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Policy Makers - Global Economics Weekly Brief

Global Economics Weekly Brief

After a summer of financial turbulence and the warnings from the OECD and IMF that growth in developed economies is slowing sharply, policy-makers are feeling the pressure to do something – and quickly.

In the US, the combination of a stubbornly weak labour market and an election next year drove President Obama to reach for the fiscal pumps. In the Eurozone, the European Central Bank’s policy of buying bonds is going ahead rapidly, albeit with much controversy. And in the UK, there are increased calls for special measures to kick-start growth. Meanwhile in Switzerland, currency appreciation due to safe haven investment flows led authorities to peg the franc to the euro. With many developed economies on the ropes, the fight back from policy-makers appears to have begun. The fight is on to save the economies of many global countries rapidly.

The UK services sector follows manufacturing down
. The Purchasing Managers’ Index (PMI) survey of the UK service sector saw its largest fall in over 10 years in August. At 51.1, it is only marginally above the 50-mark, below which signals contraction. On top of last week’s manufacturing sector reading, it reveals a UK private sector that is struggling.

Bank of England maintains current stance. The Bank of England kept interest rates and the asset purchase scheme unchanged at the September meeting, despite the darkening outlook for the UK. The minutes will be released next week and should shed light on the likely future policy stance. The weakness in recent data may have persuaded other Monetary Policy Committee (MPC) members to pitch their tent in Adam Posen’s camp and vote for further asset purchases.

European Central Bank (ECB) turns more gloomy by the day! At last week’s press conference, ECB President Jean Claude-Trichet was pessimistic about the Eurozone’s economic outlook, warning of an increased risk of a more pronounced downturn. Things didn't get better as one ECB board member resigned over the current policy to purchase the sovereign debt of peripheral economies. Meanwhile, fears of Greek default continue to stalk the markets. The IMF and Europe had raised the possibility of Greece not receiving its next tranche of bailout funds for not meeting budget deficit targets. Greece announced a new property tax and a default should be avoided for now or will it?, but the situation remains acute. Watch this space!

Eurozone GDP and PMI data points to slowing growth.
Confirmation that Eurozone growth slowed to just 0.2%q/q in Q2 was very disappointing and raised questions about the ECB’s decision to increase interest rates twice just months before. More recent data indicates a further deterioration too. The services PMI for the Eurozone came in at 51.5 in August, a 28 month low. The underlying data shows contraction in both Italy and Spain and near stagnation in Germany. The Eurozone as very serious issues!

Switzerland decides enough is enough.
Switzerland’s safe-haven status in times of financial distress had brought the unwelcome side-effect of an over-valued currency. This undermines exporters’ competitiveness and reduces import prices to a degree where economy-wide deflation is becoming a possibility. To prevent further rises the authorities decided to peg the Swiss franc against the euro and a promise to defend it with the “utmost determination”. Unfortunately this does not solve the problem. Capital will simply flow to other countries and potentially create similar problems there.

President Obama proposes bold jobs package. Stubborn unemployment in the US prompted the announcement of a $450bn American Jobs Act. The aim is to encourage job creation by reducing employment costs via lower payroll and employee taxes. But the chances of the package making its way through Congress in its current guise are slim. Experience suggests that a political battle similar to that seen during the debt ceiling debacle in July may be on the cards. Will this package help and will there be a ROI?

US services sentiment bucks global trend. Positive data on the US economy has been hard to come by of late, so the Institute of Supply Management's (ISM) non-manufacturing index unexpected rise to 53.3 in August from 52.7 in July was very welcome news. Unfortunately the report wasn't all positive. The output component of the index fell by 0.5 to 55.6 and there was no hint of an improvement in the labour market – its measure slipped 0.9 to 51.6.

China’s inflation may have peaked. Consumer prices in August rose 6.2%y/y, down from 6.5% y/y as food inflation moderated. Speculation that China will ease policy in response to the global slowdown is probably premature though. Although inflation may have peaked, it will come down slowly. So, while price stability remains a priority of the authorities, the policy stance is likely to remain hawkish. Augusts' industrial production, investment and retail sales data continue to suggest a gradual slowdown from elevated growth levels.

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Policy Makers
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