Last week, we learned that the British economy grew at its fastest pace in over four years, with a +1.1% rise in second-quarter GDP, much stronger than economists’ consensus estimate of a +0.6% rise. Also, Germany’s Ifo business sentiment survey surged to 106.2 in July, up from 101.8 in June. Economists had expected a sentiment decline in July, so this surge shocked the pundits. In a similar surprise, the ISAE Italian consumer confidence index rose to 105.6 for July, vs. a revised 104.5 for June and an analysts’ consensus forecast of just 103.9. For icing on the cake, Europe aced its banking “stress test” on Friday: Only 7 of 91 banks (5 of them in Spain) failed to survive the “worst imaginable” scenario.
This is an amazing turnaround for a continent that had been relegated to the economic trash heap last spring, due to riots in Greece and troubles in Spain. The continent once maligned as “socialist” has re-embraced government austerity as the old-fashioned solution to its debt problems. Despite recent credit downgrades in both Ireland and Portugal, the euro has soared lately – defying the skeptics once again.
There’s another reason why Europe is happy these days. There’s only one week left in July! I must admit that my European friends tell me that sentiment tends to be on the rise in late July, since August is right around the corner and many Europeans take their traditional month-long vacation in August!
Maybe the European Central Bank (ECB) President, Jean-Claude Trichet, is entitled to a little crowing. In a Financial Times article on Thursday, he said that public spending cuts and tax increases should be imposed immediately throughout the industrialized world. Trichet argued that policymakers who want to keep “stimulating” (i.e., running higher deficits) are mistaken. He said that cutting borrowing would not hinder growth. Trichet also took a shot at the Obama Administration and the International Monetary Fund (IMF) by criticizing the results of their 2009 push for budgetary stimulus, saying, “With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all the industrial economies under the motto: ‘stimulate’, ‘activate’, ‘spend.'” It is highly unusual for the ECB to criticize U.S. policies, but Trichet is clearly emboldened by the success of Europe’s austerity programs.
Meanwhile, the debt picture isn’t so rosy in the U.S. as deficit projections have been increased. Turning a deaf ear to Europe’s pleas, the White House raised its forecast Friday for the fiscal 2011 federal budget deficit to $1.4 trillion, or about 9.2% of GDP, up from its previous projection of $1.267 trillion. Not only are the federal budget deficits for 2009, 2010 and 2011 well above $1 trillion, but the White House is projecting $8.5 trillion of additional debt over the next decade. Also, the White House expects the U.S. unemployment rate to only decline to 8.1% by 2012. This is after saying (last year) that the 2009 stimulus (spending) package would help keep the jobless rate below 8% for the foreseeable future.
The White House budget office’s higher projected deficit numbers reflect the expected impact of the new healthcare law, the financial-regulation bill, the new student loan laws and other measures enacted since the fiscal 2011 budget was first drafted. Ironically, the White House budget office said the healthcare law, which was initially promised to cut deficits (or at least be budget-neutral), is expected to add $51 billion in debts from 2010 to fiscal 2012 – even before the plan takes full effect. While Europe prospers, despite austerity cuts, the U.S. is continuing to add new federal programs to balloon our deficits further.
Last Wednesday, Federal Reserve Chairman Ben Bernanke told Congress that plans for further easing were still in the preliminary phase. Bernanke also told Congress that the economic outlook remains “unusually uncertain” and that he saw no immediate relief for the weak job market. Wall Street sold stocks on the assumption that the Fed was running out of policy bullets to stimulate the U.S. economy.
However, Chairman Bernanke must have slept well Wednesday night, because he said on Thursday that the Fed was “ready to take further steps” to stimulate the U.S. economy if growth turns out to be weaker than expected. This seemed to reassure Wall Street, as the S&P 500 rose by 2.25% on Thursday. Also, since the Fed promised to keep interest rates extra low for an extended period of time, stocks will appear more attractive, since investors are increasingly getting frustrated with earning near-zero interest rates.
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