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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Germany posts first budget surplus since 2007 as recession beckons. Inflation stays put. Can Cyprus have its cake and eat it? Time for bank managers?

Germany posts first budget surplus since 2007 as recession beckons

It is not the first time a headline here has proclaimed that Germany is on the verge of recession. Many of last year’s surveys, such as PMIs, did indeed imply Germany was contracting. But yesterday it was official.

Germany’s Federal Statistics Office released data to show that German GDP contracted 0.5 per cent in Q4. But since the country just about managed to avoid contraction in Q3 that means it’s not in recession, not officially anyway.

Year on year Germany expanded by 0.7 per cent, compared to 3.0 per cent growth in the year to Q4 2011. So, relative to many of its troubled neighbours, the German economy looks okay. Yes, there is a good chance the first quarter of this year will see contraction too, meaning Germany is in recession, but other data out yesterday may be more interesting.

In 2012, Germany’s public budget posted a surplus of 0.1 per cent of GDP. This compares with a deficit of 0.8 per cent in 2011. In 2010 there was a deficit of 4.1 per cent of GDP.

As you know, the Maastricht Criteria is supposed to limit government debt to less than 3 per cent of GDP. Germany hardly set a good example in 2010 by going over this limit, but these days the agreement is that the limit must never be broken. Never, as in cross-your-heart-hope-to-die sort of never, as opposed to a mere promise it would not be broken, which is what we had previously.

It means of course a lot of deaths over the next year or so, and indeed France –which had previously said it absolutely will not go over the Maastricht Criteria again – probably will.

But all this begs the question: is it wise?

At a time when it is clear that there is insufficient demand, meaning  we have over-capacity, and the traditional engines of consumer spending are close to broke, is it really wise for one of the world’s great exporters to be experiencing a budget surplus?

Inflation stays put

So that’s three months on the trot.  Inflation, as measured by the CPI index, was 2.7 per cent in December, the same as October and November. The RPI measure of inflation was 3.0 per cent, up from last month’s reading of 2.9 per cent, but down from 3.1 per cent in October.

You may recall that back in August things looked rather promising. CPI inflation was down to 2.2 per cent. It really seemed as if inflation was heading for the Bank of England’s 2 per cent target. It even seemed that it was possible inflation would dip below the rate of increase in average wages.

Alas the story since then has not been so good.

It is possible to apply a positive twist. We already know utility prices would add around 0.25 percentage points to inflation, so maybe it was something of a result that inflation only stayed where it was.

As for what will happen next, it is difficult to say what will happen to the price of food and energy because these are determined by global forces. For instance, who can say what the harvest in Australia will be like?

But even if we set aside food and energy, what’s called core inflation is still too high. In December it was 2.4 per cent.

There is still a feeling out there that inflation will return to target by the end of this year, but frankly the feeling out there has been proven to be wrong rather a lot of late.

Can Cyprus have its cake and eat it?

Cyprus needs money for its banks. It needs rather a lot – around 17 billion euros.

Okay, it’s not a lot in the grand scheme of things, but for a country as small as Cyprus that is a staggeringly high amount.

The thing is that Cyprus has been something of a haven for wealthy Russians. There have also been allegations of money laundering.  The island’s banks are a popular destination for Russian oligarch’s money. Last year, German intelligence agency Bundesnachrichtendienst concluded that Cyprus is a “gateway for money laundering activities in the EU.” It warned that if Germany did indeed release money to prop up Cypriot banks, the German people may effectively be funding Russian money laundering.

So can Cyprus enjoy the fruits of Russian money, but at the same time expect European money if things go pear shaped?

 

Time for bank managers?

We keep hearing the call, but banks keep denying it’s a problem. You know the story: get to know your bank manager, play the odd round of golf , and stay in his good books. Then when you need a bit of support from the bank, your friendly manager will know all about you, and the money will be yours.

Actually come to think of it that sounds a bit dodgy. But it wasn’t meant to.

Bank managers used to get it wrong, but they are a pretty important part of the community, and their judgement calls could make and break businesses.

These days it’s all about the computer. The bank manager, if such a person exists, may think you are a thoroughly decent person and be impressed by the story you tell, but if the computer doesn’t like you, too bad.

And if it is really like that, and you are ambitious and want to get on in life, do you really want to work for a bank? Do you really aspire to be a bank manager?

These days a career in banking is not about getting to know local businesses; it’s about derivatives innit.

Okay, that is just how it seems, but it’s not really like that is it?

Stephen Green or Baron Green of Hurstpierpoint – the former CEO and Chairman of HSBC – is by all accounts a very nice bloke. He is, after all, an ordained priest, and author of ‘Good Value Reflections on Money, Morality and an Uncertain World’.  Alas he was top man at HSBC when all that money laundering went on, so that has somewhat blotted his copy book.

But the ex HSBC chairman, who is now the UK government’s Trade Minister, has been speaking about banks. Given his background, one assumes he knows what he is talking about.

He recently said to the House of Lords small business committee: “If you’re a bright, ambitious young banker, what did you want to do at any point over the past 10 or 20 years? You didn’t want to be the relationship manager in Rotherham, it was head to Canary Wharf.”

He added: “Over time they [lost] strong talent in business banking. The central risk management function responds by disempowering them and you get into this downward spiral.”

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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