3 Must Know Market Moving Econ Stories of the Week
Here’s your Cheat Sheet to this week’s top econ stories:
Is Britain’s Economy Triple Dipping?
Lower production output from oil producers in the North Sea and manufacturers has brought Great Britain close to its third recession in four years.
During the last three months of 2012, the economy shrank more than expected, with fourth quarter Gross Domestic Product falling 0.3 percent, according to Britain’s Office for National Statistics. This fall was greater than the 0.1 percent decline analysts had predicted, and it appears to be a sign of further bad news to come. The International Monetary Fund cut its 2013 forecast for economic growth to 1.0 percent from the 1.1 percent that was predicted last October.
The tougher-than-anticipated economic situation will have political ramifications as well. As Reuters reported, the lowered prospects will put pressure on the coalition of Conservatives and Liberal Democrats to ease back on deficit-cutting measures. Only a day before the figures were released, the Conservative-led government fended off criticism from the IMF regarding its austerity plan.
The British economy has contracted 3.3 percent since the first quarter of 2008, helped along by a mild recession that took place from late 2011 to the middle 2012.
A 10.2 percent quarterly drop in mining and quarrying production, which eliminated 0.18 percent of GDP, contributed to the drop, as did falling factory output. Industrial output was down 1.8 percent and Britain’s service sector remained flat.
Contrasting to the IMF’s assessment, the Governor of the Bank of England, Mervyn King, has said he predicts no more than a “gentle recovery” this year, according to Reuters. But even slow growth could be hindered if the talk of a triple-dip recession hurt consumer and business confidence.
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Where’s the Fed at?
Towards the end of last year, the Federal Reserve announced not one, but two quantitative easing programs. These two new rounds of money printing have now officially pushed the central bank’s balance sheet to a new trillion dollar level.
According to the latest statistical release, the Federal Reserve’s total assets increased $47.9 billion in the past week to hit $3.01 trillion, a fresh all-time record. Holdings of U.S. Treasury securities rose $7.8 billion to $1.697 trillion, while mortgage-backed securities in the portfolio jumped $35.6 billion to $983.17 billion. In comparison, the central bank reported total assets of $926.6 billion in the beginning of 2008, before four rounds of quantitative easing.
In September, the Federal Open Market Committee announced QE3, which buys agency mortgage-backed securities at a pace of $40 billion per month. The program is open-ended and will continue for as long as the Federal Reserve thinks is necessary. Three months later, the central bank announced it would purchase $45 billion of long-term Treasury securities, known as QE4. It also decided to keep interest rates at historic lows as long as the unemployment rate remains above 6.5 percent.
With the Federal Reserve increasing its long-term holdings around $85 billion per month, its balance sheet is well on its way to hitting $4 trillion near the end of this year. “You’re hard-pressed to find another example in history where the Fed pulled out all the stops to help a recovery along,” said Michael Hanson, senior U.S. economist at Bank of America, according to Bloomberg. While the central bank may provide brief moments of hope that it will be able to halt these bond purchasing programs in the near future, some market participants feel otherwise.
QE for years…
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Morgan Stanley believes the policy makers at the Federal Reserve will decide to continue with asset purchases for another two years. The firm explains in a note, “We are skeptical that dissenters within the FOMC on current monetary policy will succeed in overturning the current policy settings before the end of 2014.” The report adds, “We expect that very low nominal interest rates, an ongoing commitment to QE3 and a below-par recovery with attendant pressure on the dollar will still combine to encourage investment buying of gold.”
The Fed is already estimated to be effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets. If the central bank continues purchasing $85 billion in securities through 2014, its balance sheet will easily climb near $5 trillion or more. We are truly in unprecedented financial times as central banks around the world try to keep the system afloat.
As a result, many investors and entities turn to precious metals as an insurance policy. Gold has been on a 12-year winning streak as central banks not running the printing presses purchase gold. Alexei Ulyukayev, First Deputy Chairman, recently announced that gold accounts for nearly 10 percent of Russia’s foreign reserves. Ulyukayev also told reporters in Davos that the the Bank of Russia will continue to “pursue this course” of adding gold to reserves.
In general, central banks around the world became net-buyers of gold in 2009 for the first time in decades. Earlier this month, new data from the Census and Statistics Department of the Hong Kong government showed that gold imports by China totaled 91 metric tons in November, almost double October’s haul. Depending on December’s reading, total imports for 2012 could easily top last year’s amount by 400 tons.
When history looks back on the financial crisis and studies its deep, wide-sweeping effects on the global economy, it seems likely that Europe will be recognized as the region where the hardest battles were fought. Unemployment across the euro zone hit a record high of 11.8 percent toward the end of 2012, and GDP is expected to contract for a second straight year. The common currency was put on the chopping block, and the butcher’s hand was stayed only by the extraordinary efforts of the International Monetary Fund, the European Central Bank, and national finance ministers.
Mario Draghi, president of the ECB, has been hailed as the euro’s savior because of a bond-buying program that diffused what became a dangerous level of tension in the markets last year. Draghi spearheaded operations that demonstrated commitment to nations in crisis, such as Spain, Greece, and Italy, removing crippling uncertainty about the fate of the region and the currency.
Now, after billions in bailouts and severe austerity measures that sparked riots across the region, market sentiment is struggling to remain positive. Many of the mechanisms necessary for recovery have been put in place, but there’s no guarantee that things won’t get worse before they get better.
At the World Economic Forum’s annual meeting in Davos, currently underway, Draghi said that while the bond-buying maneuver helped remove risk for the euro, “we haven’t seen an equal momentum on the real side of the economy.”
Momentum on the real side of the economy would mean curbing rampant joblessness in many southern-European nations. It would mean a stable, falling debt load for Greece, and successful financial reform in Spain. And it would mean strength in the manufacturing industry, which has been in contraction for 16 of the past 17 months.
Chris Williamson, chief economist at Markit, which compiles the PMI report, echoes the sentiment of European officials when he frames the situation as a slowing contraction. Aside from the PMI, he said that “forward-looking indicators — such as business confidence and the new orders-to-inventory ratio — also suggest that the rate of decline will continue to slow in the coming months.”
Williamson is looking at the first half of 2013 for a return to growth, but others are not as optimistic. Automotive industry officials have pegged the middle of the decade for a turnaround in the car market. Draghi himself is looking at the second-half of 2013 for positive numbers.
“We can have a positive development if national governments persevere in their actions both in fiscal consolidation but also on the front of structural reforms,” he said at Davos. “To say the least, the jury is still out.” His comments are punctuated by the threat of a triple-dip recession in Britain at the start of 2012, and contraction in Germany and France, two of the region’s largest economies.