World Economic Forum - Global Economics Weekly Brief
Optimism about continued global recovery at the World Economic Forum may have been jolted by the shock fall in UK GDP in the fourth quarter. But the decline is more likely to be a blip than the start of another dip. In the eurozone, recovery is starting to look stronger, although it remains patchy. In the US, `tax cuts` should help enliven consumers who are now waking up. The strongest growth is still expected in emerging markets, but the downgrading of Japan shows that the sovereign debt concerns are still with us. The global issue is `to much debt` and growth on borrowed money!
The UK economy shrank unexpectedly in the final quarter of 2010. Preliminary estimates suggest that economic activity slipped by 0.5% in Q4, bringing the annual growth rate for 2010 to 1.4%. The coldest December in over a century was to blame for the fall, but even without the freeze the economy would have stood still. The detailed figures show that the production sector did well, with manufacturing the star performer in a few sectors. While this was not enough to offset the contraction in services and construction, it does present some evidence of rebalancing in the UK economy.
The weather may have just postponed activity and estimates can be volatile, so the numbers may yet bounce back. But, with austerity measures about to bite in earnest, and consumers’ spending power squeezed by high inflation and weak wage growth, the economy is likely to remain pretty sluggish in 2011. Plus, still more people unemployed and 2 in 3 workers jobs being filled by foreigners.
Stubborn inflation troubled the Monetary Policy Committee. Worries about the effect of high inflation on consumers’ expectations led most members to think seriously about a rise at the January meeting. In the end, only Martin Weale joined Andrew Sentence in voting to raise the Bank Rate to 0.75%. Concerns about the weakness of private demand and the impact of the fiscal consolidation weighed the balance in favour of a hold. A decision seemingly justified by Tuesday’s GDP release. Yet, inflation is still rising!
The good news is that the budget deficit was smaller than expected in December. Net borrowing (excluding financial interventions) was £16.8bn, down 20% on both last month and this time last year. The lower than expected number seems to put the finances back on track to meet the full year borrowing target, although much will depend on the speed of GDP growth after the Q4 fall. See information below on UK debt. Not heavily focused on by the World Economic Forum.
Signs of more buoyant activity in the eurozone are encouraging. The January composite PMI index rose to a six-month high of 56.3 (a score above 50 signals expanding activity). The rise is consistent with increases in exports and new orders in November, but was mainly driven by the services component. Within the euro area Germany and France are driving the recovery, while the economies countries on the periphery stagnate.
American consumers boost US growth. The US economy grew at an annualised rate of 3.2% in Q4, up from 2.6% in Q3. This was below expectations, in spite of the largest growth in household consumption in more than four years. Imports fell and exports soared, also adding to growth, but weak investment and a stall in inventory growth let the side down. Extended `tax cuts` in 2011 and 2012 should help consumers drive more growth, particularly now that their confidence in the economy is improving. But the housing market will act as a drag. US house prices fell by 0.5% m/m in November (1.6%y/y) bringing them down to 2003 levels. This is 30% below the peak and only 3% above the 2009 trough. Existing home sales were better in November, but large stocks of property for sale will continue to weigh the market down. Plus, unemployment on the rise!
US Federal Reserve firmly in “wait and see” mode. In spite of rising commodity prices, the Federal Open Market Committee (FOMC) felt comfortable enough about long term inflation expectations to leave US interest rates unchanged and continue the second round of Quantitative Easing (QE2). The accommodative monetary policy should help the pursuit of full employment - the other half the Fed’s mandate. But strong growth will be needed to achieve this as the US unemployment rate is still at 9.4% after surging from less than half of this rate during the crisis.
Japan’s credit rating downgraded. Standard and Poor’s reduced Japan’s sovereign debt rating from AA to AA- due to its opinion of a lack of progress and coherent plan to reduce debt. Deflation, in spite of fiscal stimulus to encourage a recovery, along with an ageing population means Japan has a big job to do to get things on track, even after taking recent strong economic growth into account.
The City analyst David Buik says we should "get over" the bankers' bonus issue and "move on".
Should we also get over and move on from other unacceptable and immoral aspects of our society – just say "Ah well, so be it" and absorb them as the norm? Where there are social outrages that we have the power to address, we should certainly not "move on" from them; we should continue to make every effort to put them right.
What an exigently demanding fellow Nick Clegg is. Asked on the Today programme about the imminent round of bank bonuses – an embarrassment for the Coalition and salt in the wound for victims of the recession – he insisted, in his most caring tones, that the bank executives would "have to be sensitive". And he didn't just say it once either.
The word kept coming back – sometimes with further elaboration. In the light of bailouts, he continued, bankers should show "extra sensitivity and transparency". Good luck with that, I thought. And then I found myself wondering precisely what Mr Clegg meant by "sensitivity". Not too splashy with the celebratory Bollinger? Or simply canny enough to ensure that this year's windfalls coincided with an announcement about easy loans for first-time buyers?
Let us be realistic. While the Treasury Select Committee's members will take the opportunity to stick it to Bob Diamond today, no amount of public shaming is going to prevent the Barclays boss and his opposite numbers at rival banks paying unacceptable bonuses to staff over the next few weeks. Not least because for many people, any bonus at all for the bankers is unacceptable.
If the politicians cannot persuade the bankers to show what Nick Clegg, apparently without irony, calls "sensitivity" – and won't force them to do so – who might? Well, what about the Bank of England? It will soon have responsibility for prudential supervision of the banks under the "twin peaks" model of regulation now being implemented by the Government.
The £1bn question: RBS (Royal Bank of Scotland)
It is 83 per cent-owned by the British taxpayer, has had more than £45bn of direct aid poured in, £280bn of risky loans insured and a further £8bn set aside in case things get really bad. But the Government insisted yesterday it would not intervene to stop Royal Bank of Scotland's chief executive, Stephen Hester, earning up to £9m for his work last year.
Nor will it seek to cap the bonus pool of more than £1bn that the state-owned bank plans to lavish on its richly rewarded staff. A spokesman for David Cameron said: "We've made a broad statement which is about the need to see some restraint and some responsibility from the banks, but we are not going to set bonus pools for individual banks."
UK Financial Investments (UKFI), the government body charged with overseeing the taxpayers' investment in the banking system, declined to comment on "discussions" it has held with RBS over Mr Hester's remuneration package and those of its other bankers. However, UKFI gave its blessing last year to a £1.3bn bonus pool at RBS, and Mr Hester agreed to waive his bonus only "voluntarily".
Should have seen this at the World Economic Forum... If global governments had allowed banks to go bust there would be no bonuses` for their shoddy business skills, sorry, lack of skills!!
US banks were on brink of oblivion
`The crisis was the result of `human` action and inaction, not Mother Nature or computer models gone haywire` FCIC Report
(Financial Crisis Inquiry Commission Report)
All except one of America`s top financial institutions were at `serious risk of failure` during the height of the credit crisis they were instrumental of blame due to greed and lack of business skills, according to the country`s most senior monetary policymaker.
Revelations from the report `Financial Crisis Inquiry Commission` show that US Federal Reserve Chairman Ben Bernanke told the inquiry that 12 out of 13 most important financial institutions in the country came close to collapse. Even Goldman Sachs were a real chance they would go under. Now, they still pay out $10billion in bonuses in 2010! What the hell is going on that we allow these bonuses to be paid out again!
Between September and October 2008 was `the worst financial crisis in global history, including the Great Depression`, could it happen again, yes, if we allow these bankers to continue operating `without excellent business skills`.
In the report it states the 2008 turmoil was `avoidable` and challenged the notion that it could not have been foreseen. There were warning signs, the report states. The tragedy is that they were ignored or discounted. It added that the `crisis was the result of `human` action and inaction, not Mother Nature or computer models gone haywire. Why do bankers thing they are business people?
The FCIC also concluded that Goldman Sachs capitalised on the American government`s bailout of AIG. Goldman Sachs kept $2.9billion for itself!The World Economic Forum should have spoken!
Earlier this month, Barclays chief executive Bob Diamond told the UK Treasury Select Committee that `he` believed the ` period of remorse and apology for bankers` needs to be over. What do you think?
UK Office for National Statistics and HM Treasury jointly published on the 25 January 2011
AS at 31 December 2010
* Net UK Debt was £2,322.7 billion including interventions, equivalent to 154.9 % of Gross Domestic Product. also,
* Net Debt of £889.1 billion excluding interventions, equivalent to 59.3% of Gross Domestic Product
* Therefore, UK Banks were bailed out by £1,433.6 billion
What a mess these bankers have guided the UK into and still they wish to pay themselves billions of £`s in bonuses!
Please request your complimentary publication `The Global Competitiveness Report 2010 - 2011` World Economic Forum
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Weekly Economics review on the World Economic Forum