Financial

World markets rise as investors welcome boost from cheaper credit in China and prospects for further delay to Federal Reserve rate hike in US. The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%…

 

Powered by Guardian.co.ukThis article titled “China interest rate cut fuels fears over ailing economy” was written by Phillip Inman Economics correspondent, for The Guardian on Friday 23rd October 2015 13.24 UTC

China fuelled fears that its ailing economy is about to slow further after Beijing cut its main interest rate by 0.25 percentage points.

The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%.

The move follows official data earlier this week showing that economic growth in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one of the biggest factors, blamed partly by analysts on the high value of China’s currency, the yuan.

The rate cut sent European stock markets higher as investors welcomed the boost from cheaper credit in China, together with the hint of further monetary easing by the European Central Bank president, Mario Draghi, on Thursday.

Investors were also buoyed by the likelihood that the US Federal Reserve would be forced to signal another delay to the first US rate rise since the financial crash of 2008-2009 until later next year.

The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German Dax and French CAC were up almost 3%.

The People’s Bank of China’s last rate cut in August triggered turmoil in world markets after Beijing combined the decision with a 2% reduction in the yuan’s value. Shocked at the prospect of a slide in the Chinese currency, investors panicked and sent markets plunging.

Some economists have warned that the world economy is about to experience a third leg of post-crash instability after the initial banking collapse and eurozone crisis. The slowdown in China, as it reduces debts and a dependence for growth on investment in heavy industry and property, will be the third leg.

World trade has already contracted this year with analysts forecasting weaker trade next year. The International Monetary Fund (IMF) in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation.

At its October annual meeting, it said growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while growth in the rest of the world is expected to fall from 4.6% to 4%.

Sanjiv Shah, chief investment Officer of Sun Global Investments, said: “The Chinese decision indicates that the authorities are clearly worried about the slowdown in the pace of economic growth and have decide to engage in more pre-emptive action. The [People’s Bank of China] has cut benchmark rates and reduced banks’ reserve requirements as well as scrapping deposit controls.”

But Mark Williams, chief Asia economist at Capital Economics, remained upbeat about the prospects for China’s sustained growth, arguing that the cut in interest rates was part of a longer-term strategy and not a reaction to deteriorating growth.

“The key point is that we shouldn’t take today’s announcement as evidence that policymakers have grown more concerned about the economy. Instead, this is a controlled easing cycle that underlines how China’s policymakers, unlike many of their peers elsewhere, still have room for policy manoeuvre,” he said.

“Admittedly, we’re still waiting for clear evidence of an economic turnaround – September’s activity data still don’t show any great improvement. Nonetheless, with more stimulus in the pipeline, we still believe the economy will look stronger soon.”

Corporations considered bellwethers of the global economy have also warned of a sharp slowdown. Caterpillar, the industrial equipment manufacturer, has seen profits slide over the last year. AP Moller-Maersk, the shipping firm cut its 2015 profit forecast by 15% on Friday, blaming a slowdown in the container shipping market.

The Danish conglomerate operates Maersk Line, the world’s largest container shipping company which transports roughly 20% of all goods on the busiest routes between Asia and Europe.

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USA 

The US economy grew faster than previously thought by 3.9% in the second quarter of the year, exceeding economists’ expectations. New estimate fuels expectations the Federal Reserve will raise interest rates in 2015…

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Government data suggested the world’s biggest economy grew at an annual pace of 3.9% between April and June, exceeding economists’ expectations for the GDP estimate to stay unchanged at 3.7%. It marked an even stronger bounceback from the sluggish 0.6% growth recorded in the opening months of 2015 when an especially harsh winter hit economic activity.

The report followed comments on Thursday from the head of the US central bank, Janet Yellen, who said she could start raising borrowing costs from their record low “later this year”.

US GDP

The dollar strengthened against other currencies and US stock markets rallied after the upward revision to GDP, which the Commerce Department said was largely driven by consumer spending being stronger than previously thought.

Economists said the figures left the door open for the US central bank to raise interest rates from their current record low of close to zero at policy meetings in October or December.

“Yellen has confirmed a hike can still occur in 2015, so speculation over a December move is currently rife in the market – with short-term dollar bulls hoping for an October move,” said Alex Lydall, senior trader at foreign exchange business Foenix Partners.

“With the exception of inflation, economic indicators are still solid for the domestic economy in the US, so the pertinent question remains: will the Fed risk looking irresponsible and delay rate hikes into 2016, or will they take the plunge this year, with perhaps a more cautious hike than the expected 0.25%? The jury is still out.”

The Federal Reserve held off raising borrowing costs at its policy meeting last week as it cited volatility in the global economy. But Yellen indicated in a speech on Thursday this week that there was a still a good chance the first hike for almost a decade could come before the year is out. She said US economic prospects “generally appear solid” and it was best not to wait too long to tighten policy, which has been ultra-loose since the global financial crisis.

However, some experts noted that GDP figures did not give the most up-to-date picture of the economy’s performance and that more timely economic indicators painted a gloomier picture.

The revision had “little bearing on US policy”, said Chris Williamson, chief economist at economic data company Markit, which tracks business activity in the US and other economies.

“It does little to change the story that the economy rebounded strongly in the spring after the weak patch seen earlier in the year. More important are the forward-looking indicators, which include a number of red flag warnings that growth is slowing amid headwinds of the strong dollar, slumping oil prices, financial market volatility and emerging market jitters,” he added.

“The more up-to-date survey data play into the hands of dovish policymakers and will reduce the odds of interest rates rising any time soon.”

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Financial markets focused on the more downbeat indicators of construction and industrial production that some say might be a sign that the UK economy may be losing steam along with its largest trading partner the eurozone…

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Powered by Guardian.co.ukThis article titled “Official data points to loss of momentum in UK economy” was written by Katie Allen, for The Guardian on Friday 9th January 2015 16.30 UTC

Further evidence of a slowing British economy came on Friday as official figures showed a surprise drop in construction in November and falling industrial output as oil and gas output declined sharply.

But the data showed a bounceback in factory output that buoyed hopes for the manufacturing sector and good news on exports suggested UK companies could weather troubles in their biggest trading partner, the eurozone.

Financial markets focused on the more downbeat indicators, taking them as the latest evidence the economy lost steam in the final months of 2014. The pound lost ground against the dollar as traders bet the Bank of England would be in no hurry to raise interest rates from their record low, given the mixed signals on the economy.

“Disappointing official data are adding to survey evidence which indicate that the rate of UK economic growth slowed towards the end of last year,” said Chris Williamson, chief economist at data analysts Markit.

“Looking at all of the official statistics and survey evidence currently available, the data collectively point to the economy growing 0.5% in the fourth quarter, down from 0.7% in the third quarter,” he added.

While economists said it was too soon to say whether the slowdown at the end of the year continued into 2015, the latest figures will be unwelcome to the Conservatives as they seek to convince voters that the recovery remains on track.

“On balance, there is further evidence that UK growth is slowing as we head towards the general election,” said Simon Wells, chief UK economist at HSBC.

Among the bright spots for the economy in a clutch of reports from the Office for National Statistics was the news that manufacturing output rose by 0.7% in November, reversing October’s fall and beating economists’ expectations for growth of just 0.3%. On the year, output was up 2.7%.

But the wider industrial sector which also includes utilities, mining and oil and gas production, fell 0.1%. That drop was driven largely by a 5.5% fall in oil and gas output. The ONS said the weakness was partly down to maintenance work at two North Sea oil fields.

Respected thinktank the National Institute of Economic and Social Research said following the latest industrial production numbers it estimated growth slowed to 0.6% in the final three months of last year, after 0.7% in the three months to November 2014.

Separate official figures from the construction sector showed output fell by 2.0% on the month in November, defying economists’ forecasts for growth and contrasting with surveys of the sector.

The news on trade was more encouraging, however, as the ONS reported the narrowest trade deficit since June 2013.

The manufacturing sector is still not back to its pre-crisis strength and exports have not grown as fast as the government would have hoped. Progress has been slow in the government’s push to rebalance the economy away from overdependence on domestic demand, but some economists are predicting a strong 2015 for manufacturing.

A drop in oil prices to their lowest level in more than five years has buoyed hopes for the sector. Maeve Johnston at the thinktank Capital Economics cautioned it was far from certain oil prices will remain so low, but the fall should help “reinvigorate the recovery”.

“Indeed, if low oil prices are sustained, it should greatly reduce costs for the manufacturing sector, providing some welcome support over 2015. And sustained low oil prices would also ensure that the improvement in the trade deficit proves to be more than a flash in the pan,” she said.

The trade numbers beat expectations as the ONS reported the goods trade gap narrowed by £1bn to £8.8bn in November, as exports edged down but imports fell faster. Economists had forecast a £9.4bn gap. The less erratic figures for the three months to November showed exports grew by £2bn and imports shrank by £0.5bn.

The details showed exporters continued to benefit from targeting markets beyond the deflation-hit eurozone. Exports to countries outside the European Union increased by £2.1bn, or 6.0%, in the three months to November from the previous three months. Exports to the EU decreased by £0.1bn, or 0.3%. At the same time, the UK recorded its largest ever deficit with Germany, reflecting a decrease in exports and a slight increase in imports.

The trade gap for goods and services taken together fell to its lowest since June 2013, at £1.4bn in November.

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With its linked trade and innovation deficits, the UK seems as unprepared for a currency war as it was for real war in 1939. Countries are trying to export deflation somewhere else, using currency manipulation to do so…

 


Powered by Guardian.co.ukThis article titled “UK looks ill-prepared if a global currency war breaks out” was written by Larry Elliott economics editor, for The Guardian on Sunday 17th November 2013 19.41 UTC

Rumours of war are in the air. Currency war, that is. The US treasury has forged an alliance with Brussels to attack Germany’s beggar-thy-neighbour approach to the rest of the eurozone. Last week the Czech government said it would defend its economy by driving down the value of  the koruna, following the aggressively interventionist example of  Japan and Switzerland.

It’s not hard to see why the atmosphere is becoming less cordial. This is a low growth world marked by over-capacity. Wages are under downward pressure and this is leading to ever-stronger deflationary pressure. A lack of international policy co-operation means that countries are trying to export deflation somewhere else, using currency manipulation to do so.

If a full-scale currency war does break out Britain looks as ill-prepared as it was for a military fight in 1939. We like to think of ourselves as a nation of buccaneering traders but only 16% of small and medium enterprises, with a turnover of over £20m, are actually exporting. We like to think of ourselves as the nation of innovators, yet as Richard Jones, of Sheffield University, notes, the UK is a less research and development intensive country than it was 30 years ago, and it lags well behind most of its rivals. The UK has linked trade and innovation deficits.

Jones, in a paper for the Sheffield Political Economy Research Institute, examines in detail how during the past 30 years the UK’s corporate laboratories have vanished and how big R&D spenders such as ICI and GEC switched from being companies that thought about long-term investment to ones where the prevailing doctrine was to return the money spent on R&D to shareholders.

Those in charge of UK manufacturing companies became more interested in the next bid, the next deal and the next set of quarterly results than in developing new product ranges.

The consequences of decades of neglect of the country’s productive base and an over-reliance on North Sea oil and financial services are now glaringly apparent. In the past, recessions have ended with the current account broadly in balance. This recovery starts with a current account deficit of more than 3%  of national output.

This is despite a fall of 20% in the value of the pound between 2007 and 2013, which in theory should have boosted exports. In reality, exports grew by 0.4% a year between early 2009 and the start of 2013, compared with 1% a year in the previous decade.

Ministers have a pat answer when quizzed about the poor performance of exports. It is, they say, the result of geography. More than 40% of UK exports go to the eurozone, where growth is weak and demand for imports has collapsed. So the impact of sterling’s depreciation has been blunted.

This view is not shared by the Bank of England. While admitting that the global recovery is patchy, the bank noted in its February inflation report that “the relative weakness of UK exports does not reflect particular weakness in its major trading partners”. It concluded that some other explanation was needed “to explain the disappointing performance of UK exports”, and found it in a sharp drop in exports of financial services and the tendency of UK firms to use a cheaper pound to boost profits rather than increase market share. The decline in exports from the City since the crash highlights the risks for Britain of the “eggs in one basket” approach.

As Ken Coutts and Bob Rowthorn note in a paper on the prospects for the balance of payments, the UK has gone from being a country that had a 10% of GDP surplus in trade in manufactures in 1950 to running a 4% of GDP deficit by 2011. North Sea oil and gas were in decline, so energy added to the deficit by 1.3% of GDP. Food and government transfers to overseas bodies such as the EU, World Bank and UN were the other big debits.

On the other side of the ledger there were three sources of surpluses: financial services and insurance (3.1% of GDP); other knowledge-intensive services, which include law, consultancy and IT (2.5% of GDP); and investment income (1.1% of GDP). Once all the debits and credits were totted up Britain had a current account deficit of 1.9% of national income. This rose to 4% of GDP in 2012.

The recession has taken a heavy toll on two of the surplus sectors. Investment income has turned negative, and global demand for financial services has fallen. This has affected the UK more than the other big global providers of financial services, the US and EU.

According to the Bank of England, “This could reflect lower demand for UK financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis.” This is a polite way of saying that no one any longer wants what Lord Turner once dubbed the City’s “socially useless” products.

Coutts and Rowthorn model what happens to the current account using assumptions for growth in the UK domestic economy and world trade, the level of UK competitiveness, oil prices, North Sea oil and gas production, and returns on financial assets.

The baseline projection is that the current account is 3% of GDP in 2022. Using a slightly more pessimistic assumption, the deficit swells to 5% of GDP. As the authors note: “A deficit of this magnitude would be a cause for serious alarm.”

It certainly would be. The outgoing trade and investment minister, Lord Green, told a conference in the City to mark export week that there was no guarantee the rest of the world would be prepared to finance deficits of this size for ever. The government has a target for raising exports to £1tn a year by 2020 – which will require them to grow by 9% a year. (The average since 2012 has been 5%.)

We have heard the “export or die” message many times in the past, to little effect it has to be said. It is not impossible to improve Britain’s export performance, though doing so with the current economic model is a pipe dream. It will require nurturing manufacturing, knowledge-based services and those bits of the financial services sector for which there is long-term demand.

Britain, Jones says, “needs to build a new developmental state, a state that once again takes responsibility for large-scale technological innovation as the basis for sustainable growth and prosperity”. Amen to that. If a currency war is brewing, we need the can-do spirit of 1940, not the head-in-the-sands approach of 1938.

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While jobs growth and output are rising fast in the construction industry, retail offers a more mixed picture of the UK economy. Forecasting groups have modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013…

 


Powered by Guardian.co.ukThis article titled “Construction and retail – contrasting perspectives on UK economic recovery” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 5th November 2013 00.01 UTC

Construction and retailing offer contrasting perspectives on Britain’s economic recovery. On the UK’s building sites, things are looking up . The monthly construction industry health check from CIPS/Markit showed jobs growth and output rising at their fastest for six years. Although that may be more a reflection of the deep hole the sector plunged into during the recession, sentiment has certainly improved. The Government’s Help to Buy scheme has boosted house building, but Monday’s report suggests demand for commercial property is also on the up.

Tuesday’s report from the British Retailers Consortium is more mixed. After a strong summer, spending growth in the high street has cooled in the last couple of months. That could be because sales of new winter fashions have been hit by unseasonally warm weather, or it could be that consumers are saving up for a big splurge at Christmas. It could be that individuals are finding it hard to make the sums add up during a prolonged period when prices have been rising more quickly than wages. In all probability, the cautious mood is a combination of all three.

Rising consumer spending is the reason economic activity picked up in the second and third quarters of the year. There was little boost from the other components of growth -– investment, exports and the state – so the expansion was the result of higher household spending. How is this possible when real earnings are falling? In part, spending has been encouraged by rising employment. In part, it has been aided by stronger consumer confidence, which has led to people running down the precautionary savings they built up when they were more pessimistic about the future.

Clearly, consumers will be unable to continue dipping into their savings to fund their spending for ever. That’s why forecasting groups such as the National Institute for Economic Research have only modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013. NIESR sees little prospect of stronger investment kicking in, and with the prospects for exporters decidedly mixed that means consumers will again bear the strain.

Even so, the NIESR forecast looks too low. There will be some recovery in investment in response to stronger consumer spending. More significantly, perhaps, the housing market now has real momentum and that will lead to some further drop in the savings ratio to compensate for squeezed incomes.

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Larry Elliott: It is hard to see how the Fed can start to scale back its quantitative easing program this year. Nobody is sure any longer what the Fed is really up to. What will it take for the Fed to start winding down the stimulus?…

 


Powered by Guardian.co.ukThis article titled “Federal Reserve tapering decision has baffled the markets” was written by Larry Elliott, economics editor, for The Guardian on Thursday 19th September 2013 17.19 UTC

The dust was still settling on Thursday after the Federal Reserve delivered one of the biggest surprises to financial markets in many a year. This was a return to the central banking practices of the past when policymakers liked to keep people guessing about their intentions. These days central bankers pride themselves on their transparency.

But nobody is sure any longer what the Fed is really up to. Clearly it got cold feet about announcing even the most modest reduction in the amount of stimulus provided to the US economy through its long-term asset purchase programme, but both the decision and the way it was announced raised more questions than they answered.

Why was there no warning to the markets that the Fed was worried about the slowdown in growth? Why, in the absence of such a warning, did it not go ahead with a tokenist reduction in the stimulus, of say $5bn (£3.17bn) a month, that would have made good the commitment to start tapering but had no material impact on growth? What will it now take for the Fed to start winding down the stimulus?

But although the Fed’s communications strategy now lies in tatters, some conclusions can be drawn from the postponement of the taper. Firstly, policy is going to remain loose for longer than the markets envisaged. It is hard to see how the Fed can start to scale back its quantitative easing programme this year, and the prospect of the process being completed in 2014 – as originally envisaged – is as good as dead.

Secondly, the Fed is even more doveish than the markets thought. When Ben Bernanke first floated the idea of the taper back in May, the notion was that the trigger for the taper would be falling unemployment. But despite a continued moderate improvement in the labour market, the Fed still feels the time is not ripe to act. It took fright when speculation about the taper led to rising bond yields, making mortgages more expensive. It looked askance when share prices fell. And it is worried about the possible consequences of the looming budget showdown between Democrats and Republicans in Washington. So when the time came to act, it blinked.

Thirdly, the Fed has provided a respite – albeit probably temporary – to emerging markets that had seen their currencies fall against the dollar in anticipation of a gradual withdrawal of the stimulus.

Finally, the muted second day reaction to the decision was the reaction to one final unanswered question: does the Fed have the remotest idea how to unwind the stimulus? As Stephen Lewis of Monument Securities put it: Bernanke has given the “impression of being astride a tiger he dare not dismount.”

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After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

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Weaker-than-expected growth figures scotch fanciful hopes that Abenomics had found a magic cure for Japan’s woes. Weak growth has raised doubts about whether the government will go ahead with the increase in consumption tax next year…

 


Powered by Guardian.co.ukThis article titled “Weak Japanese GDP data highlights flaws in Shinzo Abe’s three ‘arrows’” was written by Larry Elliott, for The Guardian on Monday 12th August 2013 16.36 UTC

The honeymoon is over for Japan’s prime minister, Shinzo Abe. The financial markets loved it when Abe announced a three-arrow strategy last year for ending his country’s two decade struggle with deflation and sluggish growth. Share prices soared and the yen fell after the new government pledged large-scale quantitative easing, higher public spending and structural reform in a package dubbed Abenomics.

But markets were left distinctly underwhelmed on Monday by Japan’s latest GDP figures, which showed growth at 2.6% in the year to the second quarter of 2013, down from 3.8% in the 12 months ending in March. The rate of expansion was far weaker than expected and scotched the always rather fanciful hopes that Abe had found a magic bullet for Japan’s woes. He hasn’t.

Problems have emerged with every bit of the three-quiver policy. Firstly, driving down the value of the yen was supposed to boost the Japanese economy by making life easier for its key export sector. But it has also raised the cost of imports, particularly fuel, at a time when domestic energy production remains hampered by the Fukushima nuclear plant. Dearer energy raises business costs and eats into consumers’ real incomes. As some analysts noted, Japan is getting higher inflation as planned, but it is the wrong sort of inflation.

A second problem is that doubts are starting to surface about the government’s commitment to structural reform. Japan is an elderly and conservative country where the dynamics of an ageing population make it mightily difficult to raise participation rates in the labour market or reduce subsidies to farmers, even if ministers were prepared to make themselves unpopular.

But the biggest immediate problem for Abe is that the weak growth has raised doubts about whether he will go ahead with the increase in consumption tax next year, designed to show markets that Tokyo is serious about tackling Japan’s public debt, currently 240% of GDP. The increase in sales tax from 5% to 8% is chunky and, with a second increase to 10% planned for 2015, clearly has the capacity to derail economic recovery.

Japan has history in this respect, with tentative recoveries in the 1990s aborted due to over-hasty tightening of policy. Ideally, the increase in sales tax should take place at a slower rate over a longer period, which is what one of Abe’s advisers suggested on Monday. The question is whether this can be achieved without the government’s credibility being shredded. A final decision will be taken next month: the hesitancy adds to the sense that Abenomics is essentially smoke and mirrors.

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There is a realization that Ben Bernanke and the Fed face a near-impossible task in getting their timing right. The clamour for an end to QE is growing in the US as the job market improves. But can we just learn to trust the Fed and relax?..

 


Powered by Guardian.co.ukThis article titled “Is it time to stop worrying and learn to trust the Federal Reserve?” was written by Nils Pratley, for The Guardian on Friday 7th June 2013 22.31 UTC

• Can we relax? Was Friday's US employment report sufficiently gentle to calm investors and stop them fretting about a potential calamity when the US Federal Reserve starts to withdraw its monetary medicine?

It's certainly true that Friday's non-farm payrolls report contained no frightening number. About 175,000 jobs were created in May, consistent with a slow but steady recovery in the US economy.

It means the consensus guess doesn't require adjustment: pencil in September or October for the moment the Fed starts to reduce the pace of quantitative easing from bn (£55bn) a month. Investors like reassurance and share prices naturally bounced.

But relax? No. The story of the past three weeks – rising bond yields and falling share prices – is sending several important messages.

First, there is a realisation that Ben Bernanke and the Fed face a near-impossible task in getting their timing right. The clamour for an end to QE is growing in the US. House prices are rising again and the argument is made that money needs to be priced "normally" to avoid creating the next bubble. Indeed, if you make a couple of optimistic assumptions (like job creation at an average of 250,000 a month from here) the Fed could meet its target of a 6.5% unemployment rate as early as next summer. So hurry up with the QE reduction, goes that line of reasoning, we're no longer in crisis.

Yet the US recovery also looks extremely fragile. This week's data showed a sharp fall in manufacturing activity. There is clearly a serious risk QE could start to be withdrawn at precisely the wrong moment.

Second, the east is now a worry. This week's talking point has been China, where Société Générale's analyst pointed out that credit is growing twice as fast as the economy. That debt binge looks unsustainable for long. In the meantime, Japan has launched a huge stimulus package. But the first effect has been a rollercoaster ride in the yen that may be sowing more confusion than confidence in Japanese boardrooms.

Third, the eurozone crisis festers. Not that you'd notice from the comments of Mario Draghi, president of the European Central Bank, who would rather his (untested) promise to buy the bonds of peripheral nations was hailed as "probably the most successful monetary policy of recent times". The ranks of the eurozone unemployed (the rate stands at a colossal 12.2%) may not agree. Recession continues while banking union and the other grand ideas proceed at a crawl.

Add it all up and a tepid US jobs report really counts for little. The big picture remains unaltered: ultra-loose monetary policy has produced only an ultra-slow economic recovery. The risk of a relapse as the US withdraws QE is real. The Fed is probably obliged to act but it cannot really know what will follow.

• Steve Groves is an "actuarial genius," they say. He's certainly doing something right. The chief executive of Partnership Assurance, which on Friday made a storming £1.5bn stock market debut, saw his stake valued at £55m. He's banked a quarter and kept the rest. Not bad at the age of 38, and not bad for pursuing an idea that should been adopted by the mainstream insurance brigade a couple of decades ago.

Partnership's model is quite simple: instead of collecting only rudimentary data on new pensioners, such as how many major illnesses they've had and how many cigarettes they smoke, it does a proper job of estimating life expectancy. It asks 250 questions. If your health profile is poor enough, Partnership might be able to offer you a better income in the form of a "non-standard" annuity.

Gruesome? More like hard-headed. The logic is sound: the pension pots of those with "medical and lifestyle conditions," in Partnership's polite phrasing, should be able to buy a superior annuity. That's life, and death.

Why didn't the big insurers take up the model years ago? The answer, one suspects, is that the annuity game in the UK has been too cosy and too profitable for the big boys for too long. The game is changing, of course, as regulators and consumer groups yell at annuity buyers to shop around. But is this development good or bad for Partnership?

The pool of potential customers ought to be larger. On the other hand, having the likes of Legal & General and Aviva throw their bigger balance sheets into the ring would change the competitive picture. Partnership's view is that the 18 years of accumulated data in its mortality database represents the real competitive advantage. Wishful thinking? Quite possibly, but there's always a chance that a big insurer decides the easiest way to deal with a new competitor is to buy it. It wouldn't be the first time.

• "I think I've turned AHL around," Manny Roman, Man Group's new shareholder-friendly chief executive, told the FT in March. He spoke too soon.

AHL, a computer-driven momentum fund, was indeed spitting out better performance numbers in the first quarter of this year, and continued to do so in April. But May proved horrible. Man revealed this week that all AHL's gain of 12% this year evaporated in a fortnight. That's the problem with trend-following investment strategies: profits tend to accumulate gradually but losses can arrive suddenly.

In this case, the sudden sell-off in bond markets did the damage. The disappointment whacked Man's share price for good reason. AHL was within a whisker of passing its 2010 high-water mark, which is when the big performance-related fees would have kicked in, but now finds itself back down the slippery slope.

AHL's system is not broken, sings Man's fan club, it just needs less volatile and choppy markets. The analysis is probably correct, and it's also true that there will always be an audience for this type of alternative investment product. In the jargon, it offers "uncorrelated" returns that can serve as a useful protection. For example, the AHL computer simply loved the banking blow-up and bursting of the commodity bubble – it was up 19% in 2007 and 33% in 2008.

The trouble is, memories are short, many of AHL's rivals have done better in the past three years and money can move home easily. In AHL's glory days, the fund was easily the biggest beast in the trend-following game with bn under management in 2009. Now it has about bn v arch-rival Winton's bn. Now there's a proper trend.

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It is time for the European Central Bank to show its independence and act in the interests of all eurozone citizens– not just Angela Merkel’s, writes The Guardian’s economics editor Larry Elliott.  A different approach is needed to save the eurozone…

 


Powered by Guardian.co.ukThis article titled “European Central Bank must heed eurozone warning signs” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 30th April 2013 12.57 UTC

The warning signs are flashing red for the eurozone. Inflation is plunging, unemployment is rising and activity is weakening across the board. Unless Europe wants to become the next Japan, mired in permanent deflation and depression, action is needed now.

Stage one of the process should be a cut in interest rates from the European Central Bank (ECB) when it meets in Bratislava on Thursday. The latest inflation figures show the annual increase in the cost of living across the 17-nation single-currency area fell from 1.7% to 1.2%, its lowest in three years and well below the ECB's 2% ceiling. Even Jens Weidmann, the ultra-hawkish president of Germany's Bundesbank, would be hard pressed to say there is a threat to price stability.

It's not hard to see why inflationary pressure is abating: the eurozone economy has been flat on its back for the past 18 months. Unemployment rose by 62,000 in March, taking the eurozone jobless rate to yet another record high of 12.1%. Spain and Greece remain the weak spots, but even in Germany labour market conditions are becoming more difficult. Across the eurozone, almost one in four young people are out of work.

Why is unemployment rising? Again, you don't have to be John Maynard Keynes to figure it out. Europe's banking system is bust, there is a shortage of credit, real incomes are under pressure and the deficiency of demand is being exacerbated by austerity overkill. Retail sales figures from Greece show that in February spending was more than 14% lower than a year earlier.

The malaise is spreading from the eurozone's periphery to its core. It will be mid-May before the official growth data for the first quarter of 2013 is published, but the early evidence from Spain, where GDP fell by 0.5%, is not encouraging. Judging by the grim forward-looking surveys of business and consumer confidence, the second quarter will suffer more of the same.

Monetary policy works only with a lag, so whatever the ECB does on Thursday will be too late to prevent the recession deepening. Angela Merkel has made it clear that she does not want to see a cut in the cost of borrowing, but it is time for the ECB to show its independence and act in the interests of all eurozone citizens, not just the one seeking re-election in the German polls this autumn.

In itself, a quarter-point cut in interest rates to 0.5% would do little to revive demand, ease the credit crunch or create jobs. Instead, it should be part of a three-pronged approach to boost growth. The cut in rates should be accompanied by an ECB announcement that it is willing to embrace the unconventional methods deployed by the Federal Reserve, the Bank of England and Japan to underpin activity. It should also be the catalyst for a less aggressive approach to cutting budget deficits, with countries given more time to bring their deficits below the eurozone ceiling of 3% of GDP.

For the past three years, macroeconomic policy in the eurozone has been run on sadomasochistic principles: that only regular doses of pain will ensure countries stick to strict reform programmes.

The upshot of this policy is clear for all to see. Businesses that are starved of credit are mothballing investment and cutting their workforce. Weaker growth means higher-than-expected budget deficits. Permanent austerity has bred social dislocation and political extremism. A different approach is needed to save the eurozone from catastrophe – starting on Thursday.

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