Global Daily – Greece is back

by: Nick Kounis , Maritza Cabezas

Global-Daily-Insight-10-December-2014.pdf ()
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  • Political risks in Greece once again unsettle financial markets
  • US job openings climb to second highest level in 14 years
  • Tax hike a larger drag than expected for Japan’s economy, but prospects going forward more positive

Greece: political risks flare up

One of the risks for 2015 – the election of a new Greek President –  has been brought forward.  The process, which could potentially trigger elections early next year if unsuccessful, was scheduled for the first quarter, but will now take place later this month. A majority of 180 votes in the 300 seat parliament will be needed to elect the new President, while the coalition has 155. Greek markets tumbled and investor sentiment softened. This reflects the fear that early elections will result in the Syriza party coming into government. It is against the economic adjustment programme.

The Eurogroup has given Greece a two-month extension for its programme, which had been due to expire at year-end. Greece needs to complete certain reforms to obtain the last tranche of its programme. In addition, given its financing needs it probably need a precautionary credit line, which will also be conditional. The risk is that an unfriendly government could put Greece’s financing and hence financial stability at risk.

Still, it may not come to that. We think it is most likely that independents and deputies from other parties will help to elect the new President, which would mean elections would be unnecessary before 2016. In addition, even if there is an early election, a Syriza government might be more constructive than it appears. Over recent months, it has toned down its rhetoric, and softened its general stance, against the programme.

US job openings climb to second highest level in 14-years

After a solid labour market report in November, another encouraging report showed increasing turnover in the labour market. In the past months data that measure the flows in the labour market, such as the quits and the hiring rates have been gradually improving. Hirings increased to 3.6% in October from 3.4% the previous month, while quitters have increased to 2% up from 1.8%. This suggests that workers are quitting their jobs because they find the labour market healthy enough to search for better opportunities. This is reflected in the increasing number of positions that are being filled. This increased dynamism should push up wage growth.

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Tax hike a larger drag than expected for Japan’s economy

After a large jump in Japan’s first quarter GDP, two quarters of sharp contraction have followed. On Monday, contrary to expectations, the initial estimate of third quarter GDP growth was adjusted further down to -1.9% qoq annualized from -1.6% qoq. The revision came mainly from the capex side and inventory figures. The decision to postpone the second sales tax hike scheduled for October 2015 to April 2017 seems more than reasonable since the first tax hike is the main factor behind the slump. Indeed the drag from the tax hike on domestic private demand, mainly consumption and residential investment was much larger than expected.

Japan’s outlook more positive

We don’t expect that this data will change the outcome of the poll on December 14, which should confirm a majority for the ruling Liberal Democratic Party.  After these elections we think that the government will come out with a stronger mandate to implement the necessary reforms, as well as to do whatever it takes to support the economy. On top of this we expect that the fall in energy prices to support consumption and the decline in the yen to boost exporters. The low inflation outlook and the risks of a return of deflation suggest that a further stepping up of monetary stimulus is a distinct possibility. This all should lift Japan out of the recession going forward.