THIS was a week in which consumers and equity markets across Europe decided to defy the doomsayers. Had no-one told them about the Greek election? And what about the new data from the Institute of Fiscal Studies (IFS) reminding us that real incomes in the UK are well down on their 2008 high?
Yet by Friday, the pan-European FTSEurofirst 300 was heading for its best monthly performance in three years. Investors studiously ignored the threat of a Greek exit from the euro-zone – either voluntary or booted out. Instead they reacted positively to strong retail sales in Germany, which is after all the EU’s biggest economy.
German consumers were not the only folk heading for the shops. Spanish retail sales leapt 6.5 per cent (year-on-year) in December, the biggest increase since 2003. Ditto French consumer spending, which rose 1.5 per cent in December. Across the Channel, UK consumer confidence rose more than predicted in January, reversing December’s pre-Christmas low.
Big oil can ride out the storm of low prices
Why are consumers more perky? It might be the immediate impact of falling oil prices boosting real spending power. Brent crude seems to have settled at $45-$50 a barrel, but the US is posting its biggest surplus oil inventories since the Great Depression. There is no telling where the market floor might drift before that surplus dries up.
One interesting development is that the oil price fall has probably reversed the fortunes of the big, integrated oil majors like Shell and Exxon – for the better.
Prior to the price collapse, these firms were considered dinosaurs carrying much debt. But in an era of retrenchment, the industry’s traditional behemoths are in the best position to ride out a prolonged period of low prices, because they can divest assets to raise capital. It is the smaller oil service firms that face a cull.
Draghi knows better than Berlin on QE
How will things play out in Greece? Technically, the new Greece government of Alexis Tsipras could run out of funds quite quickly. Greece is scheduled to repay €3.4 billion (£2.6bn) over the next couple of months. However, behind the scenes, the European Central Bank is still providing liquidity for Greek banks. If the ECB were to cut off liquidity, the Syriza government would be forced to nationalise the banks, impose capital controls, and most probably reintroduce the drachma within days.
We are clearly in a negotiating scenario. Syriza wants enough debt and austerity remission to reboot spending and investment. Without investment, productivity will never recover, nor growth with it. This is hardly the stuff of Marxist revolution. Indeed, the first thing Tsipras did was to signal he was prepared to be pragmatic: “We are fully aware that the Greek people haven’t given us carte blanche.”
Is Berlin in a mood to listen? The impediment lies not in Athens but with the ECB. Berlin is furious with Mario Draghi, the Italian boss of the ECB, who has instituted a programme of quantitative easing (QE) in the teeth of German opposition. The über-conservative Bundesbank fears Draghi’s move to prop up the price of eurobonds will encourage Portugal, Italy and Spain to abandon austerity. Berlin fears that letting Greece off its debt hook could open the flood gates. Berlin is wrong. It is Draghi’s version of QE that has sustained optimism in the equity markets this week, despite Greece.
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