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Cash Back Economy - Global Economics Weekly

Cash Back Economy QE

Global Economics Weekly Brief

Most of us have used cash-back at one time or another, but even in the run-up to Christmas we do not ask for £35bn. This is what the Treasury is set to receive from the Bank of England owing to the cash accumulated by the Bank from undertaking quantitative easing (QE). Good timing.

It comes as data points to a loss of economic momentum for the UK from Q3’s strong showing. More rapid decline forecast for Q4 and 2013 not improving! In the US, President Obama’s election win high quickly gave way to political realities with a resolution to the fiscal cliff remaining top of the agenda. The message from within the US and around the globe is the same – keep back from the cliff. US owe $16 trillion and rapidly this increases daily!

UK looks to boost the public finances. Through its purchases of UK government debt, the Bank of England has accumulated a cash pile that comes from the coupon payments on these bonds. Last Friday it was announced that this ‘excess’ cash, which is estimated to amount to £35bn by the end of March 2013, will be transferred from the Bank of England’s QE facility back to the Treasury. This ‘cash-back Facility' will be gratefully received. The first transfer will reduce the budget deficit for 2012/13 by £11bn, or around 0.7% of national income. It may not, however, be a permanent transfer, as the money could be given back to the central bank in the future depending how UK government bonds perform. The future forecasts for the economy are not favourable!

Another tough month for UK industrial production. Industrial production in the UK fell by 1.7%m/m in September, as oil and gas production fell sharply owing to maintenance shutdowns. Manufacturing managed to eke out a small 0.1%m/m gain, but September's output was down 1.0% from a year ago. One bright spot for UK manufacturing continues to be vehicle production with output in the sector having risen for the past three years. The housing, traditional print, media newspapers sectors in rapid decline!

And a tougher time for service providers too. The UK services Purchasing Managers’ Index (PMI) fell to 50.6 in October, from 52.3 in September, the lowest reading in almost two years. The weak reading adds to evidence that Q3’s buoyant 1%q/q GDP figure did not herald a new dawn for growth, rather the recovery will continue to be a hard slog. Another worrying development is that the employment component has deteriorated over the past two months. While this indicator can be hit and miss, it could mean that the labour market’s decent run of late is running out of puff. More unemployment on its way!

The Bank of England holds rates steady and asset purchase programme at £375bn. The Monetary Policy Committee (MPC) is waiting to get a better sense of the impact of the Funding for Lending Scheme before making a decision on more QE. But some Committee members may be starting to have doubts on the effectiveness of printing money to buy government debt. The MPC also may hope that the decent performance of the labour market (part-time workers) in recent months gives a truer picture of the underlying health of the economy than other indicators. The minutes of the meeting, released in a couple of weeks, should shed further light on what exactly is on the minds of members. The European Central Bank also held steady last week and reiterated its readiness to activate its bond-buying programme. But only if Spain and other troubled countries ask for help first. Spain need to ask for help!

US election over, fiscal cliff to the fore.
The immediate challenge for the re-elected Obama administration is the fiscal cliff - a series of tax hikes and spending cuts equal to almost 5% of GDP due to come into force early next year. Comments last week by key Republicans potentially indicate a greater willingness to compromise, meaning an agreement to resolve the cliff may be slightly closer than it was pre-election. However, there remain a lot of issues to overcome so expect a fraught end to the year. And it isn’t an issue confined to the US. The effects of the fiscal cliff would have a global reach. If implemented in full, it could wipe up to one quarter of a percentage point off UK output in 2013 according to the IMF. The US are in very deep financial waters with very little survival gear!

Chinese economy continues modest improvement as new leadership takes over.
October’s industrial production growth rose to 9.6%y/y and retail sales growth increased. The economy is likely to experience a modest near-term reacceleration, but the long-term picture is that it has reached a structural turning point. China’s new leaders take over with the investment and export led growth model deemed to have run its course. A rebalancing toward consumption is a necessity for sustained economic catch-up with the West. ‘Natural’ forces, including less favourable demographics, will aid this rebalancing but ‘policy’ forces are arguably more important. Tentative steps toward rebalancing have been taken recently, including a loosening of control over the banking sector. The new leaders must accelerate such reforms!

* The Credit Crunch of AD 33 Repeats itself time and time again!

What with the Bank of England pushing £375+ billion and the USA Federal Reserve $1+ trillion into their countries respective banking systems, readers may be interested to learn of the following from `Banking & Business in the Roman World`;

In AD 33 the lack of cash continued to become increasingly serious (where have we read this before many times?). To remedy the situation, through the intermediary of `ad hoc` financial offices directed by Senators, the Emperor himself offered interest-free loans amounting to an overall sum of 100,000,000* sesterces from his personal fortune for the duration of three years. The borrowers were required to offer security in the form of real estate or buildings. In this way they were not forced to divest themselves of their patrimony in order to pay off their debts. Fides, that is to say confidence, returned, and the situation was retrieved for a short time.

Why do politicians/bankers/lenders ignore history? and yet history repeats itself several times because these people do not read! People need to read `The Rise and Fall of the Roman Empire` and then perhaps they will learn how to avoid repeating history.

We live in a global trading environment of which there are so many players chasing very few opportunities that it is driving down prices globally and still people do not wish to buy!

China Export Growth Collapses as World Recovery Slows - click on the connection below for comprehensive information.

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Cash Back Economy

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