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Greece, Printing Money and Inflation - Economics Weekly

Greece, Printing Money and Inflation

The Global Economics Weekly Brief

Germany’s lower house of parliament, the Bundestag, voted in favour of the expanded European Financial Stability Fund (EFSF). This was an important test for the future of the Eurozone. But it is not out of the woods just yet. Although the EFSF is a key tool in Europe’s fight to fend off sovereign debt contagion, further measures are likely to be needed to reassure sceptical markets.

Greeks took to the streets once more, protesting against further austerity measures as the government seeks to obtain the next tranche of bailout funds. While Europe’s problems dominated the headlines, not everything was negative. Q2 growth in the US was revised upwards and China’s manufacturing sector reported an improvement in September. Watch this space for more positive news.

Eurozone crisis averted again, but there is still a lot of work to do rapidly.
The German parliament voted 523-85 in favour of increasing the size of the €440bn EFSF fund and widening its scope – a much larger majority than was hoped. This is a key step to reassuring markets that there is a real commitment to save the euro, and in turn, limiting contagion. But there is still a lot of work to be done. It is likely that the size of the facility will need to be increased again – I estimate to about €2tr – before markets are reassured and some normality can return. The Eurozone needs help `big-time` rapidly or it will collapse very quickly.

Greece is still on the edge.
The International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB) – together known as the ‘troika’ – are assessing whether Greece’s austerity measures are sufficient to permit the release of the next €8bn tranche of bailout funds. The Greek government needs this to avoid default, but its proposal to raise property taxes and cut public sector jobs was met by further public unrest. While testing the resolve of the Greek parliament, Sunday saw the Greek cabinet approve further cuts. The Greek people need to get into the `real` world or they will suffer more than they are at present!

Eurozone inflation rate spikes unexpectedly. Inflation in the Eurozone rose from 2.5%y/y in August to 3%y/y in September, well above the ECB’s target of 2%. This poses a dilemma for President Trichet’s last ECB meeting this week. With growth slowing, many analysts expect the ECB to cut interest rates from the current 1.5%, but an elevated inflation rate may tempt the ECB to hold off.

Eurozone economic sentiment fell sharply in September. Somewhat unsurprisingly the European Commission’s measure of overall economic sentiment fell sharply in September. At 95, the measure is now well below the long term average of 100. Confidence fell most in Italy and France while German business confidence, as measured by the IFO survey, fell from 118.1 in August to 117.9 in September as Europe's biggest economy slows.

US Q2 economic growth data revised up but consumers are struggling. US GDP growth for Q2 was revised up to an annualised rate of 1.3%, from 1%, bringing some good news to the beleaguered economy. But data for the months since Q2 reveal US consumers are struggling. Consumer spending (adjusted for inflation) was unchanged between July and August while incomes fell 0.1%, the first drop since October 2009. Furthermore, there are signs US consumers are dipping into savings to maintain living standards as the savings rate fell to 4.5% in August, the lowest level since December 2009.

US house prices still very flat. The Case-Shiller 20 city index showed that US house prices stood still in July. However, prices are 4.1% lower than this time last year. A large supply of unsold properties is likely to keep prices depressed for some time. Unemployment due to rise again from October 2011.

Mixed messages in the UK housing market. The number of mortgage approvals for house purchase increased by 6%m/m and 16%y/y in August, bringing them to a 20-month high. But the message on house prices from Nationwide was less encouraging. In the three months to September, prices fell by 0.3%y/y, and modest price falls are on the cards for the rest of this year. Still very few first-time buyers!

UK Bank of England to consider printing more money (£50b). The Bank of England will have to consider the gathering evidence that another recession is on the cards before deciding whether to begin another round of quantitative easing (QE) to support the UK economy this week. Fears of another recession mean it is “touch and go” whether the Bank will opt for another dose of emergency measures, after a collapse in consumer confidence, the Government’s budget cuts and the eurozone debt crisis hurt growth. The Bank’s Monetary Policy Committee (MPC) is widely believed to be on the verge of sanctioning another round of QE, or electronic money printing, with its meetings this week or next month thought to be the most likely points for the measure to be approved. Should the Bank decide to alter its policy, it will be the first change it has made since raising the level of QE from £25bn to £200bn, or 14 per cent of GDP, in November 2009. Should the MPC opt to return to QE it will be a remarkable change of position from just three months ago, when two members wanted to increase interest rates from 0.5 per cent to beat down inflation.

Chinese manufacturing improves.
The pillar of strength in the global economy continues to be watched closely for signs of a slowdown, but the PMI readings for September suggest things are improving. The final reading of the HSBC manufacturing PMI was 49.9, unchanged from August, while the government PMI hit a 4-month high at 51.2. A key risk to China’s economy is the continued rapid pace of credit growth and this comes despite numerous attempts to tighten monetary policy. The People’s Bank of China has raised interest rates five times and increased reserve requirements nine times in the past twelve months.

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

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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.

Greece, Printing Money and Inflation!

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