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Prospects Daily: Greece unveils new austerity plan in effort to trim fiscal deficit

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Important developments today:

1. Greece unveils new austerity plan to trim deficit

2. U.S. service sector activity expands at fastest rate since October 2007

3. Retail sales in the Euro area remain weak

Greece unveils new austerity measures to fight deficit. The Greek government on Wednesday announced a fresh austerity package that may yield savings of €4.8 billion (about $6.5 billion) this year by further cutting spending and raising taxes. The new plan aims to cut the budget deficit from 8.7% to 4% of GDP in 2010. The austerity measures include steep reductions in civil-service salaries and entitlements, and an increase of 2% in the value-added tax. Greece is under intense pressure from the European Union and financial markets to reduce its swelling budget deficit of some 12.7% of GDP, which is more than four times the limit set by the EU.

The government’s new austerity plan received a positive response from financial markets as concerns that Greece might default on its debt were further dispelled today. Greek bonds advanced for a fourth day, while the extra yield investors demand to hold 10-year Greek government bonds over German bunds declined 15 basis points (bps) to 290 bps, the lowest level since Feb. 11. The cost of insuring Greek government debt against default also continued to fall on Wednesday, as Greece’s 5-year sovereign credit default swap spreads tightened by 8 bps to 313 bps, the lowest since Jan. 18.


Source: Institute of Supply Management


U.S. Services sector growth stronger than market expectations The Institute of Supply Management’s index on non-manufacturing businesses, which measures activity in the service sector, rose to 53 in February from 50.5 in January, indicating the fastest pace of growth in the sector since October 2007. The improvement in the ISM’s service sector index provides further evidence that the economic recovery that has thus far been led the manufacturing sector is broadening and gaining pace in the rest of the economy. While high unemployment is likely to constrain a faster recovery in consumer spending, growth in the service sector (which dominates U.S. economic activity) is expected to contribute to stability in the labor markets over the coming months.

In EuropeRetail sales in the 16-nation Euro Zone fell 0.3% (m/m) in January for an annual decline of 1.9% according to the latest report from Eurostat. The drop in retail spending in January, following a 0.5% (m/m) increase in December, was in line with expectations, continuing the pattern of growth followed by declines in consecutive months. Retail sales in Germany, the region’s largest economy, remained flat in terms of month-on-month movement in January, while the annual decline moderated to 0.2%. The recovery in the Euro Zone has been driven by strong external demand for European exports, while consumer spending has remained subdued in the face of employment concerns.

Among emerging markets:

In East Asia and Pacific, Inflation in Thailand rose for the fifth straight month to 3.7% (y/y) in February, indicative of robust consumer demand.

In Central and Eastern Europe and the CIS, Romania’s retail sales fell 10.3% (y/y) in January on weak consumer demand. In Turkey, inflation rose a faster-than-expected 1.45% (m/m) in February, while producer level prices rose 1.66% over the same period. In annual terms inflation in Turkey grew 10%, while producer level inflation stood at 6.8%.

In Sub-Saharan Africa, South African business confidence rose in February, lifted by evidence of an economic recovery that started in the manufacturing sector but is now gathering speed through the rest of the economy. The Business Confidence Index (BCI) rose to 83 in February from 81.2 in the previous month in response to positive medium term developments in the African nation.