Economy

G8 growth talk leaves wary markets awaiting action

(Reuters) - A pledge by leaders of industrialized nations to help the troubled world economy is unlikely to herald quick new action by Europe on its debt crisis, meaning more uncertainty for nervous financial markets.

The Group of Eight economies stressed on Saturday that their "imperative is to promote growth and jobs", as they also recognized problems among European banks and gave verbal backing for Greece to stay in the euro.

Still, despite U.S. calls for immediate moves to boost growth, no sign emerged that Germany would soften its stance on austerity as the cure for Europe's debt problems.

With no consensus from Europe, markets will remain in a state of alert about the risk of a chaotic Greek exit from the euro, which would hit the region's banking system and possibly the global economy.

"The market loves to hate the euro right now, and we expect continued pressure now that the chance of a Greek exit is high," said Michael Woolfolk, senior currency strategist at BNY Mellon.

"The G8 is really powerless to stop this."

Markets face an unsettling month before Greece holds fresh elections that parties opposed to its austere bailout package could win. If Greeks back pro-austerity parties on June 17, as some polls have suggested, some of the pressure could ease.

Last week, the U.S. stock market posted its worst weekly loss for the year and the S&P fell for a sixth straight session. The euro is close to its lowest levels of 2012.

European leaders on Wednesday will begin thrashing out ideas for boosting the region's recession-threatened economy that are likely to be limited.

The most likely areas of agreement would give only a small boost to growth in Europe, including providing more money for the European Investment Bank and ways to make existing European Union funds for regional investment easier to access.

Another idea is to sell bonds to fund infrastructure. Germany says they should use only existing EU budget money.

New French President Francois Hollande, as if to underscore differences with German Chancellor Angela Merkel ahead of France's parliamentary elections in June, said he would press his case to his fellow EU leaders on Wednesday for the sale of "euro bonds" backed by all the currency area's 17 member states.

That idea remains a non-starter for Berlin, at least in the short term while government budgets are so weak.

WORDS ARE EASY, SOLUTIONS WILL HURT

Robert Tipp, chief investment strategist for Prudential Fixed Income, which has more than $330 billion in assets under management, said relief for markets would come only from Greece or new emergency measures by the European Central Bank to help euro zone states locked out of financial markets.

"Long-term growth-positive measures are not going to turn this around," he said, referring to structural reforms such as to labor markets urged by some leaders in Europe.

Some investors say political leaders have yet to find the courage to make the kind of painful trade-offs needed to break the kind of impasse over austerity and growth seen in Europe.

"Talk is cheap. True reform, whether it assumes the shape of austerity or growth, will be expensive on both an emotional and financial level," said Bonnie Baha, portfolio manager at DoubleLine, which has $34 billion in assets under management.

As markets worry increasingly about problems in European banks, the G8 leaders on Saturday hinted they were prepared to act if signs of financial stress grew.

Many Greek savers have withdrawn cash from accounts. Bad loans at Spanish banks are the highest in 18 years and the government is trying to reassure investors it can clean them up.

Last week, France's Hollande suggested European bailout money be used to recapitalize banks in Spain.

Senior White House aide Mike Froman told reporters at the G8 summit that "there were a number of issues talked about with regard to stabilizing the situation in Europe, including situations in the financial system".

Italian Prime Minister Mario Monti pressed G8 peers on Italy's idea of establishing a pan-European fund to guarantee deposits in banks, a person familiar with the matter said.

But as with many other possible measures to address Europe's problems, such a plan would face stiff opposition from Germany, and officials said it was not discussed formally by the leaders.

A German official said Berlin also remains opposed to changing the rules of Europe's bailout fund so it could lend directly to banks, rather than to countries, which would push up their budget deficits and invite more punishment from markets.

For some U.S. analysts, the prospect that Greece could leave the euro zone is bringing back painful memories of how hard it is to stop shocks from spreading in the banking sector.

"I think privately within the corridors of power from Washington, Brussels to Berlin, it is acknowledged that there (are) insufficient firewalls available to withstand a Greek euro exit," said Lawrence McDonald, president of McDonald Advisory Group.

Economists more upbeat about job growth, housing

NEW YORK (AP) A new survey shows economists are growing slightly more optimistic about recovery in the job and housing markets but expect other pillars of the economy to remain weak.

The National Association for Business Economists says in a report issued Monday that its forecasters expect modest growth for the remainder of the year, with the pace picking up in 2013.

Still, the 54 economists NABE surveyed expect consumer spending, business investment and gross domestic product to remain below historic norms.

The quarterly survey compiles expectations for indicators such as hiring, home construction and spending from economists at industry groups, government agencies, banks and consultancies.

The panel now expects average monthly job growth for 2012 of 188,000, up from its forecast in February for 170,000 new jobs per month in 2012. The improved outlook would lead the unemployment rate to fall to 8 percent by the end of the year, the economists said. The rate is now 8.1 percent. By the end of 2013, the unemployment rate is expected to ease further to 7.5 percent.

The NABE economists expect housing starts to rise 18 percent to 720,000 units this year and increase again to 850,000 in 2013. Residential investment is forecast to increase 8.8 percent this year; that's better than the 6.6 percent the economists predicted in February. In 2013, they now expect a 10.4 percent rise, up from 10 percent.

The outlook for light vehicle sales is also brighter, and the NABE panel now expects sales to reach 14.5 million units this year, up from their previous forecast for 14 million units. In 2013, they now expect 14.8 million light vehicles to sell, up from a forecast for 14.6 million.

On a broader level, however, the panel's forecast remains relatively bleak.

GDP, which reflects the economy's total output of goods and services, is predicted to grow just 2.4 percent this year, which is shy of the roughly 2.5 percent growth forecast by the Federal Reserve. For 2013, the panel of NABE economists expects the GDP to grow 2.8 percent.

Panelists also say consumer spending will grow 2.2 percent this year and 2.5 percent in 2013, below the historic average rate of 2.8 percent.

After-tax corporate profits are projected to rise 5 percent this year and 6.3 percent next year. The NABE economists earlier forecast 6.3 percent growth in 2012 and 7 percent in 2013. The annual average over the past 20 years is 10.2 percent.

NABE's panel now expects real spending on nonresidential structures to grow 2.9 percent, down from the 4.2 percent they forecast in February.

The panel revised its projection for industrial production upward to 4.1 percent in 2012. Panelists still expect labor productivity growth to pick up from last year's rate of 0.4 percent, rising to 1 percent in 2012 and to 1.4 percent in 2013.

And they expect a trade deficit of $562 billion this year, up from $535 billion. For 2013, they expect a deficit of $569 billion, up from $525 billion.

The economists expect the federal budget deficit, meanwhile, to hit nearly $1.2 trillion this year but to fall to $900 next year, with reductions in government spending. Combined federal, state and local government spending is expected to contract by 1.3 percent in 2012 and 0.4 percent in 2013.

The NABE surveyed its 54 panelists April 19 to May 2.

On Wednesday, the U.S. Department of Commerce is to release data on new home sales in April. And on Thursday the Labor Department releases data on weekly jobless claims and the Commerce Department reports on demand for durable goods, while Freddie Mac, the mortgage buyer releases weekly mortgage rates.

Germany insists no eurobonds to solve debt crisis

BERLIN (AP) A German official made clear on Monday that Berlin continues to oppose the idea of jointly-issued bonds for the 17-nation eurozone, which France's new president had suggested could be used to create much-needed economic growth and ease the region's financial crisis.

At the weekend's Group of Eight summit, German Chancellor Angela Merkel joined French President Francois Hollande and U.S. President Barack Obama in signing on to a statement that called for adding growth-promoting measures to painful cutbacks to fight the eurozone crisis.

How exactly to do that has become a topic of heated debate among European leaders, who will meet Wednesday in Brussels to try to find common ground. Hollande has pushed for issuing debt backed by financially strong countries like Germany to finance growth in weaker countries like Greece or Portugal.

But Germany has long resisted so-called eurobonds, arguing they would lessen pressure for heavily indebted countries to get their finances in order. They would also likely raise borrowing costs for countries in better fiscal shape such as Germany, which currently pay very low interest rates.

Eurobonds would be "a prescription at the wrong time with the wrong side-effects," Steffen Kampeter, a deputy finance minister, told Deutschlandfunk radio.

"We have always said that as a first step we need solidity in European finances, and that is the fiscal compact," a budget-discipline pact that Merkel championed and Hollande has criticized, he said.

In addition to the informal meeting of European Union leaders Wednesday in Brussels, there will be a summit at the end of June at which the issues of economic growth and austerity will likely be the main point of debate. Merkel said last week that "it will be very important that Germany and France present their ideas together at this summit."

Hollande pledged during his election campaign to renegotiate the fiscal compact with a view to placing greater emphasis on growth, but left open when he visited Merkel last week whether he will now stick to calling for a full renegotiation.

"We need the fiscal compact, we need budget discipline, we need investments in the future," Kampeter said.

Underlining the allergic reaction that the idea of being dragged into issuing eurobonds arouses on the center-right in Germany, Michael Meister, a senior lawmaker with Merkel's party, wrote on Twitter: "no one is preventing Hollande going ahead with joint bonds for France and (Italian Premier Mario) Monti for Italy."

Merkel has spoken increasingly about growth over recent months but argues that it makes no sense to try to achieve it by running up still more debt. Government spokesman Georg Streiter said she was very satisfied that the G-8 didn't call for lighting an "economic policy straw fire by throwing tax money into stimulus programs."

France's new finance minister, Pierre Moscovici, was expected in Berlin later Monday for his first meeting with German counterpart Wolfgang Schaeuble.

At home, Merkel needs support from the opposition to ratify the fiscal compact, which requires a two-thirds majority in the German Parliament. It is angling for concessions, such as a commitment to introduce a tax on financial transactions whose proceeds could be used to stimulate growth.

Merkel's party has been calling for quick passage of the budget-discipline by the end of June, and wants Parliament to vote on it at the same time that it approves the eurozone's permanent rescue fund.

Merkel has invited the party and caucus leaders of the parties in Parliament to discuss "the fiscal compact, Europe and everything linked to that" at the chancellery on Thursday, Streiter said.

Spain: no need for European funds to help banks

MADRID (AP) Spain's economy minister says the country's banks do not need to be bolstered with European money, as suggested by France.

Luis de Guindos spoke Monday as markets dipped on last week's news that Spain's 2011 budget deficit was higher than expected an embarrassing second correction to the figure.

Bond fell, pushing the yield on 10-year bonds up by 0.06 percentage points to 6.26 percent. The Ibex-35 stock index was down 0.5 percent.

De Guindos said the increase in the 2011 deficit figure from 8.5 percent of GDP to 8.9 percent was due to overspending by four regions, which had not been "totally transparent" in providing figures initially.

He said recently nationalized lender Bankia will need an injection of around 7 billion, but rejected the need for European rescue funds.