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IMF Wants Action - Global Economics Weekly Brief

IMF Wants Central Bank Action

Global Economics Weekly Brief

Appetite for Action Now!

In the last few weeks there has been a vast change in global economic conditions and sentiment. At the annual meeting between the IMF and the World Bank over the weekend it was more than clear that there is an `appetite for action` among policymakers to confront the crisis, particularly to quell concerns about the collapse of the euro and promote stability and growth. Over the next few weeks we will look more closely at the fundamentals of the global economy to assess where we truly are and what options are open to us. This new crisis will be larger than 2007/08.

Weak demand raises the question of more quantitative easing (QE) in the UK. The minutes of the Monetary Poloci Committee’s (MPC) September meeting showed something of a shift in sentiment towards extending the asset purchase programme, but not enough to change the voting – yet. The MPC noted that weak demand growth is likely to persist for longer given a weaker than expected conditions at home and abroad. This is also supported by the fall in consumer confidence in August reported by Nationwide. Overall, lower inflation risk gives the MPC a little more room to loosen monetary policy to support economic growth. The last Labour government really left the UK with a major problem much larger than reported.

UK austerity measures continue, but public finances are still under pressure. Local authorities spent £6bn less in the last fiscal year (2010/11) than the first estimates suggested. This made a small dent in government borrowing figures, but it wasn't enough. Public sector net borrowing was £15.9 billion in August, almost £2bn higher than the same month last year. And it’s going to remain tough. Amid more calls for a softer fiscal approach, serious questions have been raised about the Office for Budget Responsibility’s estimates of how quickly the deficit can fall as the economy recovers. This coupled with slowing global economic growth suggest that getting the public finances back under control may be an even bigger challenge than first thought. The UK government really needs to get a grip on public spending rapidly. They need to pull in the activities of the civil servants big time right now.

Eurozone output contracted for the first time in over two years in September. The flash estimate of Eurozone output for September fell below the magic 50 no-change level for the first time since July 2009. The manufacturing reading came in at 48.4 in September while the services sector registered a reading of 49.1 - its first contraction in over two years. In both cases, the declines contrast markedly with strong rates of growth in early 2011.The composite output reading fell to 49.2, down from 50.7 in August. Eurozone with a major problem that needs to be jumped on rapidly.

Eurozone confidence deteriorated in September. Estimates of Eurozone consumer confidence show that it fell to its lowest point in two years. At the same time the ZEW survey of investor and analyst confidence in the Eurozone slipped by 4.6 points to -44.6. With worries about Greece’s fate; Italy and Spain fighting to fend off contagion; questions being asked about the French sovereign debt rating; and fears over banking exposure in major economies, it is hardly surprising that confidence continues to fall.

Italy becomes the latest country to have its debt downgraded. The latest twist in the Eurozone debt crisis was a downgrade of Italy's sovereign debt by Standard & Poor's, by one notch, to A with a negative outlook. This implies further downgrades are possible. The downgrade was due to "weakening growth prospects" and S&P's view that the government will find it more difficult to respond to macroeconomic challenges given the country's "fragile governing coalition and policy differences within the Parliament".

US adopts ‘Operation Twist’ to stimulate its economy. In spite of higher inflation reported last month the Federal Reserve decided to loosen its monetary stance at its latest meeting. But this time it’s not injecting any more funds. Instead, rather than ‘sticking’ with the existing maturity profile of government debt, the Fed will switch (or twist) $400 billion of short dated bonds into longer dated ones. This should reduce longer-term interest rates and spark some life into the stuttering US economy. But no-one is pretending that this is a failsafe cure. The Fed is clear that there are still significant downside risks to the growth outlook. More unemployment on its way.

Slowing global demand affects China too.
Falling manufacturing output in China has proved to be more than just a summer lull. The initial PMI reading for September fell further below the magic 50, from 49.9 to 49.4 in August. But with industrial production growing at 13.5%y/y, the overall figures do not seriously alter the likelihood of a soft landing.

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

--- --- ---

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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.

IMF Wants Action

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Comments on this item:

06-10-2011 07:37:32
Our current economic system is too slow and cannot absorb the hundreds and thousands of Asians enjoying upward mobility.
Our real estate money pumps have demonstrated their vulnerability and are too easy to manipulate. We are just waiting for China's bubble to burst. We need a better foundation.
We have life styles and economies trying to match each other at very unequal places. When we were young we learned about a future where we could work less and get more. Today our own economic system is standing in the way of this dream. With so much work that needs to be done and so many people getting laid off by business and governments we need to wake up and get off the train. Why should money be the reason we cannot have utopia?
The problems are so deeply intertwined. Do we want to live like the Greeks or the Chinese? Do we want to work like the Greeks or the Chinese? We should start with these kinds of questions and rebuild the system.
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