What's Important in the Financial World (2/22/2013)

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The European Commission suggests — in a late forecast compared to those of many other economists — that the eurozone economy will shrink in 2013, and the EU economy will tick up by only the slightest. The news is proof once again that Europe has not found any concrete and successful means to escape the gravity of the last recession and the austerity budgets that have hurt employment and gross domestic product among almost all member nations. The EC report said:

The weakness of economic activity towards the end of 2012 implies a low starting point for the current year. Combined with a more gradual return of growth than earlier expected, this leads to a projection of low annual GDP growth in 2013 of 0.1% in the EU and a contraction of -0.3% in the euro area. Quarterly GDP developments are somewhat more dynamic than the annual figures suggest, and GDP in the fourth quarter of 2013 is forecast to be 1.0% above the level reached in the last quarter of 2012 in the EU, and 0.7% in the euro area

The 2013 forecast is wishful thinking, unless something profound happens to radically change the factors that have kept the region in recession.

German Business Confidence

The assessment of Germany’s prospects, as measured by businesses there, took an unexpected jump just after the government announced the poor export numbers of late last year. Businesses must believe that something about their prospects will change, even though the balance of the region is weak financially, and German consumers are not consuming anywhere near record levels. Perhaps there is hope that recoveries in the United States, China and the developing word will help. Ifo reports:

The Ifo Business Climate Index for German industry and trade rose significantly by over three points in February. This represents its greatest increase since July 2010. Satisfaction with the current business situation continued to grow. Survey participants also expressed greater optimism about their future business perspectives. The German economy is regaining momentum.

Payroll Tax Effect

The Wall Street Journal has pulled together the wisdom of businesses, business trade groups and economists and come to conclusion that higher payroll taxes and gasoline prices have undercut a consumer recovery. The Journal reports:

Wal-Mart Stores Inc. on Thursday joined a parade of retailers, restaurants and consumer-goods companies worried about the economic impact of the recently restored federal payroll tax that has left Americans with less money to spend.

The world’s largest retailer, Burger King Worldwide Inc., Kraft Foods Group Inc. and others are lowering forecasts and adjusting sales and marketing strategies, expecting consumers with smaller paychecks to dine out less and trade down to less expensive purchases.

The expiration of the payroll tax cuts that knocked 2% off consumers’ take-home pay is having an impact, these companies say. It will ding a household with $65,000 in annual income $1,300 this year, and shift $110 billion overall out of consumers’ hands, estimates Citigroup.