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UK: Triple Dip Recession To Trigger More QE

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A number of weeks ago Max Keiser made the statement on the BBCs program that “the UK economy is screwed“. Certainly the signs are not good and George Osbourne does not inspire confidence. After the losing its AAA status and signs of moving back into a triple dip recession it looks like the only solution as usual is to crank up the printing presses.
The Bank of England will be under pressure to unleash further emergency measures this week amid signs the UK is on course for an unprecedented triple-dip recession.

A shock fall in manufacturing activity in February helped shorten odds that the Bank’s nine-strong Monetary Policy Committee (MPC) will push the button on a further £25 billion of quantitative easing (QE) – also known as money printing – when they meet on Wednesday and Thursday.

Last month’s MPC minutes saw governor Sir Mervyn King and Paul Fisher join previously lone voice David Miles in calls to restart the printing presses.

Interest rates, which have remained unchanged at 0.5% for four years, will also be in the spotlight after Bank of England deputy governor Paul Tucker told MPs on the Treasury Committee that he had put negative interest rates up for consideration.

While he admitted it was an idea that needed to be thought through carefully, the Bank is expected to look for other measures to kick-start the UK economy, which has weaved in and out of recession since the 2008 banking crisis.

More QE looks to be the inevitable solution.

Alan Clarke, UK and eurozone economist at Scotiabank, said: “The recent noises from MPC members suggest that the MPC want to do something, but it is not yet clear what. The default policy tool has tended to be more QE and a £25 billion expansion at this week’s meeting seems to be the most likely outcome.”

But Howard Archer, chief UK and European economist at IHS Global, said he thought the Bank would hold fire on more QE at its March meeting, partly because the recent sharp weakening of the pound was stimulative in itself.

He said: “Furthermore, there is a danger that doing further QE at a time when sterling is already under serious downward pressure could cause the pound to fall too far too fast which would be both destabilising and perhaps over-stoke inflation risks.”

On Friday the pound dropped below 1.50 US dollars for the first time in more than two-and-a-half years.

Philip Shaw, chief economist at Investec, said that while he thought it was likely the MPC would keep policy on hold, the weak figures gave the case for further QE “a certain degree of extra momentum”.

Source: Irish Independent

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German Growth Rate For 2013 Drops Massively

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The Bundesbank massively cut its growth forecasts for 2013 for the German economy from previous estimate of 1.6% down to 0.4%. Such a huge drop in growth forecast shows even the mighty German economy which has benefited from a weak euro is now feeling the pressure. Its the last thing Merkel needs as she faces an election next year with a weakened economy and a growing bill for bailing out the rest of Europe. Couple that with the TARGET2 imbalance and a strong possibility of Italy or Spain needing a bailout, she could be facing an angry electorate.

germanThe German economy could slam into reverse this winter as the crisis in the eurozone intensifies, the country’s central bank warned yesterday.

The Bundesbank slashed its growth forecasts in an abrupt reversal for Europe’s powerhouse economy. It now expects Germany to grow by 0.7 per cent this year and just 0.4 per cent next year.

It was previously expecting growth of 1 per cent in 2012 and 1.6 per cent in 2013.

But the Bundesbank added that there was a risk of recession – defined as two quarters of contraction in a row – this winter. ‘There are indications that economic activity may fall in the final quarter of 2012 and the first quarter of 2013,’ it said. Germany has been the key driver of an otherwise moribund eurozone.

Experts warned the country’s slump is ‘a big reality check’ and casts doubt over the future of the single currency. Any setback in the eurozone, Britain’s major trading partner, raises the risk of a new recession here. The Bundesbank blamed the crisis crippling the eurozone for the downturn amid signs that German patience with struggling economies such as Greece and Spain is wearing thin. ‘Germany cannot prosper alone,’ it said. ‘It has a particular interest in the welfare of its partners.’

The gloomy analysis came a day after the European Central Bank warned that the 17-nation eurozone will remain mired in recession until late next year. ECB president Mario Draghi said a ‘gradual recovery’ will not start until ‘later in 2013’ as the region lurches from one crisis to the next. The eurozone sank back into recession over the summer as the malaise in peripheral states spread to Germany and France.

The German government put on a brave face in response to the Bundesbank forecast. A spokesman for Chancellor Angela Merkel said: ‘The government is cautiously optimistic that we’ll keep growing.’

Source: Daily Mail

 

 

Japan Back In Recession

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Japan has sunk back into recession and the solution according to opposition leader Abe is to call for even more stimulus through unlimited monetary easing according to Bloomberg. That is not a good sign when its open-ended, as it demonstrates a lack of a clear plan as to when the economy will recover. A strong yen, weak demand from Europe and a spat with China have all combined to weaken Japan’s economy. The auto industry is factoring in a sharp contraction in sales next year  driven by a dramatic decrease in demand from China.

Japan’s economy sank into recession in the second and third quarters, fueling opposition leader Shinzo Abe’s calls for more stimulus and highlighting the risk that weak growth will derail a planned sales-tax rise.

Gross domestic product shrank an annualized 3.5 percent in the three months through September, the Cabinet Office’s second estimate showed in Tokyo today, matching a preliminary reading. The government revised the previous quarter to a 0.1 percent contraction, meeting the textbook definition of a recession.

Abe, whose Liberal Democratic Party is leading in polls to win elections on Dec. 16, has called for more fiscal stimulus and “unlimited” monetary easing, and has said that economic conditions next year will determine whether the sales tax rise goes ahead. Banks including Citigroup Inc. forecast another contraction this quarter as exports fall and domestic demand stays weak.

“It’s likely that Japan’s economy hit bottom in the last quarter,” said Shuichi Obata, senior economist at Nomura Securities in Tokyo. “The new government will aim to have solid growth by the middle of next year as they have to decide whether to raise the sales tax or not.”

……..

Japanese manufacturers such as Sharp Corp. (6753) and Honda Motor Co. (7267) are grappling with weaker earnings after a strong yen, slow European demand and anti-Japanese demonstrations in China hurt exports.

Nissan Motor Co. (7201) and Honda cut their profit forecasts for the year ending March 2013 by about 20 percent, citing a slump in China sales.

The sales tax bill raises the levy to 8 percent in April 2014 and to 10 percent in 2015, and a clause allows for implementation to be canceled based on an assessment of economic conditions. The last sales tax increase in 1997 contributed to pushing the economy into a 20-month recession, costing then- premier Ryutaro Hashimoto his job.

From the previous quarter, the economy shrank 0.9 percent in the July-September period, unchanged from the government’s initial forecast, today’s report showed.

Source: Bloomberg

 

 

UK Recovery Slower Now Than The Recovery After Great Depression

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Looking at the chart below will tell you the the UK’s recovery since 2008 has been much slower than even the recovery after the Great Depression.

So what went wrong. Well according to economist (and external member of the Bank of England’s Monetary Policy Committee) Adam Posen when looking at the US recovery compared to the UK

Cumulatively, the UK government tightened fiscal policy by 3% more than the US government did – taking local governments and automatic stabilizers into account – and this had a material impact on consumption. This was particularly the case because a large chunk of the fiscal consolidation in 2010 and in 2011 took the form of a VAT increase, which has a high multiplier for households. The fact that British real incomes were hit harder than American households’ incomes by energy price increases could be ascribed in large part to the past depreciation of Sterling, which also hit real incomes directly. All combined, these factors significantly dampened consumption growth in the UK, with knock on effects on investment and stockbuilding.

Source: The Economist

 

Mohamed El-Erian: US Recession Chances

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Mohamed El-Erian is the CEO and co-CIO of PIMCO,[1] a global investment management firm and one of the world’s largest bond investors with approximately US$1.34 trillion of assets under management was reported on an interview with Bloomberg today to have said

Let me tell you what I find most terrifying: we’re having this discussion about a risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time when the fiscal deficit is 9%, a time when interest rates are at zero. These are all conditions coming out of a recession, not going into a recession.

We put the chance of a recession at one-third to one half, which is really high given initial conditions.e 

The full article can be found on Bloomberg.

 

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