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EU Credit Crisis Continues

AAA not the EU Way
EU Credit Crisis Continues

Global Economics Weekly Brief

The loss of France’s cherished AAA rating was a particular blow to President Sarkozy in his election year. But there is more to worry about than a politician’s feelings. Eight other Eurozone members, including Austria, Italy, Spain and Portugal, were also downgraded. Standard & Poor’s (S&P) decision froze out hopes that sentiment towards the Eurozone was beginning to thaw after the successful bond issues in Spain and Italy during the week.

The decision to downgrade was blamed on European policymakers’ lack of action. This will certainly turn the heat up under them to find a swift resolution at the next summit. But worryingly, it also raises questions about the strength of the Eurozone's rescue fund as a smaller proportion of its resources will now be backed by AAA rated countries. And the bad news on Europe didn't end there. Greek debt restructuring talks collapsed, increasing the chances of a disorderly default. So, like the weather, the warm spell is over for now and it's another cold snap. The eurozone members are in retreat and sinking very fast, who will bail them out!

UK and Eurozone interest rates were left unchanged in January. The Monetary Policy Committee (MPC) and the European Central Bank (ECB) Governing Council left interest rates unchanged at 0.5% and at 1%, respectively. Neither of them had any new policy initiatives either. In the UK, the asset purchase scheme was left unchanged at £275bn. In Europe, ECB President Draghi didn’t add to the measures to support the Eurozone banking system announced last month. While much of the liquidity he made available to banks looks to have been deposited at the ECB, it does seem to have helped to bring down interest rates across the yield curve. The success of the Spanish and Italian auctions also suggests it helped stimulate a tentative improvement in sentiment. But this was short-lived in the face of the S&P downgrade.

UK bond holders trade off return for security. Investors are still very nervous about the global economy. In fact, they were so nervous that they were even prepared to pay for the privilege of lending £700 million to the UK government. Being seen as a safe haven is good news for the UK because it means the Government is able to borrow money at a low price. But there is a worrying side as well. Investors don't usually agree to accept a negative real return on their money. That they have done so reflects the fear of unresolved Eurozone tensions and nervousness about the outlook for the global economy.

UK exporters and industry found November hard going. UK exporters failed to repeat October's strong performance. Despite the headwinds from a sluggish economy, exports to EU countries rose slightly, while the value of exports to non-EU countries fell. This is disappointing given the need to build exports to faster growing regions. Overall, the trade deficit in goods widened to £8.6bn. But the UK's trade surplus in services increased by £0.1bn to £6.1bn, leaving November's overall trade deficit at £2.6bn. Poor domestic and international demand hit industrial production in November too. Overall it fell by 0.6%m/m in November after a 1%m/m fall in October. This weak performance adds to worries that the UK economy could have stagnated, or even shrunk, in Q4 2011.

Still no good news for the UK housing market. Surveyors still think house prices are falling. A net balance of 16% thought prices were lower in the three months to December. This is better than the 2011 average net balance of 24%, but things don't look too promising ahead. A rise in new sellers outpaced that of new buyers and suggests more price falls ahead. The exception is in London where prices are rising and are expected to continue to do so. Everywhere else surveyors expect prices to fall, with confidence weakest in Yorkshire and Humberside.

FSA: failure of RBS caused by `multiple very poor decisions`- Regulator criticises its own `insufficient` supervision of bank. The Royal Bank of Scotland`s (RBS) can be blamed on a combination of six factors caused by `multiple very poor decisions`, the Financial Services Authority (FSA) has concluded. The report released in December 2011 found the choices made by RBS`s management coupled with `deficiencies in the global capital regime` were the main reasons behind the bank`s bailout. The regulatory body also criticised its own flawed supervisory approach which it said provided an `insufficient challenge` to the options taken by RBS. This management of both organisations lacked skills and experience.

FSA Chairman Adair Turner said " It describes the many errors of judgement and execution made by RBS executive management which, in combination, resulted in RBS being one of the banks which failed amid the global crisis.

In my opinion, the bankers should pay back `all` their bonuses for the last five years as a minimum and resign from their jobs plus, the FSA management should be replaced immediately!

US retail sales collapsed in December. US retail sales slowed for the third month in a row in December. They increased by just 0.1%m/m, but after taking account of autos, gas and building materials they fell by 0.1%m/m. This is disappointing just as things seemed to be looking up for the US. But it could turn out to be a blip. Consumer confidence reached an eight month high in January according to the University of Michigan, driven by brighter expectations about the future outlook. More unemployment in the retail sector to hit in the next three months.

Chinese inflation fell to a 15-month low in December. A favourable base effect helped drive the headline figure drop in December, and despite a spike in food prices, the underlying trend is still down. This should pave the way for further monetary easing. The boost this could give the domestic economy would be good news for exporters to China, as would the expectation that the quota for new loans set by central government should increase. Overall, in spite of some slowing, China is still a giant on the world economic stage. The UK Chancellor’s visit to drum up business is only one small example of this.
Business cycle / Economic cycle / Recession / Depression Globally

The Meaning of Business Cycle, Economic Cycle, Recession, and Depression Globally

The term business cycle is used in several ways by economists and business people. This item defines business cycle in context with related terms including economic cycle, recession, and depression.

1) The primary meaning of business cycle refers to fluctuations in economic output in a country or countries, characterized by well known phases of a business cycle such as recession, depression, recovery, and expansion. The business cycle or economic cycle in this sense may be accompanied by changes in stock market prices, known as the stock market cycle. For more on these cycles and their phases, see the sections below.
2) The term business cycle sometimes refers to stages in the life span of a single company. In this regard, important phases in a company's life may include: birth (or start up), growth, maturity, decline, and demise. Progress through these cycles may be impacted heavily by the economic business cycle (business cycle meaning number 1 above).

To accountants, companies are viewed as ongoing entities that will continue in business indefinitely. In reality, the vast majority of business start ups move through these stages and cease business within a few years or within the founder's life time at most.
3) The term business cycle also refers to phases in the life of an ongoing business covering a year or several years, whereby the company takes in revenues from normal operations for a year or more, re-evaluates business performance and growth prospects, adjusts or changes the `business model` (competitive strategy, marketing strategy, pricing and margin models, etc.), and then resumes business under the new model for a period before re-evaluating again.
Ø The Economic Business Cycle: Recession | Depression | Recovery and Expansion
Ø Recession and Depression Defined
Ø The Economic Business Cycle: Causes and Cures
The Economic Business Cycle: Recession, Depression, Recovery and Expansion
The most familiar use of the terms business cycle or economic cycle refers to changes in economic activity within a country or countries. The cycle in this sense is defined in terms of economic output, especially the country's `gross domestic product (GDP) (the market value of all goods and services produced within the country during a year). The image below shows how different named phases of the cycle correspond to increases or decreases in GDP:

Over time, the GDP of most countries tends to grow, as suggested by the "Long Range Growth" line in the figure. The long range growth curve may be considered a baseline, around which economic output may fluctuate as the economy enters different phases of the business cycle. Note that stock market prices (the Stock Market Cycle) tend to rise or fall in anticipation of changes in the economy (GDP).

In reality, the "cycle" tends to be as less predictable, less regular, and less smooth than the figure above suggests. The length, severity, and sequence of phases may differ from what is shown in the figure.

The business/economic cycle should not be confused with seasonality or seasonal fluctuations in business. Seasonal fluctuations tend to impact some businesses and industries more than others and they are tied predictably to calendar seasons or to short-lived fads. By contrast, the business/economic cycle has broad impacts across companies, across industries, and across calendar seasons.

While the business cycle is defined and measured primarily in terms of national GDP, progress through its phases is felt most keenly by individuals and businesses in terms of changes in:

Ø Employment or unemployment.
Ø Wholesale sales and retail sales.
Ø New building loans and new building starts, or building closures and property foreclosures.
Ø Business start ups and business growth, or business failures.

Recession and Depression Defined

In the United States, recession is usually defined as two consecutive quarters of decline in the GDP. This definition is provided by the National Bureau of Economic Research (NEBR) and it is not, however, the only definition in use. An alternate definition even appears within the NEBR, from its Business Cycle Dating Committee. This committee reviews several economic indicators, including employment, real income, retail sales, and other factors, and defines a recession as the period of time between the "Peak" and the Trough" in the above chart.

The term recession was not used until the time of the Great Depression of 1929-33. Prior to that, any decrease in economic output was called a depression. "Recession" was coined at this time to distinguish between the severe conditions of the early 1930s, on the one hand, and lesser economic downturns, on the other hand, such as those occurring in 1910 and 1913.

The term depression is usually defined now simply as an economic downturn that is longer lasting and more severe than the more frequently occurring recessions. Sometimes, in order to define the term more formally, a depression is said to begin when GDP declines more than 10% from the most recent economic peak. By this criterion, the last two real depressions in the United States occurred:

Ø From 1929 to 1933—the Great Depression—where US GDP declined by nearly 33% and unemployment rose to 25%.
Ø In 1937-38, where GDP declined by more than 18% and unemployment reached 19%.
By contrast, US GDP declined at most 5% in the severe recession of 1973-75.

In general, periods of economic depression are characterized by greatly reduced GDP, as well as severely high measures of unemployment, foreclosures, business closures, and greatly reduced wholesale and retail sales activity.

The Economic Business Cycle: Causes and Cures

During recessions and depressions governments and private industry alike are keenly motivated to act on measures that might move the economy back into recovery and expansion. Any attempt to remedy an economic downturn, however, has to start with some understanding of why downturns occur in the first place and which factors will trigger recovery. This subject is central to the field of macroeconomics and, not surprisingly, it is a field characterized by competing theories and speculation, and few established "laws."

A number of factors that are known to be associated with upturns or downturns in the economy, although the extent to which they are either causes or results is not known.

Ø An imbalance or balance between the country's money supply, inflation, and interest rates (in the United States, maintaining this balance is the responsibility of the Federal Reserve Board).
Ø Excessive government spending, especially deficit spending, either outside the country or on non productive domestic programs.
Ø Consumer and business optimism or pessimism, regarding business growth and inflation.
Ø Large increases or decreases in the price of oil.
Ø Weak demand for goods and services.
The latter situation, weak demand, is a central factor in so-called Keynesian economics (after John Maynard Keynes). Since the 1930's, governments with capitalist economies have held--to some degree--the Keynesian view that during recessions and depressions, the government should act to increase aggregate demand by (a) increasing the money supply, and or (b) increasing government spending, and or (c) reducing taxes.

Plan for the future with the `right` people and the `right` business models for success.

We have another global crisis that needs urgent attention by `skilled and experienced people` who can do the job right!

EU Storm warning: As the European debt crisis spreads across the continent, the outlook for the single currency has never looked so grim. Financial markets fluctuated violently as Italy, Spain, Portugal and now France, plus Germany are dragged into the eurozone debt crisis triggered another day of turmoil for investors. Yet, the banks are `stashing` away billions in any currency at the highest level ever recorded!

--- --- ---

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More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

EU Credit Crisis Continues

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