph: Fabrizio Bensch/Reuters

US Treasury secretary Jack Lew has urged both sides to crack on and get a deal soon.

Jean-Claude Juncker, EC president, is still confident of a deal “in the days or weeks ahead”.

But Greece’s deputy PM has criticised the lack of ‘political will’ to get a deal.

And the uncertainty is weighing on Europe’s stock markets, which are mainly in the red or flat today.

Traders work at their screens in front of the German share price index DAX board at the stock exchange in Frankfurt, Germany May 29, 2015. REUTERS/Stringer
The stock exchange in Frankfurt, Germany, this morning. Photograph: Stringer Shanghai/Reuters

Here’s our latest news story, wrapping up all the main developments

Greece needs to step up and produce a credible set of reforms, to pave the way to a deal, says Treasury secretary Lew.

US Treasury secretary blasts lack of Greek progress

Jack Lew sounds exasperated with the lack of progress over Greece this year.

Too much time has been wasted this year, the US treasury secretary tells reporters at the G7. Both sides need to get serious, fast.

Jack Lew is also warning that the consequences of Greece leaving the eurozone can’t be fully predicted.

That’s a message he also hammered home in London on Wednesday.

US Treasury secretary Jack Lew is now giving a press conference in Dresden - and begins by subtly chiding Germany over its trade and budget surpluses.

Wolfgang Schäuble is fielding more questions on Greece.

He tells reporters at the G7 meeting in Dresden that although other European leaders may have “different views with the Greek leaders”, we all share a common responsibility for Europe.

We will do everything possible to live up to our responsibilities, he pledges.

And he also points out that Greece’s leaders have a democratic mandate.

As Schäuble puts it:

The Greek government are the representatives of the Greek people, and that is why they deserve respect.....

And he concludes by insisting that while it’s not a marriage of love:

I have no personal problem with my colleague [Greece’s Yanis Varoufakis].

And that’s the end of the press conference.

Updated

Here’s confirmation that EC president Jean-Claude Juncker has predicted a Greek deal soon...

Schäuble: Greece has until 30 June

Onto questions...

How much time is left to get a deal with Greece?

Wolfgang Schäuble replies that we have until the end of June, when the existing programme runs out.

As things stand, that programme will expire if there is no agreement.

Updated

Weidmann says that the G7 policymakers see “considerable merit” in establishing a bankers code of conduct, to address the string of recent scandals.

These scandals relate to the mindset in the financial industry, and the misconduct individuals. And individual integrity and good conduct is beyond the reach of regulation.

The task of reshaping the global financial system after the crisis is not finished, says Weidmann.

Policymakers at the G7 meeting agreed to press on and complete the job, including removing the problem of “Too big to fail” banks.

Bundesbank president Jens Weidmann now gives a statement.

We can’t blame bad luck for the disappointing economic growth seen across the world economy in recent years, Weidmann says. He cites demographic factors, weakening productivity growth as factors that have hurt potential growth in recent years.

(reminder, the press conference is live here)

Schäuble: G7 only discussed Greece briefly

We had a brief discussion on Greece, Schäuble says, only for a few minutes.

And then he takes a pop at Athens, saying that the positive noises out of Greece do not match what the G7 was told by the institutions

We stand ready to help Nepal after the tragic earthquake this month, which may include debt relief, says Schäuble.

We had a very intensive debate on terrorist financing, Schäuble continues. He cites virtual currencies as an area of concern.

On tax issues, we agreed that we must co-operate to boost tax fairness, and to improve cooperation between national tax bodies, Schäuble tells the G7 press conference.

It is feasible to make progress here, and to improve everyday tax administration. We need to work more with developing countries too.

Schäuble speaks first, saying the G7 meeting was “most successful”.

Of course, the ministers, central bank governors and economists didn’t agree on everything....they never do. But we had a fruitful discussion on how to boost economic growth and make the global economy more resilient.

There was full agreement on the need for structural reforms -- ambitious structural reforms to stimulate private sector investment and boost productivity.

Updated

The G7 closing press conference with Wolfgang Schäuble and Jens Weidmann is starting now.

This live feed has an English translation

A flurry of quotes from EC president Jean-Claude Juncker just hit the wires; none of them suggest a breakthrough is imminent (he’s in Toyko for a Japan-EU summit)

The selloff in Europe’s stock markets is accelerating, as investors fret about Greece.

The German DAX is the worst performer, down over 1%.

European stock markets, May 29 2015
European stock markets, May 29 2015 Photograph: Thomson Reuters

Daniel Sugarman of ETX Capital says traders are worrying about next month’s IMF repayments (despite Yanis Varoufakis insisting he has it under control):

European markets continued to feel the ongoing effects of the situation in Greece, with fresh fears that the country will be unable to make yet another repayment due to the IMF. The Greek government has still not made it clear how it intends to make the €1.6 billion repayment, the first tranche of which falls due next Friday.

Updated

Heads-up: Germany’s finance minister and central bank chief will be giving a press conference at the G7 meeting in Dresden, in around 40 minutes time.

Greece’s long slump is even worse than the Great Depression of the 1930s....

The Great Depression ended after president Roosevelt took a range of drastic measures, including suspending the gold standard in 1933. Greece, though, wasn’t able to weaken its own currency so had to undergo such a painful ‘internal devaluation’.

Updated

Greek recession confirmed

More gloom for Greece -- statistics body ELSAT has just confirmed that the country is back in recession.

Updated GDP data showed that the Greek economy shrank by 0.2% in the first three months of 2015, in line with the initial estimate earlier this month.

Greek GDP

The detail of ELSTAT’s report (online here) paints a pretty weak picture.

Investment by companies and the government, or “gross fixed capital formation” tumbled by 7.5% compared with the 4th quarter of 2014.

That suggests firms basically stopped spending amid the political uncertainty, as the government tightened its own belt too.

Exports fell by 0.6% quarter-on-quarter, while imports decreased by 0.7%.

Greece’s economy had returned to growth last year, after plunging into a deep slump after accepting harsh austerity measures in return for two bailouts.

But the “recovery” quickly stumbled. Greek GDP shrank by 0.4% in the final three months of last year; two consecutive quarters of contraction equals a recession.

Updated

Last month’s hefty withdrawals are part of a wider pattern.

Greek banks have been suffering deposit outflows since December 2014, when the previous government called a general election after failing to elect a new president.

This chart from Credit Suisse’s Neville Hill shows how it slowed down after Greece won a four-month bailout extension in late February:

Greek bank deposits fall to lowest since 2004

Worried Greeks pulled €5.6bn out of their accounts last month, as the country’s banks continue to bleed.

Official data just released shows that Greek bank deposits fell to €139.4bn in April, down from €145bn in March.

That’s the lowest level since 2004, as fears of a default, capital controls or even a full-blown Grexit continue to alarm depositors.

This could just send a shiver through the G7 meeting in Dresden and the negotiations in Brussels. Not to mention households across Greece.

Bank deposits had been fairly stable last year, but have been steadily falling since the start of 2015, forcing the ECB to provide more and more help (€80.2bn of emergency liquidity at the last count)

Updated

The picture is brighter in Italy this morning. The Italian stats office has just confirmed that the economy grew by 0.3% in the last quarter.

That’s in line with the initial estimate two weeks ago, and means Italy’s economy expanded for the first time since autumn 2013.

Greek finance minister: We want a comprehensive deal with debt relief

Yanis Varoufakis made some interesting points in his interview with Vima FM radio station, and a couple of perplexing ones.

He said:

  • Greece is aiming for a single, comprehensive agreement with the creditors that will involve debt relief.
  • Greek negotiators are resisting pressure to accept “permanent recessionary measures”, including raising VAT rates.
  • Greece will not implement a transaction tax on bank withdraws, as has been rumoured (he claims the idea came from the creditors too)
  • He also claimed that Greece could raise taxes without hurting economic demand, if they also promoted the redistribution of wealth in the economy.....
  • And no-one should panic about Greece’s ability to repay the International Monetary Fund next month. Yanis has it in hand.

Updated

You can hear Yanis Varoufakis’s radio interview here (it’s in Greek.....)

Thanks, Greek Analyst!

Greek finance minister Yanis Varoufakis is speaking on Greek radio now.

I’m afraid I’ve not got the link, but the key points are being tweeted:

Swiss economy contracts

As if the Fifa scandal wasn’t bad enough, Switzerland has been hit with the news that its economy is shrinking.

Swiss GDP fell by 0.2% in the first three months of the year, worse than the stagnation which economists expected.

The strong Swiss franc is being blamed. It soared in January after its central bank gave up trying to keep it artificially weak; that made Swiss exports less competitive.

As the State Secretariat for Economic Affairs put it:

“The trade balance in goods and services in particular delivered negative growth contributions.”

More news from the G7 meeting in Dresden, from French finance minister Michael Sapin.

I think we knew that already.....

Updated

Worries about Greece are weighing on Europe’s stock markets again. They’re mostly down in early trading:

European stock markets, May 29 2015
European stock markets, May 29 2015 Photograph: Thomson Reuters

Stan Shamu of IG believes markets will remain edgy until a deal is reached:

I suspect there will be plenty of headlines about Greece driving volatility in coming weeks as €1.6 billion is due over four tranches.

Moscovici: We are dedicated to keeping Greece in the euro

Pierre Moscovici

What about Christine Lagarde’s comment that Greece could leave the euro, Commissioner Moscovici?

He replies that this is “not the scenario of the Commission”.

We are dedicated to have Greece staying in the eurozone, a solid Greece, a reformed Greece.

And there is “true solidarity” between the Institutions (Greece’s lenders) Moscovici tells CNBC’s Steve Sedgwick.

But being prepared and responsible, have you worked on a plan B for Grexit, in case a deal isn’t reached?

No, I don’t consider that, Moscovici insists. We have one plan, one action, one will, to keep Greece in the eurozone.

Updated

European commissioner Pierre Moscovici is the first policymaker to break cover from the G7 this morning.

He told CNBC thatthere’s been “good progress” between Greece and lenders.....

....but more work needs to be done, including on Greece’s pensions.

Updated

Greece’s deputy prime minister, Yannis Dragasakis, has claimed that ‘political will’ is the missing ingredient needed for a deal (explaining why his boss phoned the leaders of Germany and France last night)

Updated

Introduction: Greek talks, and US growth figures

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

We’re coming to the end of another week that started with hopes of a breakthrough between Greece and its creditors, but has seen little evidence of progress since.

Talks between the two sides will continue in Brussels today, and over the weekend, to close the gap on labour market reform, pensions, VAT rates and Greece’s budget targets. The same issues they’ve been split over for weeks.

Greece hopes for a deal by Sunday, but its lenders remain quite sceptical. Last night’s warning from Christine Lagarde that Greece could potentially leave the euro shows that policymakers still believe the crisis could spiral.

As Lagarde argues, Grexit wouldn’t be “a walk in the park”, but would “probably not” mean the end of the euro.

Greek PM Alexis Tsipras spoke with German Chancellor Angela Merkel and French President Francois Hollande in a teleconference call last night, in an attempt to drum up a ‘political’ deal to break the deadlock.

The Kathimerini newspaper explains:

The three leaders spoke for about an hour and government sources referred to “a positive climate.”

The exact content of the conversation remained unclear but it is thought Tsipras asked Merkel and Hollande to make good on a pledge they made at an EU leaders’ summit in Riga last week to help overcome potential obstacles in the negotiations.

As we covered yesterday, the Greek crisis was occupying the minds of the G7 finance ministers and central bankers yesterday. Not officially on the agenda, but ‘on the sidelines. For example:

G7 Finance Ministers and National Bank Governors sipping champagne before their evening meal at the Schloss (Castle) Wackerbarth in Radebeul, Germany, last night.
G7 Finance Ministers and National Bank Governors before their evening meal at the Schloss (Castle) Wackerbarth in Radebeul, Germany, last night. Photograph: THOMAS KOEHLER / PHOTOTHEK / BMF / POOL HANDOUT/EPA
President of the World Bank Group Jim Yong Kim takes a glas champagne before a dinner during G7 summit of finance ministers at at Schloss Wackerbarth in Radebeul, eastern Germany, on May 28, 2015. The finance ministers and central bank governors of the Group of Seven (G7) countries meet in Dresden to discuss the health of the global economy and financial regulation, but Greece is also almost certainly to be on the agenda. AFP PHOTO / ROBERT MICHAELROBERT MICHAEL/AFP/Getty Images
President of the World Bank Group Jim Yong Kim and a group of waiters. Photograph: Robert Michael/AFP/Getty Images

Those G7 ministers will continue to discuss the global economy in Dresden today, so let’s hope they didn’t overdo the champagne.

Also coming up today....

We get the second estimate of US growth in the first quarter of this year, at 1.30pm BST.

The first estimate, of annualised growth of just 0.2%, could actually be revised even lower.

We’ll be tracking all the main events through the day:

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