QE Efforts Pick-Up Globally. Is it too little too late?
Global Economics Weekly Brief
If watching Andy Murray was tension enough for you, spare a thought for economic policymakers. Across the world monetary policy belt buckles were loosened a notch or two in a bid to counter rapid weakening global conditions. In the UK the Monetary Policy Committee (MPC) boosted its quantitative easing (QE) scheme, while the European Central Bank (ECB) reduced Eurozone rates to a record low.
July, 9, 2012
Even China joined in the QE-like party, reducing its rate for the second month in a row. The US extended Operation Twist last month, but with its economy losing momentum too, the pressure to expand QE is rising. The background story is the same everywhere: rapid weaker global demand is hitting orders. And it’s compounded by tensions in the Eurozone. Even though the last EU leaders meeting brought hope of a solution, confidence is still pretty low. With most governments sticking to austerity plans, and uncertainty still rife, the only remedy is monetary. Expect buckles to be loosened a bit more before this is all over. More austerity plans to come globally!
The UK boosted QE in July. It has become unusual for the MPC to change policy outside of the Inflation Report cycle when it has access to more in depth analysis, but it took the plunge in July. The MPC voted to extend the asset purchase scheme by £50bn at July’s meeting, boosting the programme up to £375bn, or 25% of GDP, over the next four months. The statement accompanying the decision, and Mervyn King's gloomy testimony to the Treasury Select Committee, left us in no doubt that the MPC is worried about the economy. Now it’s a question of whether this boost to QE will be enough.
UK Banks exposed if Euro crisis escalates
Now we know why UK banks are not lending money! Britain`s banks do not have enough capital to withstand an escalation in the eurozone crisis, the Bank of England has warned. Barclays is the most exposed of all UK lenders to the eurozone periphery, with loan and sovereign debt exposures equivalent to 170% of its entire equity capital. Royal Bank of Scotland also has dangerously large total exposures to the eurozone region. Plus, the UK Quantitative Easing programme is now £375 billion which is almost 40% of the entire stock of national debt. What a state to be in! The past Labour government really messed up big time!
The banks scandal has revealed how a cosy club of bankers globally rigged rates. Now they will all pay the price! The credit crisis triggered the rates inquiry and would have gone undetected were it not for the financial crisis. When America authorities started their probe into allegations that lenders were `fiddling` Libor and other rates, they unwittingly opened up a hornet`s nest. How long as this global `fiddling` been going on? Many years we believe! Also, did governments know what was going on, probably! Do we trust the bankers and governments?
Greece fails to collect taxes due to staff cuts
The Greek government has been unable to collect £10 billion in court-ordered tax fines because it has cut too many staff. Previously, they could not collect taxes because no one requested/demanded the taxes! Greece need to enter the real world! At this present lack of responsibility and accountability the Greek government will fail to pay back any money to lenders!
Why do not governments act with responsibility and accountability with urgent attention to detail?
ECB cut its rates to a record low. The ECB also loosened policy by cutting its main rate to 0.75% last week. And it cut the deposit rate (interest paid on money parked overnight at the ECB) to zero, in the hope that it will encourage lending within the currency union. In his statement, President Draghi was notably concerned about weaker growth in countries that had previously been quite buoyant. It was a clear reference to Germany where recent data has been poor. In anticipation of tougher battles ahead Draghi left the door open for more measures, stating that “we still have all our artillery ready”. Europe is in serious trouble with very high bank borrowings and governments running out of money rapidly!
China cut its interest rates for the second consecutive month. The People's Bank of China cut its benchmark lending rate from 6.31% to 6%, having just cut rates last month. Before these moves, the Chinese had not cut interest rates since 2008. It also lowered the amount of depositors’ balances that banks must set aside. It’s unusual for China to undertake both moves on the same day and shows the authorities are ultra keen to stimulate demand to bolster growth. China’s manufacturing sector remains sluggish. The initial reading of China’s manufacturing PMI fell to a seven-month low in June. Rapidly falling export orders were a culprit and this underlines impact of the major problems in Europe and the US on overall global demand.
Lack of new orders dragged the UK economy down in June. The Purchasing Managers’ Indices (PMI) for services, manufacturing and construction all deteriorated in June. The construction index had its sharpest fall in two and a half years to 48.2 and joins manufacturing in the sub-50 contraction range. The service sector is still growing, but more slowly, as it has been hit by weaker economic conditions too. All three sectors suffered from fewer orders. New construction work dried up at its fastest rate since April 2009 and manufacturing orders declined for the third consecutive month. As cost pressures mount, it’s no wonder the survey suggests jobs are being shed in these sectors. More unemployment on its way rapidly in the next three months!
Eurozone activity picked up a bit in June, but the outlook remains dark. The final reading of the Eurozone composite PMI was up slightly on May, but at 46.4 it is still firmly in contraction territory. Data for the whole of Q2 showed the biggest contraction in three years as economic conditions deteriorated in the three months to June. It means the Eurozone economy is likely to have shrunk in Q2, despite avoiding a recession in Q1. A lack of new orders was the culprit in the Eurozone too. And it had the same consequences with firms cutting employment to reduce costs. No one in the Eurozone escaped. Even Germany, the economic poster-boy of the Eurozone, suffered its fastest contraction in three years. Watch this space for more information that will rocket Europe into the dark ages!
US employment and manufacturing figures were disappointing. US non-farm payrolls increased by 80,000 in June, up on May, but still well below the 100,000 the Federal Reserve thinks is necessary for a stable job market. The unemployment rate was unchanged at 8.2%, but the numbers confirm that US economic momentum is weak, especially after poor manufacturing data. The PMI equivalent in the US, the ISM, also fell from 53.5 to 49.7 - the first sub-50 reading in almost two years. US manufacturers were hit by a collapse in new orders too. There is no getting away from the fact that the US recovery is in trouble. With this backdrop it’s likely that Ben Bernanke and his colleagues at the Fed will feel the time is right to loosen their money belts sometime soon too. More unemployment on its way as the market contracts `big-time`!
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QE Too Little Too Late this weeks Global Economics Weekly