Record high US deficit

(15.02.2011) President Obamas budget showed that the deficit for this year will reach 1650 bill. USD. Today Riksbanken will hike the repo rate to 1.5%.

By Knut A. Magnussen, Senior Economist at DNB Markets

illustration numbersThe US budget for 2012 revealed that the deficit will reach 1650 bill. USD this year – the largest ever and close to 11% of GDP. Hence there is large need for tightening. According to the budget documents the deficit will be reduced to 7% of GDP in 2012 and to a good 3% in 2015. Over a ten year period the reduction will be 1100 bill. USD. The major planned tightening is spending cuts, whereas tax increases counts for a third. However, it will be difficult for Obama to get support for tax increases from the republicans.

The planned cuts are not enough top stabilize public debt in the longer term. Net debt will rise to 77% of GDP in 2021. The fixed income market did not react much to the news. Today US retail sales for January will be released. A fairly strong reading is expected partly due to the surge in petrol prices. However, bad weather may have hampered sales and there is probably some negative risk to the forecasts.      

Chinese inflation rose less than expected to 4.9% in January, up from 4.6% in December. Once again food prices made the largest contribution, rising with 10.3%. Also producer price inflation picked up (6.6%). The high and rising inflation implies that Chinese authorities will continue the tightening of monetary policy ie by letting the yuan appreciate further.

Markets are still very worried for the debt situation in Europe. After a somewhat disappointing meeting among European finance ministers yesterday, the euro fell to a three week low vs the dollar and long government yields rose further. The ministers agreed on the size of the ESM (500 bill euro), but did not agree on an enlargement of the existing rescue fund. Eurozone manufacturing production fell somewhat in December, mush as expected. However, the strong trend still seems in place. Today GDP for Q4 will be published. We expect that GDP will grow by 0.3% - somewhat less than the consensus.        

The OECD leading indicator for December was released yesterday. The overall picture was not changed. Still the indicators show solid expansion for US, Germany and Japan, but more moderate growth for Canada, France and UK. Interestingly the indicators show risk of a downturn for China and for the five major Asian economies.

The most important event today is the rate meeting at Riksbanken. It is widely expected the repo rate will be hiked from 1.25% to 1.5%. This will be the fourth hike in a row, backed by very strong growth and improvements of the labour market. With inflation close to target the need for higher rates seems clear. However, we do not think that the rate will be lifted further this time around. Inflation has been higher than expected, but the SEK has strengthened more than expected by the central bank as well.

UK inflation for December is due this morning. It is expected that inflation will increase from 3.7% to 4.0%. The high inflation is a major challenge for the central bank. Hence the new inflation report out tomorrow will be very important is this respect. We think the central bank should not hike on the basis of temporary increases to inflation. However, this may be clarified in the report tomorrow.