WHAT’S AT STAKE IS WHETHER RECESSION TURNS INTO DEPRESSION
The U.K. economy contracted 1.5% in the fourth quarter, the biggest contraction since 1980, as consumers cut spending. Brown’s government last month ordered Northern Rock, the nationalised bank, to expand lending to help the economy. Ministers also agreed to guarantee £325billion of Royal Bank of Scotland Group Plc’s investments. Chancellor of the Exchequer Alistair Darling suggested yesterday that the Bank of England could start printing money as soon as this week, as interest rates lose their ability to revive growth. Policy makers may lower the key rate by a half point to the lowest since the bank was founded in 1694.
BoE Governor Mervyn King said in February he’ll buy up to £50billion pounds of debt “as soon as possible,” after cutting interest rates to a record low failed to open debt capital markets to the companies that need cash most. The last borrower with non-investment grade ratings to sell bonds in pounds was Dutch electric-generation company Intergen NV in July 2007, when credit markets froze for all but the safest borrowers. The bond-buying program comes after the central bank started to purchase commercial paper last month, and is the next stage toward quantitative easing, where Governments increase money supply to reduce its cost and stoke the economy. Policy makers are trying to ease access to funding after banks worldwide lost or wrote down $1.2 trillion since the start of the credit crisis. Investment-grade companies including Tesco Plc, the U.K.’s biggest supermarket operator, and Imperial Tobacco Group Plc, the maker of West and JPS cigarettes, have sold £27.9 billion of bonds in Britain’s currency this year. This almost three times the amount issued in the same period of 2008.
Policy makers have reduced the U.K.’s interest rates from 5.75% to an all-time low of 1% since the end of 2007; and are expected to further cut it to 0.5% on March 5. Britain’s economy shrank 1.5% in the fourth quarter of last year, the biggest contraction since 1980, as consumer spending declined. Chancellor of the Exchequer, Alistair Darling, yesterday suggested in an interview in the Daily Telegraph that the BoE could start quantitative easing, or printing money to buy bonds, as soon as this week. . Gordon Brown has also given banks loan guarantees and pushed them to make more finance available to help the economy weather its worst slump in three decades.
U.K. consumer confidence stayed close to the lowest level in at least four years in February as the recession persisted and companies cut jobs, Nationwide Building Society said. An index of sentiment rose to 43 from 41 the previous month, which was the worst result since data began in 2004, the mortgage lender said in a statement today. “Consumers’ views about the current economic and labour market conditions are in line with the recessionary climate in the U.K,” Fionnuala Earley, chief economist at Nationwide, said in the statement. The confidence gauge still rose on the month for the first time since October. A measure of attitudes on buying household goods and making major purchases rose seven points to 92, the highest since October 2006, while an index on expectations for the future increased 5 points to 57. The gauge of attitudes on the present situation fell 2 points to 22.
How does that this affect the markets? The severe stresses in global equities are adding extra weight and support to the "safe haven" US dollar. However, given that the dollar is already trading strongly, and given the latest reports from AIG insurance and the car manufacturers, in financial markets and the US economy, it could be seen that there are limits to the market's appetite to buy dollars. Add to this that in US yesterday; there was more bad news for the housing market. Pending home sales for January fell 7.7% hitting a new all-time low going back to the start of the index in January 2001.
Today’s data sees UK PMI at 09:30 GMT and US ISM non-manufacturing this afternoon at 15:00 GMT.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts
Wednesday, 4 March 2009
Tuesday, 17 February 2009
TOUGH TIMES ON THE HORIZON
Figures out this week from both sides of the pond are looking like they will confirm that the annual rate of inflation is decelerating. This may on some measures show inflation as negative. This may sound like good news to households where incomes have been squeezed by tax rises and higher bills. But a sustained period of deflation would have huge economic costs. While the risk that deflation will take hold of the Western economies is small, the prospect is powerfully exercising the minds of central bankers and explains the urgency with which the BoE and the Fed have cut interest rates. Deflation would be the worst of outcomes for the global economy.
Unfortunately, easy monetary policy also stimulated an unsustainable boom in asset prices and an irresponsible expansion of credit. The collapse of the housing market bubble and the credit crunch are now pulling the global economy down into recession. Inflation is decelerating sharply, helped by falls in commodity prices. In the UK, the annual rate of CPI declined a full point to 3.1% in December. The BoE expects the figure to fall below 1%. Annual inflation as measured by the retail price index has been falling even more rapidly and is approaching its lowest level since 1960.
Although a short period of falling prices does little damage. Consumers will eventually become used to seeing the prices of some items fall consistently, but a long period of general price falls, as happened in Japan in the 1990s, would be damaging. Consumers would star to postpone purchases, as they would have the ability to buy goods more cheaply in the following months or years. This leads on to both employment and investment collapsing. Stocks fall as corporate earnings would contract. Most damaging, households with debt - either mortgage debt or unsecured loans - would suffer intense hardship. Adjusted for inflation, the value of their debt burden would rise. Deflation would cause hardship, eviction and widespread corporate and personal bankruptcy. This is the risk, if not yet prospect, that both central banks will now contend with
In Europe, German investor confidence (out at 11:00 GMT) is looking likely to show that it has improved for a fourth month in February after the government stepped up efforts to bolster the economy and the ECB signaled it will cut interest rates to a record low. The ZEW Center for European Economic Research is expected to say that its index of investor and analyst expectations rose to -25 from -31 in January. The index reached a record low of -3.9 in July. ECB policy makers say they have room to drop borrowing costs further as the euro area battles its worst recession since World War II. The German Chancellor, Angela Merkel, agreed to spend about €80billion over two years to boost the German economy, the largest in the 16-nation bloc. This has led to Germany’s benchmark DAX share index has rising 4% over the past three weeks.
German GDP slumped 2.1% in the fourth quarter of 2008 from the third, the biggest drop in 22 years. The economy is looking to shrink by a further 2.5% this year, according to the IMF. Porsche SE, have reported a 14% plunge in sales, and Volkswagen AG’s Audi luxury division expects a “super difficult” year.The ECB has cut its rates by 2.25% points since early October to 2%, the most aggressive easing since the bank took control of monetary policy a decade ago. This is expected to drop further to 1.5% in their March meeting.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Unfortunately, easy monetary policy also stimulated an unsustainable boom in asset prices and an irresponsible expansion of credit. The collapse of the housing market bubble and the credit crunch are now pulling the global economy down into recession. Inflation is decelerating sharply, helped by falls in commodity prices. In the UK, the annual rate of CPI declined a full point to 3.1% in December. The BoE expects the figure to fall below 1%. Annual inflation as measured by the retail price index has been falling even more rapidly and is approaching its lowest level since 1960.
Although a short period of falling prices does little damage. Consumers will eventually become used to seeing the prices of some items fall consistently, but a long period of general price falls, as happened in Japan in the 1990s, would be damaging. Consumers would star to postpone purchases, as they would have the ability to buy goods more cheaply in the following months or years. This leads on to both employment and investment collapsing. Stocks fall as corporate earnings would contract. Most damaging, households with debt - either mortgage debt or unsecured loans - would suffer intense hardship. Adjusted for inflation, the value of their debt burden would rise. Deflation would cause hardship, eviction and widespread corporate and personal bankruptcy. This is the risk, if not yet prospect, that both central banks will now contend with
In Europe, German investor confidence (out at 11:00 GMT) is looking likely to show that it has improved for a fourth month in February after the government stepped up efforts to bolster the economy and the ECB signaled it will cut interest rates to a record low. The ZEW Center for European Economic Research is expected to say that its index of investor and analyst expectations rose to -25 from -31 in January. The index reached a record low of -3.9 in July. ECB policy makers say they have room to drop borrowing costs further as the euro area battles its worst recession since World War II. The German Chancellor, Angela Merkel, agreed to spend about €80billion over two years to boost the German economy, the largest in the 16-nation bloc. This has led to Germany’s benchmark DAX share index has rising 4% over the past three weeks.
German GDP slumped 2.1% in the fourth quarter of 2008 from the third, the biggest drop in 22 years. The economy is looking to shrink by a further 2.5% this year, according to the IMF. Porsche SE, have reported a 14% plunge in sales, and Volkswagen AG’s Audi luxury division expects a “super difficult” year.The ECB has cut its rates by 2.25% points since early October to 2%, the most aggressive easing since the bank took control of monetary policy a decade ago. This is expected to drop further to 1.5% in their March meeting.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
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