Gathering signs of a strong bounceback for the eurozone in the second quarter were tempered today by a warning from the European Central Bank over levels of national and corporate debt.
FT analysis of high-frequency indicators — a less comprehensive but more timely measure of activity than official data — shows strong increases in job ads, holiday bookings and visits to leisure and entertainment venues.
Manufacturing also continues to progress, as evidenced by the German truck mileage index, which is well above its pre-pandemic levels. The mood of optimism, at least for the short term, is also reflected in surveys of European company bosses.
Amid the encouraging wave of data, it fell to the ECB this morning, in its twice-yearly financial stability report, to inject a note of caution.
Despite increased optimism on growth — new forecasts show expansion of 4.3 per cent this year and 4.4 per cent in 2022 — the bank warned of the pandemic’s legacy of higher debt and weaker balance sheets.
If unaddressed, this could end in “sharp market corrections and financial stress or lead to a prolonged period of weak economic recovery”, it said.
If that scenario wasn’t scary enough, the ECB again conjured up the spectre of “corporate zombification” — legions of living dead companies kept alive by cheap loans and government aid.
“Zombification may lead to an inefficient capital allocation, but also poses medium-term risks to the financial system if risks are not properly priced,” it said.
The report follows a warning last month from the European Systemic Risk Board, which monitors the EU financial system, of a “tsunami” of insolvencies once pandemic emergency measures were withdrawn.
European investors, meanwhile, are anxiously awaiting minutes from the US Federal Reserve’s policy meeting later today for clues on when the Americans will take away their own punch bowl.
As Frankfurt bureau chief Martin Arnold notes, the ECB has (partially, at least) acknowledged its own part in sustaining the debt-ridden and unproductive hordes — the question is whether it will take its own advice, focus on saving viable companies and let the zombies finally rest in peace.
UK inflation more than doubled to 1.5 per cent in April, fuelled by energy bills and rises in petrol prices. Without the temporary cut to value added tax for the hospitality sector, the headline figure would stand at 3.2 per cent, the highest in nine years.
House prices, meanwhile, have hit their highest level ever. The labour market improved in the first quarter, with the unemployment rate dropping from 5.1 per cent to 4.8 per cent as companies began rehiring ahead of economic reopening.
Japan’s economy shrank 1.3 per cent in the first quarter as it was hit by a new wave of pandemic restrictions, hurting consumer spending. One of the slowest vaccination programmes in the world — just 3.5 per cent of the population has had a first dose — suggests bounceback will not be swift.
There are many reasons for the recent jump in US inflation, writes chief economics commentator Martin Wolf, but politics is the driving force.
Tightening monetary policy will be unpopular, “yet if a central bank does not take away the punch bowl before the party gets going”, he argues, “it has to take it away from people who have become addicted to it”.
Ryanair won an initial victory at an EU court against rival airlines in Portugal and the Netherlands receiving state aid during the pandemic last year.
“The EU Commission’s spineless approach to state aid since the beginning of the Covid-19 crisis has allowed member states to write open-ended cheques to their inefficient zombie flag carriers,” Ryanair said.
Walmart, the world’s biggest retailer, enjoyed its strongest-ever first quarter as Americans spent their government stimulus payments. Target, The Home Depot and Macy’s also reported strong sales.
Many US retailers have dropped the requirement for (fully vaccinated) customers to wear masks.
Business groups urged help for UK companies struggling to repay debt built up during the pandemic when Covid-19 emergency measures preventing winding-up petitions expire next month. Shareholders, meanwhile, continue to protest against big payouts for company bosses.
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US and European companies may have reported stellar results in the first quarter as they bounced back from pandemic lows, but stock markets have barely moved.
Investors have already priced in the probability of a strong recovery, explains US equities correspondent Aziza Kasumov, and are now focused on risk factors such as rising input costs.
Lenders hit by US corporate debt defaults have been struggling to recoup their losses. Moody’s rating agency said the average recovery rate on bonds and loans was 45 cents on the dollar — compared with the historical average of more than 50 — thanks to looser underwriting standards and changes in the way debt is structured.
The price of Brent crude hit $70 yesterday as global economic recovery strengthened prospects for oil demand. Obstacles to further growth include fears that coronavirus variants could yet get out of control as well as an acceleration in the shift to renewable energy. -FT